Managerial Myopia, Earnings Guidance, and Investment

74 Pages Posted: 13 Jun 2022 Last revised: 8 Aug 2022

Multiple version iconThere are 2 versions of this paper

Date Written: August 5, 2022

Abstract

This study investigates the real effects of management communication, specifically of forecasts or earnings guidance, on investment. Managers can signal the strength of their projects through accuracy in their earnings guidance. This leads less accurate managers to distort their investments; the equilibrium investment strategy involves over-investment when earnings exceed the forecast and under-investment when earnings fall short. Moreover, we find that managers are pessimistic in their forecasts, which helps to explain the corresponding well-documented empirical regularity. This downward bias increases the likelihood of investment manipulation but decreases the real loss from distortion. Interestingly, the over-investment induced by earnings guidance helps to mitigate the classic under-investment problem for a myopic manager with unobservable investment. Earnings guidance can therefore be value-increasing when managerial myopia is severe.

Keywords: Earnings guidance, management forecast, managerial myopia, real effects, investment distortion, manipulation, bias.

JEL Classification: C72, D82, D83, G14, M41.

Suggested Citation

Aghamolla, Cyrus and Hashimoto, Tadashi, Managerial Myopia, Earnings Guidance, and Investment (August 5, 2022). Available at SSRN: https://ssrn.com/abstract=4128156 or http://dx.doi.org/10.2139/ssrn.4128156

Cyrus Aghamolla (Contact Author)

Rice University

6100 South Main Street
MS-531
Houston, TX 77005-1892
United States

Tadashi Hashimoto

Yeshiva University ( email )

500 West 185th Street
New York, NY NEW YORK 10033
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
222
Abstract Views
781
Rank
263,143
PlumX Metrics