Meeting Company-Issued Guidance and Management Guidance Strategy

46 Pages Posted: 10 Sep 2009 Last revised: 9 Dec 2015

See all articles by Ram T.S. Ramakrishnan

Ram T.S. Ramakrishnan

University of Illinois at Chicago

Xiaoyan Wen

Texas Christian University

Date Written: December 8, 2015

Abstract

We analyze the rationale for the market rewarding accurate management earnings guidance. We postulate that firms with better quality of information before investment also have better quality of information after investment but before earnings are realized. This late-interim information is of no value for production-investment decisions; however, by issuing accurate guidance, firms can signal a high-quality information environment, leading to better investment decisions in the future. We show that guidance accomplishment predicts future performance even if current earnings are not statistically correlated to future earnings. A manager interested in short-term market value tends to issue optimistic earnings guidance in equilibrium. Since the market rewards accurate guidance, though the management guidance is not verifiable, the equilibrium market valuation still induces the manager to issue informative guidance that enhances the investment efficiency through information quality discovery process.

Keywords: earnings guidance, information quality, investment efficiency

JEL Classification: M43, M41

Suggested Citation

Ramakrishnan, Ram T.S. and Wen, Xiaoyan, Meeting Company-Issued Guidance and Management Guidance Strategy (December 8, 2015). UIC College of Business Administration Research Paper No. 10-07. Available at SSRN: https://ssrn.com/abstract=1470880 or http://dx.doi.org/10.2139/ssrn.1470880

Ram T.S. Ramakrishnan

University of Illinois at Chicago ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States
312-996-3270 (Phone)
312-996-4520 (Fax)

Xiaoyan Wen (Contact Author)

Texas Christian University ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
206
Abstract Views
1,227
rank
147,581
PlumX Metrics