No Reliance on Guidance: Counter-Signaling in Management Forecasts

Abstract

This study presents and provides an explanation for a novel stylized fact: both high-performing public companies as well as more troubled companies withhold issuing guidance. We assume that the manager’s ability affects the level of earnings and the accuracy of the guidance, but issuing a forecast is costless for all manager types. Managers are thus able to signal their ability through accuracy in their forecasts. While high ability managers would seem to benefit the most from issuing guidance, in equilibrium we find that both high and low ability managers withhold guidance, while intermediate ability managers issue forecasts. This occurs since high ability managers do not need to rely on guidance in order to convey their ability to the market, while intermediate managers must forecast to separate from low ability managers. Hence, we find that high ability managers counter-signal in equilibrium by withholding guidance, which does not result in a subsequent “punishment” by the market. Additionally, the results offer new empirical predictions.

Keywords: Counter-Signaling, Voluntary Disclosure, Earnings Guidance, Management Forecasts

JEL Classification: C72, D82, D83, G14