Should Management Earnings Guidance be Pooled? Classifying Management Earnings Guidance into Capital Market, Opportunistic, and Disclose or Abstain Rationales: Implications for Research

Prior studies identify several motives for why firms release management earnings forecasts (MFs). A common feature of such studies is they pool MFs when drawing inferences about a specific motive. By ignoring the heterogeneous rationales managers have to issue MFs, pooling could lead to biased inferences. To address the issue, we develop an approach that classifies MFs into one of the three rationales: capital market incentives, compliance with Rule 10b-5 to disclose material nonpublic information or abstain from trading, or managerial opportunism. Our classification scheme indicates that 65% of MFs are released for capital market incentives, 22% are issued to comply with Rule 10b-5, and 13% are opportunistic. Four sets of empirical tests provide construct validity for the classification scheme. Such tests include replications of earlier studies where we find that our MF classification scheme increases power and changes prior inferences regarding MFs. Classifying MFs into our three categories will aid future researchers in constructing better specified and more powerful tests of the economic determinants and consequences of management's decision to issue MFs.