Prior Forecasting Accuracy and Investor Reaction to Management Earnings Forecasts
46 Pages Posted: 2 Oct 2005 Last revised: 8 Jul 2009
Date Written: June 8, 2009
We examine the properties of firms' forecasting records and whether the accuracy of their prior earnings forecasts affects investor response to their subsequent forecasts. Within the context of a Bayesian model of investor learning, we find that the stock price response to management forecast news is increasing in prior forecast accuracy and also in the length of a firm's forecasting record. Further, we document that investors are more responsive to extreme good and bad news forecasts when a firm has an established forecasting record. Overall, these results suggest that a firm’s prior forecasting behavior allows it to establish a forecasting reputation.
Keywords: Management forecasts, reputation, voluntary disclosure
JEL Classification: G12, G18, G38, K22, G39, M41, M45
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