Earnings Guidance and Managerial Myopia
43 Pages Posted: 1 Oct 2005
Date Written: September 2005
We examine whether firms that frequently issue quarterly earnings guidance behave myopically, where myopic behavior is defined as sacrificing long-term growth for the purpose of meeting short-term goals (e.g., Porter 1992). Specifically, we examine the association between firms' frequency of issuing quarterly earnings guidance and their (1) investment in research and development (R&D); (2) probability of meeting or beating analysts' quarterly consensus forecasts; and (3) long-term operating performance in terms of three-year change in return on assets. We find that dedicated guiders' investment in R&D is significantly lower than that of occasional guiders. We also find that in comparison to occasional guiders, dedicated guiders meet or beat analyst consensus more frequently. However, preliminary results with limited data show that dedicated guiders' long-term earnings growth is significantly lower than that of occasional guiders. Overall, our results are consistent with dedicated guiders engaging in myopic behavior to meet short-term earnings targets.
Keywords: Earnings guidance, managerial myopia
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