The Tale of Silent Dogs: Do Stock Prices Fully Reflect the Implication of News Withholding?

60 Pages Posted: 7 Aug 2017

See all articles by Frank Zhou

Frank Zhou

University of Pennsylvania - The Wharton School

Yuqing Zhou

University of California, Los Angeles (UCLA), Anderson School of Management, Students

Date Written: August 4, 2017

Abstract

We investigate whether investors correctly interpret the implication of lack of management forecasts. We find that, for firm quarters without management forecasts, investors underestimate the magnitude of bad news implied by nonguidance, which generates 40 basis points predictable negative abnormal stock returns around the earnings announcement and up to 100 basis points for some subsamples. The results are consistent with limited strategic thinking: investors underestimate the relation between management's information withholding and management's private information. This leads to an initial overpricing of the implication of nonguidance and a subsequent correction around the earnings announcement. We contribute to the literature by showing that investors are constrained in understanding managers' strategic nondisclosure decisions. As a result, management can withhold bad news without suffering much negative capital market consequence, at least prior to the earnings announcement.

Keywords: Management forecasts; limited strategic thinking; information withholding; anomaly

JEL Classification: G14; M41

Suggested Citation

Zhou, Frank and Zhou, Yuqing, The Tale of Silent Dogs: Do Stock Prices Fully Reflect the Implication of News Withholding? (August 4, 2017). Available at SSRN: https://ssrn.com/abstract=3013757 or http://dx.doi.org/10.2139/ssrn.3013757

Frank Zhou (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Yuqing Zhou

University of California, Los Angeles (UCLA), Anderson School of Management, Students ( email )

Los Angeles, CA
United States

HOME PAGE: http://www.yuqingzhou.com/

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