Exploring Ambiguity and Familiarity Effects in The 'Earnings Game' Between Managers and Investors
THE JOURNAL OF BEHAVIORAL FINANCE, 15: 70–77, 2014
Posted: 27 Dec 2019
Date Written: December 6, 2014
Prior evidence suggests that managers and investors play an earnings game in which managers bias their earnings forecasts downward as the earnings announcement date approaches. Knowing managers’ incentives to provide biased guidance, investors still revise their expectations downward helping to create “positive earnings surprises.” Using a 2 (ambiguity) × 2 (familiarity) between subject randomized experimental design where MBA students playing the roles of manager and investor answer a series of questions related to earnings guidance, we investigate whether earnings environment ambiguity and manager-investor familiarity inﬂuence behavior during the “earnings game.” In general, results from this study suggest that ambiguity contributes to managers’ propensity to mislead and investors’ propensity to follow, and a false sense of familiarity may amplify investors’ reliance on managers’ guidance.
Keywords: Ambiguity, Earnings guidance, Familiarity, Information uncertainty
JEL Classification: M41
Suggested Citation: Suggested Citation