Does the Precision of News Affect Market Underreaction? Evidence from Returns Following Two Classes of Profit Warnings

Abstract

"We evaluate whether the market reacts rationally to profit warnings by testing for subsequent abnormal returns. Warnings fall into two classes: those that include a new earnings forecast, and those that offer only the guidance that earnings will be below current expectations. We find significant negative abnormal returns in the first three months following both types of warning. There is also evidence that underreaction is more pronounced when the disclosure is less precise. Abnormal returns are significantly more negative following disclosures that offer only qualitative guidance than when a new earnings forecast is included". Copyright Blackwell Publishers Ltd, 2005.

The Impact of Corporate Governance Press News on Stock Market Returns

“…Consistently with previous studies (Bulkley and Herrerias, 2006; Cai et al ., 2006; Dimson and Mussavian, 1998) our results show that press news play an important role in investors’ expectation about future firm value. Our analysis also provides novel findings showing that, before news is made public, investors are only able to assess the type of corporate governance event underlying it.…”

Business cycles and profit warnings: over and under reaction of U.S. firms, according to size and industry 1995-2009

“…These findings are very similar for both the market model and the market adjusted model and consistent with other studies in the field (Jackson and Madura, 2003;Bulkley and Herrerias, 2005). This study examines whether investors overreact to bad news during good times and under-react to bad news during economic downturns.…”

Do Newspaper Articles Predict Aggregate Stock Returns?

“…Das and Chen [2007] apply an algorithm to extract investor sentiment from stock message boards and find that technology sector postings are related to stock returns. Other studies (e.g., Tetlock [2010], Schumaker and Chen [2009], Philpot and Johnson [2008], Bulkley and Herrerias [2006], Antweiler and Frank [2004], Doms and Morin [2004], Kloptchenko et al [2004], Coval and Shumway [2001]) confirm that news stories are associated with considerable response by the financial sector. For an introduction to text mining in general, the reader is referred to Weiss, Indurkhya, Zhang, and Damerau [2004], Konchady [2006], Feldman and Sanger [2006], and Srivastava and Sahami [2009].…”