Is the Bottom Line the Top Priority? A Choice Model of Revenue and Earnings Guidance

Abstract

Based on the observation that managers provide almost 30% more revenue than earnings forecasts in recent periods, we jointly explore the decision to provide or forego revenue and/or earnings guidance. Our modeling innovation combines a random effects multinomial logit model, instrumental variables, and a correction for selection bias, which correctly classifies over 90% of observed guidance decisions. We find a stronger investor reaction to guidance surprises for firms whose guidance choice conforms to the predicted decision, suggesting that predictable guidance policies engender forecast credibility. The market response is driven more by managerial guidance than analyst revisions. Non-guiders quickly switch to guiding when the choice model suggests that guidance is the expected choice.

Keywords: voluntary disclosure, guidance, revenue forecasts, sales guidance, multinomial logit

JEL Classification: C35, D81, G14, M41