nach oben

Review of Accounting Studies

Erschienen in:

01.12.2013

Management forecast credibility and underreaction to news

verfasst von: Jeffrey Ng, İrem Tuna, Rodrigo Verdi

Erschienen in: Review of Accounting Studies | Ausgabe 4/2013

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

In this paper, we first document evidence of underreaction to management forecast news. We then hypothesize that the credibility of the forecast influences the magnitude of this underreaction. Relying on evidence that more credible forecasts are associated with a larger reaction in the short window around the management forecasts and a smaller post-management forecast drift in returns, we show that the magnitude of the underreaction is smaller for firms that provide more credible forecasts. Our paper contributes to the literature by providing out-of-sample evidence of the drift in returns documented in the post-earnings-announcement drift literature, with the credibility of the news being one explanation for the phenomenon.

Vorheriger Artikel Do sell-side analysts exhibit differential target price forecasting ability?

Nächster Artikel A theory of voluntary disclosure and cost of capital

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Nur mit Berechtigung zugänglich

Anilowski et al. (2007) measure aggregate management forecast news by aggregating the management forecast news for all firms in First Call for each quarter from 1990 to 2004.

The assumption that all forecasts are unbiased is simply for ease of exposition. The above example would hold as long as the actual earnings for the less credible forecast is more than 7 cents.

Related to our prediction, prior research has shown that PEAD is smaller for firms with high quality accruals (Francis et al. 2007) and for firms that host conference calls (Kimbrough 2005). Likewise, the accruals anomaly is smaller for more reliable accruals (Richardson et al. 2005) and for firms with higher analyst disclosure quality ratings (Drake et al. 2009).

Our results are robust to the use of the mean consensus (instead of the median) EPS forecast from the I/B/E/S Summary File. They are also robust to the use of unscaled forecast surprise and alternative scalars, namely the absolute value of the management EPS forecast and the absolute value of the analyst median consensus EPS forecast. .

When we include in our sample management forecasts that are bundled with earnings announcement releases, we continue to find evidence that there is an underreaction to forecast news and that greater credibility mitigates this underreaction.

The results are robust when we use the current year’s distribution as an alternative way to assign firms into portfolios.

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

We use the single numerical estimate for a point forecast and the midpoint of the lower bound and upper bound for a range forecast.

We use one penny as the boundary to determine the credibility of point forecasts because point forecasts are typically preceded by modifiers such as “about” or “approximately.” In untabulated analysis, we use zero or two pennies and find similar results.

In untabulated analysis, we find that our measures of credibility are positively associated with current forecast accuracy, suggesting that they carry information about actual earnings.

The number of observations differs across quintiles because we use cut-offs based on the distribution of the forecast surprises in the previous calendar year.

We note that the correlation between Bad News and Good News is not mechanically equal to minus one because about 12 % of our sample has forecasts that provide no news. That is, for these observations, both Bad News and Good News are equal to zero.

We are not testing the existence of an underreaction to prior returns, to earnings surprises, or to analyst forecast revisions when QMomentum, QPEAD, and QAnalystDrift are included in the regressions. First, our sample differs substantially from those used in these literatures due to the requirement that a firm issue a management forecast. Second, the cumulation of the returns begins from the second day after the management forecast date.

The choice of three-by-five (instead of five-by-five) portfolios is to ensure a reasonable number of firms in each portfolio. This is particularly important in the earlier years of our sample for which the number of forecasts is relatively small. For example, the average number of firms in each portfolio in 1996 and 1997 is about 20–30 firms.

Abarbanell, J., & Bernard, V. (1992). Tests of analysts’ overreaction/underreaction to earnings information as an explanation for anomalous stock price behaviour. Journal of Finance, 47, 1181–1207.CrossRef

Ajinkya, B., & Gift, M. (1984). Corporate managers’ earnings forecasts and symmetrical adjustments of market expectations. Journal of Accounting Research, 22, 425–444.CrossRef

Anilowski, C., Feng, M., & Skinner, D. (2007). Does earnings guidance affect market returns? The nature and information content of aggregate earnings guidance. Journal of Accounting and Economics, 44, 36–63.CrossRef

Baginski, S., Conrad, E., & Hassell, J. (1993). The effects of management forecast precision on equity pricing and on the assessment of earnings uncertainty. The Accounting Review, 68, 913–927.

Ball, R., & Brown, P. (1968). An empirical evaluation of accounting numbers. Journal of Accounting Research, 6, 159–178.CrossRef

Bartov, E., Krinsky, I., & Radhakrishnan, S. (2000). Investor sophistication and patterns in stock returns after earnings announcements. The Accounting Review, 75, 43–63.CrossRef

Bernard, V., & Thomas, J. (1989). Post-earnings-announcement drift: Delayed price response or risk premium. Journal of Accounting Research, 27, 1–36.CrossRef

Bernard, V., & Thomas, J. (1990). Evidence that stock prices do not fully reflect implications of current earnings for future earnings. Journal of Accounting and Economics, 13, 305–340.CrossRef

Bhushan, R. (1994). An informational efficiency perspective on the post-earnings announcement drift. Journal of Accounting and Economics, 18, 45–65.CrossRef

Bradshaw, M., Richardson, S., & Sloan, R. (2002). Do analysts and auditors use information in accruals? Journal of Accounting Research, 39, 45–74.CrossRef

Clement, M., Frankel, R., & Miller, J. (2003). Confirming management earnings forecasts, earnings uncertainty, and stock returns. Journal of Accounting Research, 41, 653–679.CrossRef

Cotter, J., Tuna, İ., & Wysocki, P. (2006). Expectations management and beatable targets: How do analysts react to explicit earnings guidance? Contemporary Accounting Research, 23, 593–624.CrossRef

Drake, M., Myers, J., & Myers, L. (2009). Disclosure quality and the mispricing of accruals and cash flows. Journal of Accounting, Auditing & Finance, 24, 357–384.

