Investors’ Responses to Reported Earnings when Management Issues Goal versus Expectation Earnings Guidance: An Experimental Investigation

Abstract

We investigate whether nonprofessional investors’ responses to a company’s reported earnings differ when management earnings guidance is presented as a goal or an expectation. We present 64 MBA students and 262 Mturk participants with management earnings guidance, manipulating between-subjects whether management provides the guidance in the form of a “goal” or an “expectation” and whether the company’s reported earnings fall short or exceed investors’ expectations that are derived from management’s earnings guidance. Our experimental results suggest that investors respond less negatively when reported earnings fall short of investors’ expectations, but not less positively when earnings exceed investors’ expectations, when earnings guidance is issued as a goal rather than as an expectation. Mediation analysis of post-experiment questions supports the interpretation that earnings falling short of investors’ expectations leads investors to perceive managers as less competent and be more disappointed when managers issue expectation guidance rather than goal guidance, which in turn influences investors’ attractiveness judgments of the company.

Keywords: earnings guidance; investor surprise; attribution theory; investor judgment

JEL Classification: C91, G10, M41