Earnings Announcements, Differences of Opinion, and Management Guidance
University of Arkansas - Sam M. Walton College of Business
Lynn L. Rees
Texas A&M University - Department of Accounting
Wayne B. Thomas
University of Oklahoma - Michael F. Price College of Business
May 2, 2013
Journal of Business Finance & Accounting, Forthcoming
Berkman, Dimitrov, Jain, Koch, and Tice (2009) document a negative relation between differences of opinion and earnings announcement returns, and this relation is more pronounced when short sale constraints are likely to be high. These findings are interpreted as support for the theory in Miller (1977) that binding short sale constraints cause pessimists to be underrepresented in price formation. We conjecture that accounting information (i.e., earnings news) likely plays a role in this returns pattern. After controlling for the level of earnings news, we find that the relation between differences of opinion and stock returns is either eliminated or opposite from what is predicted from Miller’s theory. Further, we present evidence that suggests the confounding effect of earnings news can be explained by (pessimistic) management earnings guidance. Our findings offer an alternative explanation for why low differences of opinion stocks earn greater abnormal returns around earnings announcements.
Number of Pages in PDF File: 44
Keywords: Differences of opinion, short-sale constraints, management earnings guidance, earnings announcements, market efficiency
JEL Classification: D82, G14, G19Accepted Paper Series
Date posted: February 17, 2011 ; Last revised: May 3, 2013
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