Private Information Acquisition and the Probability of Disclosure
Posted: 13 Jul 1998
Date Written: November 1995
This paper tests McNichols and Trueman's (1994) hypothesis that predisclosure private information acquisition and trading is increasing in the probability of disclosure. Using a pair-matched sample of certain earnings releases and less likely management forecasts, evidence consistent with the hypothesis is provided. The proportion of price reaction in predisclosure periods (relative to total price reaction) is greater for actual earnings releases. The results do not depend on whether predisclosure price reaction is measured in absolute terms or incorporates the direction of price movement. Examination of a "forecasts only" subsample shows that more likely and more precise forecasts are not associated with greater predisclosure price movement than less likely and less precise forecasts. The results on forecast precision are consistent with the intuition that the precision effect is likely second order for releases with a low probability of occurrence.
JEL Classification: M41, G12, G14
Suggested Citation: Suggested Citation