Investors' Reactions to Management Guidance Forms
41 Pages Posted: 20 Jul 2006
Date Written: June 26, 2006
In this study, we investigate underlying mechanisms for the effects of management guidance forms on investors' judgments. We do so by comparing effects of point and range guidance with those associated with a hybrid management guidance form that combines the attributes of both point and range guidance. With respect to investors' earnings reestimates made after actual earnings announcements, we find that both the number and type of benchmarks associated with the guidance forms matter. High-knowledge investors use both primary (explicitly-stated) and secondary (implicitly-stated) benchmarks, whereas low-knowledge investors attend only to primary benchmarks. We also find that investors have greater confidence in their earnings estimates when management guidance explicitly provides best estimates.
Keywords: management guidance, guidance form, investor knowledge, multiple reference points
JEL Classification: M41
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