Management Earnings Guidance as a Commitment Device

63 Pages Posted: 5 May 2021 Last revised: 11 May 2022

See all articles by Dirk E. Black

Dirk E. Black

University of Nebraska at Lincoln - School of Accountancy

Brandon Gipper

Stanford University Graduate School of Business

Phillip C. Stocken

Dartmouth College - Tuck School of Business

Date Written: May 10, 2022

Abstract

This paper examines whether issuing management earnings guidance motivates a firm to raise its performance. We hypothesize that managers anticipate failing to attain a forecast reflects poorly on them and would ex post motivate management and employee effort. Thus, managers choose to issue guidance ex ante to commit themselves to exert this heightened effort. Consistent with this commitment, management hone their firm’s production function to raise firm performance. We find evidence supporting this hypothesis: management issue guidance and raise performance at firms where commitment should be most beneficial for the firm, such as when (i) employee productivity is malleable, (i) employee effort is impactful, (iii) performance is credibly measured, and (iv) capital markets strongly reward increased performance. Further, we find that firms alter their operating activities, rather than manage their accruals, to increase performance. The enhancement in firm performance from using managerial earnings guidance as a commitment device is greatest for firms issuing moderately aggressive forecasts and is accomplished by reductions in operating leverage. Inconsistent with concerns that forecasting causes myopia and incentivizes short-term real earnings management, performance increases persist for several years.

Keywords: management earnings forecast, guidance, commitment, performance

JEL Classification: L25, M41

Suggested Citation

Black, Dirk E. and Gipper, Brandon and Stocken, Phillip C., Management Earnings Guidance as a Commitment Device (May 10, 2022). Tuck School of Business Working Paper No. 3837650, Available at SSRN: https://ssrn.com/abstract=3837650 or http://dx.doi.org/10.2139/ssrn.3837650

Dirk E. Black (Contact Author)

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

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Brandon Gipper

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
(650)498-4350 (Phone)

Phillip C. Stocken

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-2843 (Phone)

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