The Effect of Confirming Management Earnings Forecasts on Cost of Capital

40 Pages Posted: 21 Aug 2000

See all articles by Michael B. Clement

Michael B. Clement

University of Texas at Austin - Department of Accounting

Richard M. Frankel

Washington University in Saint Louis - Olin Business School

Jeffrey S. Miller

University of Notre Dame - Department of Accountancy

Date Written: March 13, 2000

Abstract

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

Suggested Citation

Clement, Michael B. and Frankel, Richard M. and Miller, Jeffrey S., The Effect of Confirming Management Earnings Forecasts on Cost of Capital (March 13, 2000). Available at SSRN: https://ssrn.com/abstract=232550 or http://dx.doi.org/10.2139/ssrn.232550

Michael B. Clement (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

2110 Speedway, Stop B6400
Austin, TX 78712
United States
512-471-0332 (Phone)
512-471-3904 (Fax)

Richard M. Frankel

Washington University in Saint Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Jeffrey S. Miller

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

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