The Impact of Management Forecasts on Short-Term Stock Price Volatility

Abstract

This paper examines the impact of management forecasts on short-term stock return volatility. Two measures of volatility are employed: excess intra-day price volatility and the standard deviation of returns. I find that the average management forecast is followed by heightened volatility in the fifteen-day period following the traditional announcement window. The magnitude and persistence of the heightened volatility are positively related to the forecast's information content and inversely related to the forecast's precision and pre-announcement trading volume. Moreover, I find that the increase in volatility after a management forecast is significantly greater than volatility generated by comparable economic news on an earnings announcement date. Consistent with risk-averse investors pricing an unexpected increase in volatility-related risk, ex post changes in volatility are negatively related to announcement period returns. The pricing of the change in volatility is shown to be stronger for firms issuing bad earnings news.

Keywords: disclosure, managmement forecasts, capital markets

JEL Classification: G12, M41, M45