Managerial Myopia, Earnings Guidance, and Investment*

Abstract

This study investigates the real effects of management communication, specifically of forecasts or earnings 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 are pessimistic in 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 to mitigate the classic under‐investment problem for a myopic manager with unobservable investment. Earnings guidance can therefore be value‐increasing when managerial myopia is severe.

Manager myopia and green technology innovation

“…Based on the relevant studies of Hu et al. (2021), a relatively novel text analysis method is adopted to construct managers' myopia indicators, focusing on the impact of managers' intrinsic characteristics of time perception on green technology innovation, and extending the research conclusions of Aghamolla and Hashimoto (2023) and Sheng et al. (2022).…”

“…First, our study complements the existing literature on the link between manager myopia, a characteristic of manager personality traits, and corporate green technology innovation. Based on the relevant studies of Hu et al (2021), a relatively novel text analysis method is adopted to construct managers' myopia indicators, focusing on the impact of managers' intrinsic characteristics of time perception on green technology innovation, and extending the research conclusions of Aghamolla and Hashimoto (2023) and Sheng et al (2022). That is, managerial myopia may lead to long-term underinvestment, which will not only lead to undesirable situations, such as reduced earnings management or innovation, but also have serious consequences for firm output.…”