Management Forecasts and Bad News Hoarding: Evidence from Stock Price Crashes

63 Pages Posted: 9 May 2012 Last revised: 27 Oct 2018

See all articles by Sophia Hamm

Sophia Hamm

Tulane University - A.B. Freeman School of Business

Edward Xuejun Li

City University of New York (CUNY) - Stan Ross Department of Accountancy

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: October 26, 2018

Abstract

Many recent studies explore how earnings properties such as opacity, conservatism, and comparability relate to stock price crash risk. Motivated by the importance of earnings guidance as a voluntary disclosure mechanism that directly provides new information to the market, we investigate how guidance and the bias therein are linked to crash risk. Our initial analysis shows that on average, more guidance is associated with a higher crash risk. After an in-depth investigation, we find that this positive relation is driven by guidance optimism that the market does not instantly detect. This finding is consistent with optimistic guidance temporarily disguising bad news until its future revelation. Overall, our finding highlights that bias in earnings guidance can expose equity investors to significant downside risk.

Keywords: crash risk, earnings guidance, forecast bias, optimism

JEL Classification: G14, M41, M43

Suggested Citation

Hamm, Sophia and Li, Edward Xuejun and Ng, Jeffrey, Management Forecasts and Bad News Hoarding: Evidence from Stock Price Crashes (October 26, 2018). Available at SSRN: https://ssrn.com/abstract=2055008 or http://dx.doi.org/10.2139/ssrn.2055008

Sophia Hamm (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Edward Xuejun Li

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3235 (Phone)

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

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