How Index Fund Ownership and Earnings Guidance Frequency Influence Managerial Myopia

ABSTRACT Managerial myopia imposes significant costs on firms, stakeholders, and the overall economy. Research suggests that both a firm’s shareholder base and the frequency of its earnings guidance influence myopia. Shareholder bases have undergone significant changes in recent years as index fund ownership supplants long-term shareholder ownership, yet it is unclear how the growth of index funds affects managerial myopia. We experimentally examine how index fund ownership influences managers’ myopia, and how these effects vary based on firms’ earnings guidance frequency. Consistent with prior research, results show that the likelihood of myopic decision-making increases as earnings guidance frequency increases. Results also show that the likelihood of myopic decision-making increases as index funds replace long-term shareholders, but only for managers who provide frequent earnings guidance. Our results suggest that eliminating frequent earnings guidance to help curtail myopia may become even more important as index fund ownership grows and supplants long-term shareholder ownership. JEL Classifications: M41; G11; G31; C91; D83.