Management Earnings Forecast and Technical Innovation: The Mediating Effects of Cost of Debt

Abstract

Purpose - This study examines whether a firm's management earnings forecasts affect its technical innovation activities. Our study also examines whether the cost of debt plays a mediating role between the management earnings forecasts and the innovation nexus.

Design/methodology/approach - We obtained data from 1032 Chinese non-financial firms listed on the Shanghai and Shenzhen stock markets from 2005 to 2022 (i.e., 18576 firm-year observations). We used various econometrics techniques, such as Heckman's (1979) two-stage selection method and two-stage least square, to examine the relationship between management earnings forecasts and the firm's technical innovation activities.

Findings - We find a positive relationship between management earnings forecasts and the firms' technical innovation. We also find that the cost of debt mediates the relationship between management earnings forecast and technical innovation. Further analysis indicates that frequent earnings forecasts provide incremental information regarding a firm's future value and cash flows, thus reducing the volatility and uncertainty in cash flow calculations. Our findings are robust to several tests.

Research Implications - Our study has implications for policymakers, practitioners, and high-level management of Chinese firms, enabling them to understand the relationship between management earnings forecasts and firms' innovation activities.