Waiting for Guidance: Disclosure Noise, Verification Delay, and the Value-Relevance of Good-News versus Bad-News Management Earnings Forecasts

49 Pages Posted: 14 May 2018

See all articles by Lee J. Cohen

Lee J. Cohen

University of Georgia - Department of Finance

Alan J. Marcus

Boston College - Department of Finance

Zabihollah Rezaee

University of Memphis - School of Accountancy

Hassan Tehranian

Boston College - Department of Finance

Date Written: March 10, 2018

Abstract

The market views bad-news management earnings forecasts as more credible than good-news forecasts not because good-news forecasts are biased, but rather because they are noisier than bad-news forecasts. After controlling for noise, the difference in market response disappears. Bad-news forecasts have unconditionally lower dispersion around final earnings and, unlike good-news forecasts, bad-news forecasts become more accurate and contain higher magnitude updates as earnings announcement dates approach. The results provide new direct evidence that management differentially seeks to verify bad news, and withholds greater amounts of bad news while it seeks verification. Consistent with rational markets, this mitigation of noise provides a novel explanation for the asymmetric market response to management earnings forecasts.

Keywords: Management earnings forecasts, value-relevance, news, noise, bias

JEL Classification: M41, G14, G30

Suggested Citation

Cohen, Lee J. and Marcus, Alan J. and Rezaee, Zabihollah and Tehranian, Hassan, Waiting for Guidance: Disclosure Noise, Verification Delay, and the Value-Relevance of Good-News versus Bad-News Management Earnings Forecasts (March 10, 2018). Global Finance Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2663704 or http://dx.doi.org/10.2139/ssrn.2663704

Lee J. Cohen

University of Georgia - Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Alan J. Marcus (Contact Author)

Boston College - Department of Finance ( email )

Fulton Hall
Chestnut Hill, MA 02467
United States
617-552-2767 (Phone)
617-552-0431 (Fax)

Zabihollah Rezaee

University of Memphis - School of Accountancy ( email )

Fogelman College of Business and Economics
Memphis, TN 38152-6460
United States
901-678-4652 (Phone)

Hassan Tehranian

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-3944 (Phone)
617-552-0431 (Fax)

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