The Tale of Silent Dogs: Do Stock Prices Fully Reflect the Implication of News Withholding?
60 Pages Posted: 7 Aug 2017
Date Written: August 4, 2017
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: Suggested Citation