Can Executives Predict How Firm News Affects Stock Price?
55 Pages Posted: 7 Apr 2021
Date Written: March 16, 2021
More than 650 U.S. public company executives predict the stock price response to their quarterly financial reports and share their prediction after under a nondisclosure agreement. Despite having full knowledge of the reports prior to their release, executives’ estimates differ from realized returns by roughly 100% of the average absolute one-day response (i.e., 600 to 700 basis points) and are directionally wrong in one-third of cases. Executives are more likely to trade against the market the greater their error, engage in less corporate window-dressing the more inaccurate they tend to be, and exhibit little behavior to suggest learning from unexpected price movements. Overall, the results point to a substantial disconnect between executives and investors that compromises the efficiency of capital allocation.
Keywords: public company executives, stock price expectations, market efficiency, insider trading, myopia, learning from price
JEL Classification: D84, G14, G40, M12, M41
Suggested Citation: Suggested Citation