Implications of Analyst Forecasts at the Time of Earnings Announcements for Market Reactions to Earnings Announcements

Posted: 30 Aug 2011

See all articles by Gerald J. Lobo

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Minsup Song

Sogang University

Mary Harris Stanford

Texas Christian University - Department of Accounting

Date Written: May 30, 2011

Abstract

Theory suggests that the informativeness of price at the time of an earnings announcement increases with the number of informed traders who possess superior information to process news from firm disclosures (Kyle 1985; Admati and Pfleiderer 1988; Kim and Verrecchia 1994). In this paper, we investigate how informed traders’ activities during an earnings announcement affect the stock price and trading volume reactions to the earnings announcement. We use the number of analyst forecasts issued on days 0 and 1 with respect to the quarterly earnings announcement as a proxy for informed traders’ activities. Our empirical results show that earnings response coefficients are increasing in the number of announcement period analyst forecasts. We also find the trading volume reaction to stock price changes increases monotonically with the number of announcement forecasts, after controlling for absolute stock price change, firm size, and prior stock return volatility. These results are consistent with predictions by Kim and Verrecchia (1994) that additional information created by informed traders makes stock price more informative.

Keywords: earnings announcement, analyst forecast, forecast timing, stock price reaction, trading volume

JEL Classification: D82, G29, M41

Suggested Citation

Lobo, Gerald J. and Song, Minsup and Stanford, Mary, Implications of Analyst Forecasts at the Time of Earnings Announcements for Market Reactions to Earnings Announcements (May 30, 2011). Available at SSRN: https://ssrn.com/abstract=1919466

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Minsup Song (Contact Author)

Sogang University ( email )

Palaus Hall 802, Sogang Business School
1 Shinsoo-Dong, Mapo-Gu
Seoul
Korea, Republic of (South Korea)
82-2-705-8855 (Phone)

Mary Stanford

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817-257-7483 (Phone)

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