No Reliance on Guidance: Counter-Signaling in Management Forecasts

58 Pages Posted: 2 Aug 2018 Last revised: 4 May 2019

See all articles by Cyrus Aghamolla

Cyrus Aghamolla

University of Minnesota - Twin Cities

Carlos Corona

Carnegie Mellon University - David A. Tepper School of Business

Ronghuo Zheng

University of Texas at Austin - McCombs School of Business

Date Written: May 1, 2019

Abstract

This study presents and provides an explanation for a novel stylized fact: both high-performing public companies as well as more troubled companies withhold issuing guidance. We assume that the manager’s ability affects the level of earnings and the accuracy of the guidance, but issuing a forecast is costless for all manager types. Managers are thus able to signal their ability through accuracy in their forecasts. While high ability managers would seem to benefit the most from issuing guidance, in equilibrium we find that both high and low ability managers withhold guidance, while intermediate ability managers issue forecasts. This occurs since high ability managers do not need to rely on guidance in order to convey their ability to the market, while intermediate managers must forecast to separate from low ability managers. Hence, we find that high ability managers counter-signal in equilibrium by withholding guidance, which does not result in a subsequent “punishment” by the market. Additionally, the results offer new empirical predictions.

Keywords: Earnings Guidance, Management Forecasts, Counter-Signaling, Disclosure

JEL Classification: C72, D82, M41

Suggested Citation

Aghamolla, Cyrus and Corona, Carlos and Zheng, Ronghuo, No Reliance on Guidance: Counter-Signaling in Management Forecasts (May 1, 2019). Available at SSRN: https://ssrn.com/abstract=3219401 or http://dx.doi.org/10.2139/ssrn.3219401

Cyrus Aghamolla

University of Minnesota - Twin Cities ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

Carlos Corona (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Ronghuo Zheng

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

Austin, TX 78712
United States

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