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The Effects of Management’s Preannouncement Strategies on Investors’ Judgments of the Trustworthiness of Management

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Abstract

This paper examines the role of management’s earnings preannouncements on judgments about its trustworthiness by nonprofessional investors. We predict that management’s preannouncement decision and the resulting direction (e.g., favorable vs. unfavorable) of the earnings surprise influence investors’ ethical judgments about management’s trustworthiness; these judgments, in turn, are associated with investors’ other investment related judgments. We test our predictions in an experiment in which MBA students make investment-related judgments under four different preannouncement strategies. Consistent with our predictions, the results of our study show that managers’ preannouncement decisions are significantly associated with investors’ evaluations of management’s trustworthiness. Specifically, holding the size of the earnings surprise constant, we find that judgments of management’s trustworthiness are damaged more following (a) a negative as opposed to a positive earnings surprise, and (b) the release of a preannouncement compared to when management does not issue a preannouncement. Also consistent with our predictions, we find that evaluations of management’s trustworthiness are significantly and positively associated with judgments of the attractiveness of the firm’s equity as an investment. Based on our findings, we encourage further research to explore whether managers understand the trust implications associated with their preannouncement decisions and the extent to which this understanding influences their disclosure decisions.

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Authors and Affiliations

  1. LeBow College of Business, Drexel University, 32nd and Market Streets, Philadephia, PA, 19104, U.S.A.

    Anna M. Cianci

  2. W. P. Carey School of Business, Arizona State University, Main Campus, P.O. Box 873606, Tempe, AZ, 85287-3606, U.S.A.

    S. Kaplan

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  1. Anna M. Cianci
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  2. S. Kaplan
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Correspondence to S. Kaplan.

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Anna M. Cianci is an Assistant Professor in the Accounting Department at Drexel University. She received her Ph.D. from Duke University in Accounting. Her primary research interests are judgement and decision making issues in financial accounting and auditing.

Steve Kaplan is a Professor of Accounting at Arizona State University, where he has been a member of the faculty since 1981. He received his Ph.D. from the University of Illinois. He␣has published widely in journals such as The Accounting Review, Journal of Accounting Research, Journal of Accounting and Public Policy, Business Ethics Quarterly and Journal of Business Ethics. He is the Previous editor of Behavioral Research in Accounting, a section journal of the American Accounting Association. His primary research interests are behavioral issues, judgment and decision making, and ethics

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Cianci, A.M., Kaplan, S. The Effects of Management’s Preannouncement Strategies on Investors’ Judgments of the Trustworthiness of Management. J Bus Ethics 79, 423–444 (2008). https://doi.org/10.1007/s10551-007-9408-2

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