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No reliance on guidance: counter‐signaling in management forecasts
Author(s) -
Aghamolla Cyrus,
Corona Carlos,
Zheng Ronghuo
Publication year - 2021
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12367
Subject(s) - stylized fact , earnings , business , punishment (psychology) , signal (programming language) , earnings management , economics , microeconomics , actuarial science , finance , computer science , psychology , macroeconomics , social psychology , programming language
This study presents and provides an explanation for a novel stylized fact: both high‐performing and troubled companies withhold issuing earnings guidance. We assume that the manager's ability affects the level of earnings and the accuracy of guidance, but issuing a forecast is costless for all manager types. Managers are thus able to signal their ability through accuracy in their forecasts. While high ability managers would seem to benefit the most from issuing guidance, in equilibrium we find that both high and low ability managers withhold issuing guidance, while intermediate types forecast. Hence, high ability managers counter‐signal in equilibrium, which does not result in a subsequent “punishment” by the market.