No Reliance on Guidance: Counter-Signaling in Management Forecasts

63 Pages Posted: 2 Aug 2018 Last revised: 14 Jul 2021

See all articles by Cyrus Aghamolla

Cyrus Aghamolla

University of Minnesota - Twin Cities

Carlos Corona

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Ronghuo Zheng

The University of Texas at Austin - McCombs School of Business

Date Written: August 5, 2020

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

JEL Classification: C72, D82, D83, G14

Suggested Citation

Aghamolla, Cyrus and Corona, Carlos and Zheng, Ronghuo, No Reliance on Guidance: Counter-Signaling in Management Forecasts (August 5, 2020). RAND Journal of Economics, Vol. 52, No. 1, 2021, 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)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

HOME PAGE: http://https://fisher.osu.edu/people/corona.55

Ronghuo Zheng

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

Austin, TX 78712
United States

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