Subjective Beliefs and Management Earnings Guidance Bias: Evidence from CEOs’ Political Affiliations

Abstract

This study finds that CEOs’ annual earnings guidance is more negatively biased in periods when the White House is governed by the political party the CEOs did not contribute to, relative to periods when the White House is occupied by their party. The results hold as strongly for the last guidance of the year, suggesting that CEOs do not revise their priors over the year. Upon facing an opposing presidency, the sensitivity of CEOs’ capital investments to cash flow decreases, relative to their politically aligned years. The results are largely driven by Republican CEOs, consistent with prior findings of asymmetry in the political partisanship in the US. The results do not appear to be driven by CEOs facing more information uncertainty when they are politically opposed, or by CEOs’ strategic motives to help their party.

Keywords: Subjective Belief, Partisan Conflict, Earnings Guidance, Firm-CEO Matching

JEL Classification: G30, M41