Prior Forecasting Accuracy and Investor Reaction to Management Earnings Forecasts

Abstract:     
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.

Number of Pages in PDF File: 46

Keywords: Management forecasts, reputation, voluntary disclosure

JEL Classification: G12, G18, G38, K22, G39, M41, M45

working papers series