Hidden in the Woodshed: Big Bath Herding

57 Pages Posted: 2 Aug 2018

See all articles by Tatiana Fedyk

Tatiana Fedyk

University of San Francisco

Natalya V. Khimich

Drexel University

Date Written: June 29, 2018

Abstract

This paper demonstrates that bad news herding is actually accompanied by bad news over-reporting. By focusing on write-offs during two major recessions of 2001 and 2008 and taking advantage of a unique hand-collected dataset on reversals of restructuring charges, we document that when firms herd in their negative reports, they over-state bad news, creating a cushion that can be reversed in the future. Specifically, we show that: (1) large write-offs by early firms are followed by clustered write-offs by their peer firms; (2) herding firms over-report and subsequently partially reverse their write-offs; and (3) the reversals help herding firms to meet financial analysts’ earnings forecasts that otherwise would not be met. Taken together, these results lend credence to the following mechanism behind bad news herding: firms strategically engage in herding with excessive bad news reports to benefit from subsequent reversals.

Keywords: Big Bath, Herding, Write-offs, Restructuring Charges, Reversals of Restructuring Charges

JEL Classification: M, G

Suggested Citation

Fedyk, Tatiana and Khimich, Natalya V., Hidden in the Woodshed: Big Bath Herding (June 29, 2018). Available at SSRN: https://ssrn.com/abstract=3224962 or http://dx.doi.org/10.2139/ssrn.3224962

Tatiana Fedyk (Contact Author)

University of San Francisco ( email )

2130 Fulton Street
San Francisco, CA 94117
United States

Natalya V. Khimich

Drexel University ( email )

3141 Chestnut St
Philadelphia, PA 19104
United States

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