The Informational Feedback Effect of Stock Prices on Management Forecasts

Abstract

Using management earnings forecasts over the period 1996-2010, I find that the sensitivity of forecast revisions to contemporaneous stock returns is increasing in the amount of investors’ private information in prices. This effect remains after controlling for various confounds and is robust to the use of mutual fund redemptions as a shock to price changes that is exogenous to fundamental news. Furthermore, investors’ private information helps managers improve their forecast accuracy. Together, these findings suggest that stock prices contain information that managers do not otherwise have regarding firms’ fundamentals, and that managers incorporate this information in their earnings forecasts.

Keywords: Learning from Prices, Private Information, Probability of Informed Trading, Mutual Fund Redemptions, Management Forecasts, Corporate Disclosure

JEL Classification: G10, G14, G30, G31, M41