Uncertainty and Expectation Revisions after Earnings Announcements

38 Pages Posted: 11 Apr 2008

See all articles by P. Eric Yeung

P. Eric Yeung

Cornell University - Samuel Curtis Johnson Graduate School of Management

Abstract

Bayesian theory predicts an increase in market participants' reliance on reported current earnings to revise their expectations of future earnings when the uncertainty in future earnings is higher. Prior studies focus on price reactions and find negative associations between measures of earnings uncertainty and investors' reliance on reported current earnings. This study examines analysts' forecast revisions (of future earnings) around the announcements of current period earnings and finds positive associations between measures of earnings uncertainty and analysts' reliance on reported current earnings. The findings suggest that uncertainty measures and discount rates are correlated, and cross-sectional differences in the discount rate taint the interpretation of price reactions as evidence of expectation revisions under uncertainty. This study sheds additional light on the complex relationships among earnings uncertainty measures, price reactions to earnings surprise, and cost of capital.

Keywords: Analyst forecast revisions, Earnings uncertainty, Earnings announcements, Cost of capital, Price reactions

JEL Classification: G12, G14, G29, M41

Suggested Citation

Yeung, P. Eric, Uncertainty and Expectation Revisions after Earnings Announcements. Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1117522

P. Eric Yeung (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
356
Abstract Views
2,231
rank
103,936
PlumX Metrics