Managerial Overextrapolation: Who and When

Dayong Huang (), Lijun Lei (), Mengmeng Wang () and Yuhang Xing ()
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Dayong Huang: Department of Accounting and Finance, University of North Carolina at Greensboro, Greensboro, North Carolina 27412
Lijun Lei: Department of Accounting and Finance, University of North Carolina at Greensboro, Greensboro, North Carolina 27412
Mengmeng Wang: Department of Accounting and Finance, University of North Carolina at Greensboro, Greensboro, North Carolina 27412
Yuhang Xing: Department of Finance, Rice University, Bellaire, Texas 77401

Management Science, 2025, vol. 71, issue 6, 5328-5350

Abstract: Corporate managers overextrapolate past earnings in their earnings guidance, and this behavior is robust after including extensive controls, such as expectation management, earnings management, and overconfidence. The degree of overextrapolation is driven by the persistence of the underlying earnings process and other factors that affect representativeness heuristics, including trend, salience, and volatility. Experience and value diversity among corporate managers help mitigate this bias, whereas demographic diversity does not. Using the Tax Cuts and Jobs Act of 2017, we provide causal evidence that managers overextrapolate past earnings.

Keywords: guidance; extrapolation; overextrapolation; earnings (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:6:p:5328-5350

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