On the Anomalous Stock Price Response to Management Earnings Forecasts

45 Pages Posted: 29 Nov 2011  

Somnath Das

University of Illinois at Chicago

Kyonghee Kim

University of Missouri at Columbia

Sukesh Patro

Northern Illinois University

Date Written: November 1, 2011

Abstract

This paper examines stock price formation subsequent to management forecasts of quarterly earnings. In the post-announcement period, we find a significant upward price drift for both good news forecasts and bad news forecasts. The asymmetry in the initial market response and the subsequent upward drift in stock prices are consistent with a reversal of an initial overreaction to managers’ bad news forecasts and a continuation of an initial underreaction to managers’ good news forecasts. This interpretation is supported by a negative (positive) relationship between the initial market response and the post-guidance drift in the bad news (good news) group. The drift pattern is robust to issues arising from measurement. Trading strategies exploiting the post-announcement drift suggest the existence of economically significant trading profits, net of estimated trading costs.

Keywords: Management forecasts, earnings guidance, stock price drift, overreaction, underreaction

JEL Classification: G14, G30, M41

Suggested Citation

Das, Somnath and Kim, Kyonghee and Patro, Sukesh, On the Anomalous Stock Price Response to Management Earnings Forecasts (November 1, 2011). Available at SSRN: https://ssrn.com/abstract=1965692 or http://dx.doi.org/10.2139/ssrn.1965692

Somnath Das

University of Illinois at Chicago ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States
312-996-4482 (Phone)
312-996-4520 (Fax)

Kyonghee Kim

University of Missouri at Columbia ( email )

332 Cornell Hall
Columbia, MO Columbia 65211
United States

Sukesh Patro (Contact Author)

Northern Illinois University ( email )

236P Barsema Hall
DeKalb, IL 60115
United States
8157531354 (Phone)

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