Earnings guidance: market pressure or corporate governance? Evidence from corporate innovation in China
Nankai Business Review International
ISSN: 2040-8749
Article publication date: 18 May 2021
Issue publication date: 9 September 2021
Abstract
Purpose
This study aims to investigate whether and how earnings guidance affects corporate innovation.
Design/methodology/approach
Exploiting the setting of China, where the Shenzhen Stock Exchange has required all public firms listed on its ChiNext board to issue earnings guidance since 2012, this study uses a difference-in-differences (DID) methodology to examine the effect of earnings guidance on corporate innovation and further conducts cross-sectional analyzes from the information risk and monitoring demand perspectives. Moreover, the authors conduct path analysis to verify the possible channels through which corporate innovation is impeded by market pressure or improved through increased corporate transparency.
Findings
This study documents a positive relationship between earnings guidance and corporate innovation, as measured by the number of invention patents, indicating that the “corporate governance” hypothesis dominates in China. Cross-sectional analyzes show that this positive effect is more pronounced for firms subject to greater information risk and monitoring demand. Finally, the path analysis further confirms that earnings guidance improves innovation by increasing corporate transparency.
Practical implications
First, this study captures the bright side of mandatory earnings guidance and suggests that increasing the disclosure frequency can yield benefits for firms. Second, the findings imply that regulations, regardless of what they refer to, should be based on a country’s specific context.
Originality/value
First, this study provides evidence supporting the “corporate governance” argument based on the context of China and, thus contributes to the debate on earnings guidance. Second, this study enriches the literature on the economic consequences of earnings guidance. Third, the study extends research on the determinants of corporate innovation.
Keywords
Acknowledgements
National Natural Science Foundation of China.
No. 71702030.
No. 71790604.
No. 71932003.
Citation
Yang, D., Wang, J. and Chen, H. (2021), "Earnings guidance: market pressure or corporate governance? Evidence from corporate innovation in China", Nankai Business Review International, Vol. 12 No. 3, pp. 409-433. https://doi.org/10.1108/NBRI-11-2020-0060
Publisher
:Emerald Publishing Limited
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