The Stock Price Effects from Downward Earnings Guidance Versus Beating Analysts' Forecasts: Which Effect Dominates?

Accounting and Business Research, Vol. 41, pp. 95-118, 2011

41 Pages Posted: 5 Oct 2010 Last revised: 14 May 2014

See all articles by Lynn L. Rees

Lynn L. Rees

Utah State University - Huntsman School of Business

Brady J. Twedt

University of Oregon - Lundquist College of Business

Date Written: September 4, 2010

Abstract

This paper provides evidence on the net stock price effects associated with managers following a disclosure strategy of guiding earnings down to a level where they can report a positive earnings surprise. Prior literature documents a stock price premium when firms meet or beat analysts’ forecasts. However, studies also show a substantial negative price response to downward earnings guidance that can potentially negate any benefit from reporting a positive earnings surprise. We find that the negative stock price effect for firms that release downward earnings guidance is substantially larger than the stock price premium from meeting analysts’ forecasts. Further, this downward guidance stock price penalty persists after explicitly controlling for other news that might be disclosed by managers that voluntarily provide guidance. These findings challenge conclusions made in some prior research that the optimal disclosure strategy is to ensure a positive earnings surprise at the earnings announcement date.

Keywords: Earnings Guidance, Meet or Beat Analysts' Forecasts, Market Reaction, Disclosure Strategies

JEL Classification: G10, M41

Suggested Citation

Rees, Lynn L. and Twedt, Brady J., The Stock Price Effects from Downward Earnings Guidance Versus Beating Analysts' Forecasts: Which Effect Dominates? (September 4, 2010). Accounting and Business Research, Vol. 41, pp. 95-118, 2011. Available at SSRN: https://ssrn.com/abstract=1687125

Lynn L. Rees

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
435-797-2272 (Phone)

Brady J. Twedt (Contact Author)

University of Oregon - Lundquist College of Business ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

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