Fama, E. (1998). Market efficiency, long-term returns, and behavioral finance. Journal of Financial Economics, 49, 283–306.CrossRef

Foster, G., Olsen, C., & Shevlin, T. (1984). Earnings releases, anomalies and the behavior of security returns. The Accounting Review, 59, 574–603.

Francis, J., LaFond, R., Olsson, P., & Schipper, K. (2007). Information uncertainty and post-earnings announcement drift. Journal of Business Finance and Accounting, 34, 403–433.CrossRef

Frankel, R., McNichols, M., & Wilson, G. P. (1995). Discretionary disclosure and external financing. The Accounting Review, 70, 135–150.

Gigler, F. (1994). Self-enforcing voluntary disclosures. Journal of Accounting Research, 32, 224–240.CrossRef

Givoly, D., & Lakonishok, J. (1980). Financial analysts’ forecast of earnings: The value to investors. Journal of Banking & Finance, 4, 221–233.CrossRef

Gleason, C., & Lee, C. (2003). Analyst forecast revisions and market price discovery. The Accounting Review, 78, 193–225.CrossRef

Gong, G., Li, L., & Wang, J. (2011). Serial correlation in management earnings forecast errors. Journal of Accounting Research, 49, 677–720.CrossRef

Graham, J., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40, 3–73.CrossRef

Healy, P., & Palepu, K. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31, 405–440.CrossRef

Hirst, D. E., Koonce, L., & Miller, J. (1999). The joint effect of management’s prior forecast accuracy and the form of its financial forecasts on investor judgment. Journal of Accounting Research, 37, 101–124.CrossRef

Hirst, E., Koonce, L., & Venkataraman, S. (2008). Management earnings forecasts: A review and framework. Accounting Horizons, 22, 315–338.CrossRef

Hutton, A., Miller, G., & Skinner, D. (2003). The role of supplementary statements with management earnings forecasts. Journal of Accounting Research, 41, 867–890.CrossRef

Hutton, A., & Stocken, P. (2009). Prior forecasting accuracy and investor reaction to management earnings forecasts. Working paper, Boston College and Dartmouth College.

Jennings, R. (1987). Unsystematic security price movements, management earnings forecasts, and revisions in consensus analyst earnings forecasts. Journal of Accounting Research, 25, 90–110.CrossRef

Kimbrough, M. (2005). The effect of conference calls on analyst and market underreaction to earnings announcements. The Accounting Review, 80, 189–219.CrossRef

McNichols, M. (1989). Evidence of information asymmetries from management earnings forecasts and stock returns. The Accounting Review, 64, 1–27.

Ng, J., Rusticus, T., & Verdi, R. (2008). Implications of transaction costs for the post-earnings-announcement drift. Journal of Accounting Research, 46, 661–695.CrossRef

Patell, J. M. (1976). Corporate forecasts of earnings per share and stock price behavior: Empirical tests. Journal of Accounting Research, 14, 246–276.CrossRef

Penman, S. H. (1980). An empirical investigation of the voluntary disclosure of corporate earnings forecasts. Journal of Accounting Research, 18, 132–160.CrossRef

Petersen, M. (2009). Estimating standard errors in finance panel data sets: Comparing approaches. Review of Financial Studies, 22, 435–480.CrossRef

Richardson, S., Sloan, R., Soliman, M., & Tuna, İ. (2005). Accrual reliability, earnings persistence and stock prices. Journal of Accounting and Economics, 39, 437–485.CrossRef

Rogers, J., & Stocken, P. (2005). Credibility of management forecasts. The Accounting Review, 80, 1233–1260.CrossRef

Rogers, J., & Van Buskirk, A. (2009). Bundled forecasts and selective disclosure of good news. Working paper, University of Chicago.

Skinner, D. (1994). Why firms voluntarily disclose bad news. Journal of Accounting Research, 32, 38–60.CrossRef

Sloan, R. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review, 71, 289–315.

Wang, I. (2007). Private earnings guidance and its implications for disclosure regulation. The Accounting Review, 82, 1299–1332.CrossRef

Waymire, G. (1984). Additional evidence on the information content of management earnings forecast. Journal of Accounting Research, 22, 703–718.CrossRef

Williams, P. (1996). The relation between a prior earnings forecast by management and analyst response to a current management forecast. The Accounting Review, 71, 103–113.

Titel: Management forecast credibility and underreaction to news
verfasst von: Jeffrey Ng
İrem Tuna
Rodrigo Verdi
Publikationsdatum: 01.12.2013
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 4/2013
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-012-9217-4

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 4/2013

Dynamic risk, accounting-based valuation and firm fundamentals

A theory of voluntary disclosure and cost of capital

Stock option grant vesting terms: economic and financial reporting determinants

Target’s earnings quality and bidders’ takeover decisions

Optimal versus suboptimal choices of accounting expertise on audit committees and earnings quality

Textual risk disclosures and investors’ risk perceptions