Does the market overweight imprecise information? Evidence from customer earnings announcements

Does the market overweight imprecise information? Evidence from customer earnings announcements We examine how supplier-firm shareholders respond to the earnings announcements of their major customers to test the moderated confidence hypothesis, which predicts overreaction to imprecise signals. In our setting, the moderated confidence hypothesis predicts that supplier shareholders will overreact to customer earnings news because that news contains imprecise information about the suppliers’ future cash flows. We find evidence that supplier earnings announcement abnormal returns are negatively correlated with supplier abnormal returns at the earlier customers’ earnings announcements, consistent with supplier overreaction. We also find evidence that the overreaction declines with the strength of the economic ties between the supplier and the customer. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Does the market overweight imprecise information? Evidence from customer earnings announcements

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Publisher
Springer Journals
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Economics / Management Science; Accounting/Auditing; Finance/Investment/Banking; Public Finance & Economics
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-014-9293-8
Publisher site
See Article on Publisher Site

Abstract

We examine how supplier-firm shareholders respond to the earnings announcements of their major customers to test the moderated confidence hypothesis, which predicts overreaction to imprecise signals. In our setting, the moderated confidence hypothesis predicts that supplier shareholders will overreact to customer earnings news because that news contains imprecise information about the suppliers’ future cash flows. We find evidence that supplier earnings announcement abnormal returns are negatively correlated with supplier abnormal returns at the earlier customers’ earnings announcements, consistent with supplier overreaction. We also find evidence that the overreaction declines with the strength of the economic ties between the supplier and the customer.

Journal

Review of Accounting StudiesSpringer Journals

Published: May 24, 2014

References

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