In the intricate world of corporate finance, the setting of earnings targets is commonly perceived as a rational exercise grounded in historical data, market trends, and competitive benchmarks. However, a groundbreaking study conducted by an international team of researchers reveals a more complex and strategic dimension to this practice. Contrary to conventional expectations, firms that fail to meet their earnings projections often respond not by tempering expectations but by ambitiously raising them. This counterintuitive behavior, examined through a comprehensive observational study of over three thousand publicly listed Japanese companies spanning more than a decade, sheds new light on the nuanced tactics organizations employ to shape stakeholder perceptions and manage market sentiment.
The study, spearheaded by Professor Jungwon Min of Inha University in South Korea, alongside Professors Hyonok Kim and Konari Uchida from Japan’s Tokyo Keizai University and Waseda University respectively, delves into the phenomenon of “organizational impression management.” This strategic approach involves manipulating public earnings forecasts to influence how investors and analysts interpret a firm’s performance and prospects. By analyzing annual management forecasts—a mandated practice for Japanese firms that requires disclosure of prospective earnings—the researchers uncovered a consistent tendency among companies to publish significantly optimistic targets following a missed earnings goal.
This pattern, the research points out, occurs despite an alarming 65% failure rate in actually hitting these magnified projections. The deliberate overestimation acts as a signal intended to redirect investor focus from past disappointments toward a more promising future. Such a maneuver capitalizes on the short-term psychological dynamics of financial markets, where forward-looking optimism often temporarily outweighs the sting of historical underperformance. Professor Uchida notes that, paradoxically, stock prices frequently respond positively to these inflated forecasts, even when they are systematically missed over time.
The underlying mechanisms driving this behavior are rooted in the concept of organizational impression management, a repertoire of techniques embraced by corporate leaders to curate favorable narratives in the public domain. In this context, performance targets become less about purely objective financial planning and more about molding external perceptions. By strategically setting elevated earnings goals after setbacks, firms attempt to shape narratives that preserve their reputational capital and maintain investor confidence. Such actions underscore the evolving role of communication and signaling in the intersection of corporate finance and market psychology.
Yet, the study highlights that this aggressive forecast inflation does not proceed unchecked. Several moderating forces play a critical role in curbing the extent to which firms can manipulate projections. The scrutiny exercised by large institutional shareholders emerges as a potent restraining factor. These shareholders, armed with sophisticated analytical capabilities and demanding accountability, pressure management teams to maintain a degree of realism in their forward-looking statements. Additionally, financial analysts, acting as intermediaries between firms and the broader investment community, contribute to heightened transparency and skepticism that temper undue optimism.
Perhaps most intriguing is the identified influence of female directors within corporate boards. The research points to a notable correlation between gender diversity and ethical oversight, with female directors more likely to impose discipline on earnings target setting. Their involvement appears to mitigate the propensity for overambitious goal-setting, aligning with broader research suggesting that gender-diverse boards tend to prioritize compliance and long-term sustainability. This finding injects fresh empirical evidence into ongoing discussions about corporate governance reform and the tangible impacts of board composition on firm behavior.
The implications of the study extend beyond the immediate corporate sphere into broader market dynamics. Continual failure to meet overinflated targets eventually erodes investor trust, as stakeholders increasingly detect patterns of biased estimates. This growing awareness galvanizes market correction mechanisms, wherein investors impose penalties on firms perceived to engage in persistent impression management, while rewarding those adopting more conservative and credible forecasting practices. The self-regulatory nature of such market responses introduces an adaptive check on corporate behavior, albeit after a lagging period of trust erosion.
Delving deeper into the analytical framework employed, the researchers capitalized on Japan’s unique regulatory environment mandating annual earnings forecasts. This legal requirement provided a rich and structured data source, allowing for longitudinal analysis of forecast adjustments in response to prior performance outcomes. By dissecting 12 years of data from 3,273 companies, the study achieved robust statistical power enabling nuanced inferences regarding firm-level strategies and stakeholder interactions. This methodological rigor establishes a model that could be replicated or adapted in other institutional contexts to investigate similar phenomena.
The findings challenge traditional assumptions that corporate performance targets are set passively, merely reflecting extrapolations from historical results or peer comparisons. Instead, the evidence supports a view of target setting as an active and deliberate exercise influenced by reputational concerns and strategic communication objectives. This reframing invites a reevaluation of how earnings forecasts are interpreted by investors, regulators, and policymakers. Recognizing the potential for impression management necessitates critical scrutiny of forecast credibility and an awareness of the psychological interplay underlying market valuations.
From a behavioral perspective, the study enriches understanding of the cognitive biases and heuristics that investors exhibit when confronted with corporate disclosures. The temporary uplift in stock prices following overestimated targets exemplifies market participants’ susceptibility to optimism bias and framing effects. By strategically leveraging this tendency, firms can extract short-term benefits, albeit at the risk of long-term reputational damage. This duality highlights the complex incentives shaping corporate communication strategies within financial ecosystems.
Furthermore, the research contributes to the evolving discourse on ethics in corporate financial reporting. By uncovering patterns of systematic overestimation, it exposes the tension between legal disclosure obligations and ethical imperatives for honest communication. The role of governance structures, particularly the ethical influence exerted by specific board members, emerges as a critical avenue for promoting transparency and mitigating manipulative behavior. This insight offers practical guidance for enhancing corporate accountability frameworks.
Ultimately, this study illuminates a subtle yet potent tool in the corporate arsenal for managing impressions—overestimated earnings targets following prior misses—which operates at the intersection of finance, psychology, and governance. It underscores the necessity for vigilance among all stakeholders—investors, regulators, and governance bodies alike—to discern and address the implications of inflated forecasts. As markets evolve and corporate communication strategies grow increasingly sophisticated, understanding these dynamics is imperative to fostering integrity and stability in financial systems.
The research not only advances academic knowledge but also provides a critical lens through which to view contemporary corporate reporting practices. In an era when narrative can overshadow numerical substance, deciphering the true intent and credibility behind earnings targets becomes ever more crucial. This study serves as a clarion call for reinforced analytical scrutiny and proactive governance reform to ensure that earnings forecasts fulfill their role as reliable indicators of corporate health rather than instruments of impression management.
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Subject of Research: Not applicable
Article Title: Performance target setting for organizational impression management: overestimated earnings targets after previous target misses
News Publication Date: 3-Jun-2025
Web References: http://dx.doi.org/10.1007/s11846-025-00910-0
References: Kim, H., Min, J., & Uchida, K. (2025). Performance target setting for organizational impression management: overestimated earnings targets after previous target misses. Review of Managerial Science. https://link.springer.com/article/10.1007/s11846-025-00910-0
Image Credits: Professor Konari Uchida from Waseda University
Keywords: Corporations, Business, Financial management, Finance, Ethics, Economics, Communications, Risk management, Behavioral psychology, Society
