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

48 Pages Posted: 29 Mar 2018

See all articles by Lee Jeremy Cohen

Lee Jeremy Cohen

University of Georgia - C. Herman and Mary Virginia Terry College of Business

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: February 1, 2017

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 Jeremy 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 (February 1, 2017). Global Finance Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3148740

Lee Jeremy Cohen

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Brooks Hall
Athens, GA 30602-6254
United States

Alan J. Marcus

Boston College - Department of Finance ( email )

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

Zabihollah Rezaee (Contact Author)

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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