Executive Experience of Guiding Investors

Abstract

This qualitative study explores executive experience with issuing earnings guidance, a voluntary disclosure used to manage investor expectations. Advocates argue that guidance reduces investor uncertainty; critics counter that guidance invites dysfunctional behaviors as guiding executives scramble to achieve previously announced financial targets. This paper contributes to the discussion by interviewing people who provide and use guidance information.

The paper distinguishes low- and high-stakes guidance states and suggest that an escalation of commitment effect prods executives to the latter condition, inviting earnings management. Next, the paper provides results of interviews of financial executives at 31 publicly traded U.S. firms plus eight users of accounting information about their experiences with earnings guidance. Primary findings are that guidance is ubiquitous, executives fear credibility loss from reporting financial results that vary from guided estimates, and certain forms of guidance are associated with elevated anxiety. The paper closes with a nascent theory of earnings guidance and offer implications for future research.

Keywords: earnings guidance, earnings management, qualitative research

JEL Classification: M41