Is Earnings Guidance Associated with Less Firm Innovation?

51 Pages Posted: 11 Jan 2015 Last revised: 3 Jun 2019

See all articles by Shuping Chen

Shuping Chen

University of Texas at Austin - Red McCombs School of Business

Kelly Huang

Florida International University

Brent Lao

Florida International University (FIU)

Date Written: January 8, 2015

Abstract

We inform the policy debate on whether management earnings guidance fosters managerial myopia by examining whether firms providing earnings guidance exhibit less firm innovation. At the core of the debate is whether guidance impedes long-term value creation, and evidence on the association between guidance and innovation addresses this central issue as firm innovation is a key driver of firms’ competitiveness and long-term economic growth. Using a propensity-score matching design and a pair-matching design to address the endogeneity concern that other firm characteristics can drive the relation between future innovation and current guidance, we find that earnings guiders exhibit a greater number of future patents and patent citations than matched non-guiders. This result holds for firms issuing quarterly guidance and more frequent guidance. Further analysis using a Heckman two-stage procedure to address the impact of unobservable correlated omitted variables and a difference-in-differences design to address potential reverse causality yields similar results. Overall, our findings suggest that management earnings guidance alleviates managerial myopia rather than exacerbates it.

Keywords: earnings guidance, firm innovation, managerial myopia, patents

JEL Classification: M40, M41, M49, G10, G30

Suggested Citation

Chen, Shuping and Huang, Kelly and Lao, Brent, Is Earnings Guidance Associated with Less Firm Innovation? (January 8, 2015). Available at SSRN: https://ssrn.com/abstract=2546827 or http://dx.doi.org/10.2139/ssrn.2546827

Shuping Chen (Contact Author)

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
521.471.5328 (Phone)

Kelly Huang

Florida International University ( email )

11200 SW 8th Street
Miami, FL 33199
United States

Brent Lao

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

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