Management Earnings Guidance as a Commitment Device

51 Pages Posted: 5 May 2021

See all articles by Dirk E. Black

Dirk E. Black

University of Nebraska at Lincoln - School of Accountancy

Brandon Gipper

Stanford University Graduate School of Business

Phillip C. Stocken

Dartmouth College - Tuck School of Business

Date Written: March 25, 2021

Abstract

This paper examines whether issuing management earnings guidance motivates a firm to raise its level of performance. The failure of management to attain a forecast may reflect poorly on its industry understanding, knowledge of the firm, and management capability. Accordingly, we hypothesize and find that management, having issued guidance, are motivated to hone the firm’s production function to raise firm performance. We find that firms alter their operating activities to increase performance rather than manipulating their accruals. The enhancement in firm performance from using managerial earnings guidance as a commitment device is accomplished by reductions in operating leverage and is strongest among firms issuing moderately aggressive forecasts. Inconsistent with concerns that forecasting causes myopia, performance improvements persist for several years.

Keywords: management earnings forecast, commitment, performance

JEL Classification: L13, L25, M41, M42

Suggested Citation

Black, Dirk E. and Gipper, Brandon and Stocken, Phillip C., Management Earnings Guidance as a Commitment Device (March 25, 2021). Tuck School of Business Working Paper No. 3837650, Available at SSRN: https://ssrn.com/abstract=3837650 or http://dx.doi.org/10.2139/ssrn.3837650

Dirk E. Black (Contact Author)

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Brandon Gipper

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
(650)498-4350 (Phone)

Phillip C. Stocken

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-2843 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
99
Abstract Views
406
rank
327,797
PlumX Metrics