Earnings Guidance and Managerial Myopia

43 Pages Posted: 1 Oct 2005

See all articles by Mei Cheng

Mei Cheng

University of Arizona - Department of Accounting

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting

Yuan Zhang

University of Texas at Dallas

Date Written: September 2005

Abstract

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

Suggested Citation

Cheng, Mei and Subramanyam, K.R. and Zhang, Yuan, Earnings Guidance and Managerial Myopia (September 2005). AAA 2006 Financial Accounting and Reporting Section (FARS) Meeting Paper, Available at SSRN: https://ssrn.com/abstract=816304 or http://dx.doi.org/10.2139/ssrn.816304

Mei Cheng

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5017 (Phone)
213-747-2815 (Fax)

Yuan Zhang (Contact Author)

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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