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

43 Pages Posted: 15 Jan 2021

See all articles by Audra L. Boone

Audra L. Boone

Texas Christian University - M.J. Neeley School of Business; European Corporate Governance Institute (ECGI)

Craig M. Lewis

Vanderbilt University - Finance

Austin Starkweather

University of South Carolina Moore School of Business

Joshua T. White

Vanderbilt University - Owen Graduate School of Management

Date Written: December 15, 2020

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

Suggested Citation

Boone, Audra and Lewis, Craig M. and Starkweather, Austin and White, Joshua T., Is the Bottom Line the Top Priority? A Choice Model of Revenue and Earnings Guidance (December 15, 2020). Available at SSRN: https://ssrn.com/abstract=3749560 or http://dx.doi.org/10.2139/ssrn.3749560

Audra Boone

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Craig M. Lewis

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Austin Starkweather

University of South Carolina Moore School of Business ( email )

1014 Greene St
Columbia, SC 29208
United States

HOME PAGE: http://www.astarkweather.com

Joshua T. White (Contact Author)

Vanderbilt University - Owen Graduate School of Management ( email )

401 21st Avenue South
Nashville, TN 37203
United States

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