Evidence that Management Earnings Forecasts do not Fully Incorporate Information in Prior Forecast Errors

16 Pages Posted: 13 Oct 2009

See all articles by Weihong Xu

Weihong Xu

State University of New York (SUNY) - Accounting & Law

Abstract

This paper investigates whether managers fully incorporate the implications of their prior earnings forecast errors into their future earnings forecasts and, if not, whether this behavior is related to the post-earnings announcement drift. I find a positive association in consecutive management forecast errors, suggesting that managers underestimate the future implications of past earnings information when forecasting earnings. I also find that managers underestimate the information in their prior forecast errors to a greater extent when they make earnings forecasts with a longer horizon. Finally, I find that, similar to managers, the market also underreacts to earnings information in management forecast errors, which leads to predictable stock returns following earnings announcements.

Suggested Citation

Xu, Weihong, Evidence that Management Earnings Forecasts do not Fully Incorporate Information in Prior Forecast Errors. Journal of Business Finance & Accounting, Vol. 36, Nos. 7-8, pp. 822-837, September/October 2009, Available at SSRN: https://ssrn.com/abstract=1486381 or http://dx.doi.org/10.1111/j.1468-5957.2009.02152.x

Weihong Xu (Contact Author)

State University of New York (SUNY) - Accounting & Law ( email )

Buffalo, NY 14260
United States
716-645-5434 (Phone)
716-645-3823 (Fax)

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