Exploring Ambiguity and Familiarity Effects in The 'Earnings Game' Between Managers and Investors

THE JOURNAL OF BEHAVIORAL FINANCE, 15: 70–77, 2014

Posted: 27 Dec 2019

See all articles by Ning Du

Ning Du

DePaul University - School of Accountancy and MIS

Marjorie K. Shelley

University of Nebraska at Lincoln - School of Accountancy

Date Written: December 6, 2014

Abstract

Prior evidence suggests that managers and investors play an earnings game in which managers bias their earnings forecasts downward as the earnings announcement date approaches. Knowing managers’ incentives to provide biased guidance, investors still revise their expectations downward helping to create “positive earnings surprises.” Using a 2 (ambiguity) × 2 (familiarity) between subject randomized experimental design where MBA students playing the roles of manager and investor answer a series of questions related to earnings guidance, we investigate whether earnings environment ambiguity and manager-investor familiarity influence behavior during the “earnings game.” In general, results from this study suggest that ambiguity contributes to managers’ propensity to mislead and investors’ propensity to follow, and a false sense of familiarity may amplify investors’ reliance on managers’ guidance.

Keywords: Ambiguity, Earnings guidance, Familiarity, Information uncertainty

JEL Classification: M41

Suggested Citation

Du, Ning and Shelley, Marjorie, Exploring Ambiguity and Familiarity Effects in The 'Earnings Game' Between Managers and Investors (December 6, 2014). THE JOURNAL OF BEHAVIORAL FINANCE, 15: 70–77, 2014, Available at SSRN: https://ssrn.com/abstract=3499369

Ning Du (Contact Author)

DePaul University - School of Accountancy and MIS ( email )

1 E. Jackson Blvd
Chicago, IL 60607
United States
312-362-8308 (Phone)

Marjorie Shelley

University of Nebraska at Lincoln - School of Accountancy ( email )

445E Howard L. Hawkes Hall
Lincoln, NE 68588-0488
United States

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