Disaggregating management forecasts to reduce investors' susceptibility to earnings fixation

Research output: Contribution to journalArticle

Abstract

This study examines disaggregated management forecasts as a mechanism to reduce investors' fixation on announced earnings. Our experimental results suggest that investors' earnings fixation is reduced when they initially observe a disaggregated management forecast (earnings and its components) versus when they observe an aggregated forecast (earnings only). We also provide theory-consistent evidence that this reduction in earnings fixation is associated with investors interpreting the summary net income figure as one of several similarly important evaluation inputs rather than a substantially more important input (relative to its components). Finally, we provide evidence that suggests our results are not bounded by the level of emphasis on net income in the subsequent earnings announcement, and not fully explained by three plausible alternative explanations. Our study extends the voluntary disclosure literature by providing evidence that the form of management disclosures can influence investors' interpretation of subsequently announced information, and contributes to practice by providing a potential alternative to stopping earnings guidance.

Original languageEnglish (US)
Pages (from-to)185-208
Number of pages24
JournalAccounting Review
Volume86
Issue number1
DOIs
StatePublished - Jan 1 2011

Keywords

  • Earnings fixation
  • Forecast disaggregation
  • Stopping guidance

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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