Preannouncements of earnings tend to overstate negative or understate positive news, which decreases the chance of a negative surprise when actual earnings is announced. We conduct an experiment to investigate how experienced sell‐side analysts’ earnings forecasts are affected by preannouncements that either understate, accurately state, or overstate the magnitude of positive or negative total earnings news, holding total earnings news constant. We find that firms with negative (positive) total news receive the highest post‐earnings announcement forecasts of future earnings when the earlier preannouncement overstates (understates) the magnitude of the news. These forecasts are consistent with the analysts’ perceptions about the firms’ future prospects, but not their perceptions of management. While analysts expect preannouncements to be lower than actual earnings, they do not adjust their forecasts for these beliefs. These insights into analysts’ responses have implications both for managers and analysts.
Journal of Accounting Research – Wiley
Published: Mar 1, 2002
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