Expectations management and public guidance in the post-Regulation FD period

The phenomenon of expectations management has received considerable attention from the popular press, accounting regulators and accounting researchers over the past number of years. Both anecdotal and academic evidence are consistent with managers actively taking actions to dampen financial analysts' earnings expectations to achieve positive earnings surprises at the earnings announcement.;This study extends the existing literature on expectations management by investigating management's public earnings guidance as a mechanism to influence analysts' expectations, and market participants' reactions to the public guidance in the post-Regulation FD era.;Using a sample of 1,073 firm-quarters that started with negative forecast errors initially but achieved positive earnings surprises at the earnings announcement, I find that 58.4% of the firm-quarters issued pessimistic guidance to dampen analysts' expectations, while 40.4% of the firm-quarters kept silent. The evidence is twofold: first it presents direct evidence of expectations management in the post-Regulation FD period. Second it suggests that prior proxies of expectations management based on downward forecast revision may misclassify silent firms as guidance firms, and thus overestimate the prevalence of expectations management. In addition, I find expectations management is decreasing in my sample period.;I find that firms provide both quantitative and qualitative, both earnings-related and nonearnings-related disclosures to guide analysts' expectations. Further, firms tend to use a combination of multiple guidance forms instead of a single, specific form to dampen analysts' estimates. I also find that high-tech firms, firms with lower forecast dispersion and higher analyst optimism are more likely to engage in expectations guidance activities.;The evidence on analysts' reactions to expectations management suggests that the majority of the analysts revised their forecasts downward immediately (in terms of days rather than weeks) after the issuance of a pessimistic public guidance, and the magnitude of the analysts' downward revision is significantly greater for the guidance firms than for the non-guidance firms.;The results of investors' reactions to expectations management indicate that firms are "punished" by investors for issuing pessimistic guidance to achieve positive earnings surprises. The average three-day cumulative abnormal return around the guidance date is -10.2%, significantly larger than the average three-day cumulative abnormal return of 1.7% around the earnings announcement. Furthermore, using a matched-sample design, I find that the combined investors' reactions to the pessimistic guidance and the subsequent earnings announcement is more negative for firms that beat analysts' forecasts through management's involvement than for firms that do not guide analysts' forecasts and thus miss the expectations.