Ambiguity and Familiarity Effects on Analyst-Manager Interactions

Abstract

This study investigates the effects of fundamentals ambiguity and guidance credibility on analyst forecast revisions and manager guidance truthfulness. We manipulate earnings probability precision and managers' (ex ante) guidance credibility in an experiment with an embedded sender-receiver game. We collect forecast revision decisions and managers' guidance choices and find that analysts display ambiguity aversion by (rationally) randomizing across action choices when earnings probabilities are ambiguous and no credible supplemental information is available. However, when credible supplemental information is available (guidance), analyst participants tend to use it. Our privately informed manager-participants are more truthful when guidance can be traced to them.

Keywords: ambiguity, information uncertainty, structural uncertainty, analyst forecasts, behavioral finance, sender-receiver game

JEL Classification: C91, G14, G29, D81, D83