Manipulating expectations upward: Investor sentiment and managers’ range forecast strategy

Using management range forecast data in China, we explore how managers strategically respond to investor sentiment through biased earnings forecasts. We argue that managers are increasingly motivated to manipulate investor expectations upward when sentiment is low. Consistent with this idea, we find that as investor sentiment decreases, managers more aggressively inflate earnings forecasts by setting their true expectations closer to the lower bound of the range forecast. Managerial opportunism and capital market pressure can explain why managers strategically react to investor sentiment for a temporarily elevated valuation of firms. Finally, upward-biased forecasts weaken the immediate stock price reaction to the earnings announcement, with this negative effect mitigated if these forecasts are issued at lower levels of investor sentiment.