Unintended Consequences of Forecast Disaggregation: A Multi-Period Perspective

38 Pages Posted: 4 May 2016

See all articles by Lei Dong

Lei Dong

Eastern Washington University

Bernard Wong-On-Wing

Washington State University

Gladie Lui

Independent

Date Written: November 3, 2015

Abstract

Prior research finds that investors respond more favorably to a disaggregated earnings forecast than to an aggregated one immediately after the forecast. The present study examines the impact of this initial favorable effect on investors’ decisions following earnings surprise announcements. Based on Expectation Violation Theory, we posit that the benefit of a disaggregated earnings forecast can backfire when management subsequently reports an earnings surprise. The results of our experiment indicate that investors’ negative reactions are stronger if they first observed a disaggregated forecast than if they first saw an aggregated forecast. We find that investors make the greatest downward adjustments in investment interest when the disaggregated forecast is later found to be disappointing. This study provides evidence of the complexity of the effect of disaggregated earnings forecast and adds to the literature concerning the costs and benefits of accounting information disaggregation.

Keywords: Investor Reaction, Forecast Error, Forecast Disaggregation, Earnings Surprises, Expectation Violation Theory

JEL Classification: M41

Suggested Citation

Dong, Lei and Wong-On-Wing, Bernard and Lui, Gladie, Unintended Consequences of Forecast Disaggregation: A Multi-Period Perspective (November 3, 2015). Available at SSRN: https://ssrn.com/abstract=2774391 or http://dx.doi.org/10.2139/ssrn.2774391

Lei Dong (Contact Author)

Eastern Washington University ( email )

College of Business and Public Administration
668 N Riverpoint Blvd
Spokane, WA 99037
United States

Bernard Wong-On-Wing

Washington State University ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

Gladie Lui

Independent ( email )

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