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

Journal of Financial Reporting

46 Pages Posted: 9 Jan 2014 Last revised: 28 Nov 2018

See all articles by Kirsten Fanning

Kirsten Fanning

DePaul University

Ling L. Harris

University of Nebraska at Lincoln

Kevin E. Jackson

University of Illinois at Urbana-Champaign - Department of Accountancy

Matthew Stern

DePaul University; University of Illinois at Urbana-Champaign

Date Written: November 27, 2018

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

Suggested Citation

Fanning, Kirsten and Harris, Ling and Jackson, Kevin and Stern, Matthew and Stern, Matthew, Investors’ Responses to Reported Earnings when Management Issues Goal versus Expectation Earnings Guidance: An Experimental Investigation (November 27, 2018). Journal of Financial Reporting, Available at SSRN: https://ssrn.com/abstract=2376471 or http://dx.doi.org/10.2139/ssrn.2376471

Kirsten Fanning (Contact Author)

DePaul University ( email )

1 East Jackson Blvd.
Suite 6048
Chicago, IL 60604
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312-362-1436 (Phone)

Ling Harris

University of Nebraska at Lincoln ( email )

730 N. 14th Street
Lincoln, NE 68588
United States
4024722337 (Phone)

Kevin Jackson

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Matthew Stern

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL Champaign 61820
United States

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

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