Earnings Guidance and Managerial Myopia

We examine whether firms that frequently issue quarterly earnings guidance behave myopically, where myopic behavior is defined as sacrificing long-term growth for the purpose of meeting short-term goals (Porter [1992]). We find that dedicated guiders invest significantly less in research and development (R&D) than occasional guiders. This result is robust to controlling for other determinants of R&D investment as well as to the endogeneity between firms’ guidance frequency and R&D intensity. We also find that, in comparison to occasional guiders, dedicated guiders meet or beat analyst consensus earnings forecasts more frequently and they both manage expectations downward and cut R&D expenditures to achieve this goal. However, we find that dedicated guiders’ long-term earnings growth rates are significantly lower than those of occasional guiders. Overall, our results are consistent with dedicated guiders engaging in myopic R&D investment behavior and meeting short-term earnings targets with possible adverse effects for long-term earnings growth.