When firms fall short of their earnings forecasts, the intuitive response might be to adopt a more conservative approach—lowering expectations, rebuilding credibility, and regaining investor trust gradually. Yet in reality, many companies opt for the opposite strategy. Instead of tempering their outlook, they announce even more ambitious goals for the following period. This counterintuitive behaviour is at the heart of a new study led by Professor Jungwon Min of Inha University in South Korea, alongside Professor Hyonok Kim of Tokyo Keizai University and Professor Konari Uchida of Waseda University’s Graduate School of Business and Finance in Japan. Their research, published online in the Review of Managerial Science on June 3, 2025, reveals how firms strategically inflate forward-looking projections to influence stakeholder perceptions following underperformance.

The study draws on an extensive dataset of 3,273 publicly traded Japanese firms spanning 12 years. The findings demonstrate a consistent and calculated trend: companies that miss their earnings targets frequently respond by issuing significantly overestimated goals for the subsequent reporting period. Roughly 65% of these optimistic forecasts are ultimately not met, indicating that the goals are not merely aspirational but are likely set with full awareness of their improbability. Nonetheless, this strategy often yields short-term rewards. “Despite recent target misses, stock prices respond positively to these overestimated targets,” noted Professor Uchida, underscoring the surprising effectiveness of this manoeuvre in the immediate term.

This pattern is best understood through the lens of organisational impression management—a concept describing how entities craft their image to external audiences, particularly after setbacks. In Japan, publicly listed firms are required to publish annual earnings forecasts, offering researchers a unique opportunity to analyse how projections evolve in direct response to previous performance. The study found that firms often follow a disappointing earnings report with a bold new target, linking the act of overpromising directly to prior failure. In this light, inflated forecasts serve as a reputational buffer, designed to maintain investor optimism and market confidence.

However, the tendency to inflate expectations is not universal. The study identifies several moderating factors that can restrain firms from adopting overly ambitious targets. For instance, the presence of large institutional investors and financial analysts exerts a disciplining effect, as these actors are better equipped to detect patterns of overstatement and demand accountability. Moreover, firms with female directors on their boards are less likely to issue inflated earnings projections. The authors attribute this to greater regulatory compliance and ethical conservatism typically associated with female leadership, which can temper risky or manipulative forecasting practices. This finding highlights the role of governance in mitigating short-sighted corporate behaviour.

Over time, repeated failures to meet inflated targets begin to erode stakeholder trust. As investors become more attuned to the pattern of unmet projections, the market response shifts from supportive to sceptical. “As target misses accumulate, investors may begin to recognise the pattern of biased estimates from firms with repeated earnings shortfalls,” said Uchida. This growing awareness introduces a feedback mechanism that can curtail the efficacy of inflated forecasting. The initial benefit of enhanced perception gives way to reputational damage, market penalties, and increased scrutiny, forcing firms to adopt more realistic expectations if they wish to maintain credibility.

At a deeper level, the study challenges the notion that corporate targets are always the product of data-driven analysis or shaped by peer comparisons. “We also find evidence that firms actively shape their performance targets rather than passively accepting those dictated by past performance or peer benchmarks,” Uchida explained. In other words, these projections are not mere reflections of operational reality; they are carefully constructed narratives designed to influence how the firm is perceived. This insight complicates our understanding of corporate disclosures, suggesting that they may serve strategic rather than informational purposes, especially in contexts of reputational repair.

Ultimately, this research offers a cautionary perspective on the strategic use of forward-looking statements. While ambitious targets may temporarily boost stock prices, their effectiveness hinges on the market’s continued willingness to believe in them. As repeated disappointment sets in, that goodwill can dissipate, turning what was once a clever short-term tactic into a long-term liability. In an environment where market sentiment can be as crucial as financial fundamentals, the line between confidence and deception becomes perilously thin. This study urges investors, regulators, and analysts alike to consider not just what companies promise, but why and how often they fail to deliver.

More information: Hyonok Kim et al, Performance target setting for organizational impression management: overestimated earnings targets after previous target misses, Review of Managerial Science. DOI: 10.1007/s11846-025-00910-0

Journal information: Review of Managerial Science Provided by Waseda University