Executives offer precise guidance to manage investor expectations

Company executives tend to offer precise earnings forecasts to signal a perception of control, according to a study in the Academy of Management Journal.


Of 3,000 publicly-traded companies studied between 2005 and 2011, executives narrowed the forecast range in response to the company's performance and anticipated market response, especially when the guidance proved optimistic.

Executives, on average, shortened the forecast range by 3 cents if the company missed earnings the previous year. The range was cut by an average of 2 cents if the earnings were below industry returns prior to the release of that quarter's earnings guidance and unfavorable market response reduced the range by 4 cents, on average, according to the study.

A precise range, because it negates uncertainty, manages investor expectations by signaling that the executives are in control of the company’s revenue, according to the study.

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