Wealth Destruction Effects of Annual Management Forecasts: Evidence from Natural Experiments

55 Pages Posted: 10 Mar 2016 Last revised: 4 Nov 2016

Mahfuz Chy

University of Toronto, Rotman School of Management, Students

Date Written: September 20, 2016

Abstract

Exploiting staggered exogenous shocks to management guidance, I provide evidence that the practice of providing numerical annual earnings forecasts induces managerial short-termism and results in greater firm opacity. Specifically, I find that firms cut long-term investments in an attempt to meet earnings target set by their own forecasts. In addition, numerical annual forecasts lead to a reduction in analyst coverage and a deterioration in stock market liquidity. These adverse consequences manifest in a loss of shareholder value and a gradual decline in firm growth. The findings are robust to controlling for alternative explanations and a battery of falsification tests. Collectively, the evidence casts doubt on the desirability of numerical annual earnings guidance as a value-enhancing corporate practice.

Keywords: Management Forecasts, Management Guidance, Earnings Guidance, Inevitable Disclosure Doctrine, Myopia, Short-termism, Information Asymmetry

Suggested Citation

Chy, Mahfuz, Wealth Destruction Effects of Annual Management Forecasts: Evidence from Natural Experiments (September 20, 2016). Available at SSRN: https://ssrn.com/abstract=2728473

Mahfuz R Chy (Contact Author)

University of Toronto, Rotman School of Management, Students ( email )

Toronto, ON
Canada

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