The Effect of Confirming Management Earnings Forecasts on Cost of Capital
40 Pages Posted: 21 Aug 2000
Date Written: March 13, 2000
This study examines the market response to confirming forecasts. Confirming management forecasts are voluntary disclosures by management that corroborate existing market expectations about future earnings. The study of confirming forecasts is important because it can provide evidence on the relation between voluntary disclosure and cost of capital. We find that the market's reaction to confirming forecasts is significantly positive, indicating that benefits may accrue to firms that disclose such forecasts. In addition, while we find no significant change in the mean consensus forecasts (a proxy for earnings expectations) around the confirming forecast date, evidence indicates a significant reduction in the mean and median consensus analyst dispersion (a proxy for earnings uncertainty). Finally, we document a positive association between reduction of dispersion of analysts' forecasts and the magnitude of the stock market response.
JEL Classification: M41, M45, G29, G12
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