Management Forecasts and Bad News Hoarding: Evidence from Stock Price Crashes
63 Pages Posted: 9 May 2012 Last revised: 27 Oct 2018
Date Written: October 26, 2018
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: Suggested Citation