Managerial Myopia, Earnings Guidance, and Investment*
Cyrus Aghamolla, Tadashi Hashimoto
Contemporary Accounting Research · 2023 · Volume 40 · Issue 1
Abstract
This study investigates the real effects of management communication, specifically of forecasts orearnings 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 arepessimisticin 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 tomitigatethe classic under-investment problem for a myopic manager with unobservable investment. Earnings guidance can therefore bevalue-increasingwhen managerial myopia is severe.
Keywords
earnings guidance, management forecast, managerial myopia, real effects, investment distortion, manipulation, distorsion de l'investissement, effets réels, gestion prévisionnelle, manipulation, myopie managériale, résultats prévisionnels
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