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Management earnings forecasts and adverse selection cost: good vs bad news forecast

Management earnings forecasts and adverse selection cost: good vs bad news forecast Purpose – The aim of this paper is to investigate the effect of management earnings forecasts on the level of information asymmetry around subsequent earnings announcement. Design/methodology/approach – Employing the adverse selection cost method suggested by George et al. , the paper compares for each sample firm the adverse selection cost around earnings announcement in forecasting years with that in non‐forecasting years. Findings – Consistent with Diamond and Verrecchia is the finding that the earnings announcement in non‐forecasting years decreases information asymmetry during a three‐day announcement period and increases in a post‐announcement period up to seven days. No significant change in information asymmetry between pre‐ and post‐announcement periods when firms released a “good” news forecast is found. The firms that previously released a “bad” news forecast experience a significantly lower information asymmetry than those that did not forecast during announcement or post‐announcement days, and experience a decrease in information asymmetry in a five to seven‐day post‐announcement period. Originality/value – This paper provides the first empirical reports on the different information asymmetry changes around earnings announcements followed by a “good” news management forecast from those followed by a “bad” news forecast. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Accounting and Information Management Emerald Publishing

Management earnings forecasts and adverse selection cost: good vs bad news forecast

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References (27)

Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
1834-7649
DOI
10.1108/18347640810887762
Publisher site
See Article on Publisher Site

Abstract

Purpose – The aim of this paper is to investigate the effect of management earnings forecasts on the level of information asymmetry around subsequent earnings announcement. Design/methodology/approach – Employing the adverse selection cost method suggested by George et al. , the paper compares for each sample firm the adverse selection cost around earnings announcement in forecasting years with that in non‐forecasting years. Findings – Consistent with Diamond and Verrecchia is the finding that the earnings announcement in non‐forecasting years decreases information asymmetry during a three‐day announcement period and increases in a post‐announcement period up to seven days. No significant change in information asymmetry between pre‐ and post‐announcement periods when firms released a “good” news forecast is found. The firms that previously released a “bad” news forecast experience a significantly lower information asymmetry than those that did not forecast during announcement or post‐announcement days, and experience a decrease in information asymmetry in a five to seven‐day post‐announcement period. Originality/value – This paper provides the first empirical reports on the different information asymmetry changes around earnings announcements followed by a “good” news management forecast from those followed by a “bad” news forecast.

Journal

International Journal of Accounting and Information ManagementEmerald Publishing

Published: Jun 27, 2008

Keywords: Management forecasts; Information asymmetry; Adverse selection cost; Good and bad news; Financial forecasting; Earnings

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