On the Anomalous Stock Price Response to Management Earnings Forecasts

Journal of Business Finance and Accounting, Forthcoming

Posted: 18 Jun 2012

See all articles by Somnath Das

Somnath Das

University of Illinois at Chicago

Kyonghee Kim

Michigan State University

Sukesh Patro

Northern Illinois University

Date Written: June 1, 2012

Abstract

This paper examines stock price formation subsequent to management forecasts of quarterly earnings. In the post-announcement period, we find a significant upward price drift for both good news forecasts and bad news forecasts. Combined with the asymmetry in the initial market response, the upward post-guidance drift in stock prices is consistent with a reversal of an initial overreaction to managers’ bad news forecasts and a continuation of an initial under-reaction to managers’ good news forecasts. This interpretation is supported by a negative (positive) relationship between the initial market response and the post-guidance drift in the bad news (good news) group. The drift pattern is robust to issues arising from measurement. Trading strategies exploiting the post-announcement drift suggest the existence of economically significant trading profits, net of estimated trading costs.

Keywords: management forecasts, earnings guidance, stock price drift, overreaction, underreaction

JEL Classification: G14, G30, M41

Suggested Citation

Das, Somnath and Kim, Kyonghee and Patro, Sukesh, On the Anomalous Stock Price Response to Management Earnings Forecasts (June 1, 2012). Journal of Business Finance and Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2072437

Somnath Das

University of Illinois at Chicago ( email )

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Kyonghee Kim

Michigan State University ( email )

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Sukesh Patro (Contact Author)

Northern Illinois University ( email )

236P Barsema Hall
DeKalb, IL 60115
United States
8157531354 (Phone)

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