The Politics of Management Earnings Guidance Bias

Theory suggests that personal managerial attributes are a driver of voluntary disclosures such as earnings guidance. The empirical challenge in isolating the effect of these attributes is that managers endogenously match to firms, whose business model attributes also drive guidance choices. We overcome this challenge by exploiting changes in the political party governing the White House that are naturally exogenous to the firm-CEO matching. In a large sample of US firm, we show that CEOs issue more pessimistic annual earnings guidance in periods when the White House is governed by the political party they did not contribute to. This increased pessimism does not appear to be driven by CEOs facing more information uncertainty when they are politically opposed, because these CEOs do not reduce their guidance incidence, frequency, or forecast precision (range width). We also find no significant business model effect, either in R&D and capex outlays or in earnings outcomes, when the White House is governed by the opposing party, further supporting the unchanged uncertainty premise. Investors discount the CEOs’ pessimism during politically opposed periods, suggesting that the reporting pessimism is not investor-driven.