Prior Forecasting Accuracy and Investor Reaction to Management Earnings Forecasts

Hutton, Amy P.; Stocken, Phillip C.

doi:10.2139/ssrn.817108

Cited by 115 publications

(140 citation statements)

References 28 publications

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“…We hypothesize that news credibility can provide an explanation for underreaction to news. To test this hypothesis, we focus on management forecast news because prior research has highlighted that the voluntary and non-audited nature of management forecasts leads to concerns about the credibility of these forecasts (e.g., Jennings 1987;Skinner 1994; Hutton, Miller, and Skinner 2003;Rogers and Stocken 2005;Hutton and Stocken 2009). Thus, management forecasts provide a powerful setting to explore the role of credibility in explaining the underreaction to news.…”

Section: Introductionmentioning

confidence: 99%

Management forecast credibility and underreaction to news

Tuna

Verdi³

2013

Rev Account Stud

119

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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 postmanagement 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. JEL Classification: G12; G14; G30; M41 Keywords: Market efficiency; Credibility; Voluntary disclosure March 2012We thank Brian Bushee, Gavin Cassar, Tarun Chordia, Patty Dechow (the editor), Vicki Dickinson, S.P. Kothari, Ryan LaFond, Kin Lo, Rick Mendenhall, Ray Pfeiffer, Scott Richardson, Jonathan Rogers, Tjomme Rusticus, Praveen Sinha, Siew Hong Teoh, Joseph Weber, an anonymous referee, and workshop participants at Barclays Global Investors, University of California at Berkeley, Bristol University, Lancaster University, London Business School, University of Mannheim, University of Minnesota, MIT, Tilburg University, 2006 FEA conference, 2007 FARS Midyear Meeting, 2007 Maryland Finance Symposium, 2007 WFA conference, and 2007 AAA conference for their helpful comments. We appreciate financial support from the London Business School, the MIT Sloan School of Management, and the Wharton School. Jeffrey Ng and Rodrigo Verdi are also grateful for financial support from the Deloitte & Touche Foundation.Electronic copy available at: http://ssrn.com/abstract=930697 1 INTRODUCTIONThis paper studies whether the credibility of a disclosure is a determinant of the market underreaction to the news conveyed by the disclosure. Since Ball and Brown (1968), several papers have documented a market underreaction to news such as earnings announcements (Fama 1998). We hypothesize that news credibility can provide an explanation for underreaction to news. To test this hypothesis, we focus on management forecast news because prior research has highlighted that the voluntary and non-audited nature of management forecasts leads to concerns about the credibility of these forecasts (e.g., Jennings 1987;Skinner 1994; Hutton, Miller, and Skinner 2003;Rogers and Stocken 2005;Hutton and Stocken 2009). Thus, management forecasts provide a powerful setting to explore the role of credibility in explaining the underreaction to news.Our study relies on the idea that investors' reaction to forecast news is a function of the new information about future cash flows and the credibility of the forecast (Jennings 1987). Thus we argue that investors are more likely to delay their reaction to less credible news until more credible information (e.g., announcement of actual earnings) appear to support the forecast. If that is ...

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Section: Introductionmentioning

confidence: 99%

Management forecast credibility and underreaction to news

Tuna

Verdi³

2013

Rev Account Stud

119

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“…To mitigate the uncertainty concern, we control for Analyst Forecast Accuracy and Analyst Forecast Dispersion over the same period that we measure management forecast accuracy (Zhang 2006;Hutton and Stocken 2009 This is especially the case when the acquisition is entirely paid for using the acquirer's stock. We control for whether the target is located in the same country as the acquirer, Domestic Target, following Moeller et al (2004), and the method of payment, Cash M&A and Stock M&A, following Travlos (1987) and Moeller et al (2004).…”

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Management Forecast Quality and Capital Investment Decisions

Goodman

Neamtiu

Shroff

et al. 2013

The Accounting Review

313

199

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ABSTRACT:Corporate investment decisions require managers to forecast expected future cash flows from potential investments. Although these forecasts are a critical component of successful investing, they are not directly observable by external stakeholders. In this study, we investigate whether the quality of managers' externally reported earnings forecasts can be used to infer the quality of their corporate investment decisions. Relying on the intuition that managers draw on similar skills when generating external earnings forecasts and internal payoff forecasts for their investment decisions, we predict that managers with higher quality external earnings forecasts make better investment decisions. Consistent with our prediction, we find that forecasting quality is positively associated with the quality of both acquisition and capital expenditure decisions. Our evidence suggests that externally observed forecasting quality can be used to infer the quality of capital budgeting decisions within firms.

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“…Risk 124 is one of the important factors influencing on decision making in association with investment. Investors are paying special attention to risk-taking in investment decisions (Hutton & Stocken, 2009). Therefore, it is important to know the main factors that affect risk management.…”

Section: Introductionmentioning

confidence: 99%

An investigation on the effect of risk management on earnings volatility for shares of banks listed in Tehran Stock

Kordlouie¹,

Sadeghi²,

Sadeghi³

2018

10.5267/j.ac

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This study aims to investigate the effect of risk management on earnings volatility on shares of banks listed in Tehran Stock Exchange. The statistical population includes all 20 listed banks in Tehran Stock Exchange over the period [2009][2010][2011][2012][2013][2014][2015]. As the number of listed banks in Tehran Stock Exchange was limited, census method and multiple regressions in panel data were used to collect the data and to test the hypotheses, respectively. In this study, earnings volatility was calculated given in Dichev and Tang (2009) The results indicate that the coefficient of risk management was -0.20 with Sig. = 0.002; therefore risk management maintains a negative effect on banks' profitability volatility. In addition, stock return coefficient is 0.0053 (Sig. = 0.000) which indicates a positive effect on earnings volatility. The coefficients of dividend ratio, firm size and liquidity ratio were 0.023, 0.071 and 0.059, respectively and they have significant and positive effect on earnings volatility.

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Prior Forecasting Accuracy and Investor Reaction to Management Earnings Forecasts

Cited by 115 publications

References 28 publications

Management forecast credibility and underreaction to news

Management forecast credibility and underreaction to news

Management Forecast Quality and Capital Investment Decisions

An investigation on the effect of risk management on earnings volatility for shares of banks listed in Tehran Stock

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