Should Management Earnings Guidance be Pooled? Classifying Management Earnings Guidance into Capital Market, Opportunistic, and Disclose or Abstain Rationales: Implications for Research

51 Pages Posted: 4 Jan 2012 Last revised: 26 Oct 2012

See all articles by Edward Xuejun Li

Edward Xuejun Li

City University of New York (CUNY) - Stan Ross Department of Accountancy

Charles E. Wasley

Simon School, University of Rochester

Jerold L. Zimmerman

University of Rochester - Simon Business School

Date Written: October 24, 2012

Abstract

Prior studies identify several motives for why firms release management earnings forecasts (MFs). A common feature of such studies is they pool MFs when drawing inferences about a specific motive. By ignoring the heterogeneous rationales managers have to issue MFs, pooling could lead to biased inferences. To address the issue, we develop an approach that classifies MFs into one of the three rationales: capital market incentives, compliance with Rule 10b-5 to disclose material nonpublic information or abstain from trading, or managerial opportunism. Our classification scheme indicates that 65% of MFs are released for capital market incentives, 22% are issued to comply with Rule 10b-5, and 13% are opportunistic. Four sets of empirical tests provide construct validity for the classification scheme. Such tests include replications of earlier studies where we find that our MF classification scheme increases power and changes prior inferences regarding MFs. Classifying MFs into our three categories will aid future researchers in constructing better specified and more powerful tests of the economic determinants and consequences of management's decision to issue MFs.

Keywords: Management forecasts, Guidance, Insider trading, Voluntary disclosure

JEL Classification: M40, M41, G18, K22

Suggested Citation

Li, Edward Xuejun and Wasley, Charles E. and Zimmerman, Jerold L., Should Management Earnings Guidance be Pooled? Classifying Management Earnings Guidance into Capital Market, Opportunistic, and Disclose or Abstain Rationales: Implications for Research (October 24, 2012). Simon School Working Paper No. FR 12-03. Available at SSRN: https://ssrn.com/abstract=1978968 or http://dx.doi.org/10.2139/ssrn.1978968

Edward Xuejun Li

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3235 (Phone)

Charles E. Wasley

Simon School, University of Rochester ( email )

Rochester, NY 14627
United States
585-275-3362 (Phone)
585-442-6323 (Fax)

Jerold L. Zimmerman (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States
585-275-3397 (Phone)
585-442-6323 (Fax)

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