Abstract

This paper tests whether a negative stock market reaction associated with a management forecast of new term bad earnings is lessened by a concurrent management forecast of improved longer term earnings expectations. stock market reactions depend on the creditability of management forecasts of improved earnings expectations. In this analysis, the authors-examined market reactions around the time of management forecasts of bad earnings, with and without longer-term management forecasts of improved earnings expectations. The results show that the stock market reaction is significantly less negative when management forecasts of bad earnings are followed by management forecasts of improved long run earnings expectations than when management forecasts of bad earnings are not accompanied by management forecasts of improved earnings expectations. In addition, this paper examines financial analysts' reaction to management bad earnings forecasts and management forecasts of improved earnings expectations. The findings show that analysts react less negatively to management forecasts of improved earnings expectations than to management forecasts of improved earnings expectations to imply improved earnings exceptions. However, results show that the stock market and analysts are unable to distinguish management forecasts of improved earnings expectations that come true from management forecasts of improved earning exceptions that do not come true.

Publication Date

2004

Comments

Note: imported from RIT’s Digital Media Library running on DSpace to RIT Scholar Works in February 2014.

Document Type

Article

Department, Program, or Center

Accounting (SCB)

Campus

RIT – Main Campus

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