Confirming Management Earnings Forecasts, Earnings Uncertainty, and Stock Returns

Confirming Management Earnings Forecasts, Earnings Uncertainty, and Stock Returns In this study we examine the association among confirming management forecasts, stock prices, and analyst expectations. Confirming management forecasts are voluntary disclosures by management that corroborate existing market expectations about future earnings. This study provides evidence that these voluntary disclosures affect stock prices and the dispersion of analyst expectations. Specifically, we find that the market's reaction to confirming forecasts is significantly positive, indicating that benefits accrue to firms that disclose such forecasts. In addition, although we find no significant change in the mean consensus forecasts (a proxy for earnings expectations) around the confirming forecast date, evidence indicates a significant reduction in the mean and median consensus analyst dispersion (a proxy for earnings uncertainty). Finally, we document a positive association between the reduction of dispersion of analysts' forecasts and the magnitude of the stock market response. Overall, the evidence suggests that confirming forecasts reduce uncertainty about future earnings and that investors price this reduction of uncertainty. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting Research Wiley

Confirming Management Earnings Forecasts, Earnings Uncertainty, and Stock Returns

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Publisher
Wiley
Copyright
Copyright © 2003 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0021-8456
eISSN
1475-679X
DOI
10.1111/1475-679X.00119
Publisher site
See Article on Publisher Site

Abstract

In this study we examine the association among confirming management forecasts, stock prices, and analyst expectations. Confirming management forecasts are voluntary disclosures by management that corroborate existing market expectations about future earnings. This study provides evidence that these voluntary disclosures affect stock prices and the dispersion of analyst expectations. Specifically, we find that the market's reaction to confirming forecasts is significantly positive, indicating that benefits accrue to firms that disclose such forecasts. In addition, although we find no significant change in the mean consensus forecasts (a proxy for earnings expectations) around the confirming forecast date, evidence indicates a significant reduction in the mean and median consensus analyst dispersion (a proxy for earnings uncertainty). Finally, we document a positive association between the reduction of dispersion of analysts' forecasts and the magnitude of the stock market response. Overall, the evidence suggests that confirming forecasts reduce uncertainty about future earnings and that investors price this reduction of uncertainty.

Journal

Journal of Accounting ResearchWiley

Published: Sep 1, 2003

References

  • Biased Forecasts or Biased Earnings? The Role of Reported Earnings in Explaining Apparent Bias and Over/Underreaction in Analysts Earnings Forecasts
    Abarbanell, Abarbanell; Lahavey, Lahavey
  • Disclosure Level and the Cost of Equity Capital
    Botosan, Botosan
  • Empirical Estimates of Beta When Investors Face Estimation Risk
    Clarkson, Clarkson; Thompson, Thompson
  • Underwriting Relationships, Analyst Earnings Forecasts, and Investment Recommendations
    Lin, Lin; McNichols, McNichols
  • A Simple Model of Capital Market Equilibrium with Incomplete Information
    Merton, Merton

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