Analysts' Reactions to Earnings Preannouncement Strategies

Abstract:     
Recent research indicates that managers minimize the probability of a negative earnings surprise at the actual earnings announcement date, in part, by issuing earnings preannouncements that understate positive earnings news and overstate negative news. However, there is little evidence of the effects of this strategy on actions by investors and their agents. We conduct an experiment to investigate experienced analysts' reactions to preannouncements that either understate, accurately state, or overstate the magnitude of either positive or negative earnings news. As predicted, firms with positive total news receive the highest revised forecasts of future earnings when the preannouncement understates the magnitude of the positive news. Negative total news firms receive the highest revised forecasts when the preannouncement overstates the magnitude of the negative news. This suggests a possible benefit to preannouncement strategies that avoid negative actual earnings surprises, holding constant the total earnings surprise. Our results also provide insights into analysts' beliefs about the preannouncing firms that employ these strategies.

Number of Pages in PDF File: 35

JEL Classification: M41, M43, G24, G29, D82

working papers series