Earnings Forecasts and Price Efficiency after Earnings Realizations: Reduction in Information Asymmetry through Learning from Price

Posted: 17 Jul 2020

See all articles by Guojin Gong

Guojin Gong

University of Connecticut

Hong Qu

Kennesaw State University - Michael J. Coles College of Business

Ian Tarrant

Pennsylvania State University

Date Written: April 28, 2020

Abstract

When information asymmetry is a major market friction, earnings forecasts can lead to higher price efficiency even after the information in forecasts completely dissipates upon earnings realizations. We show this in an experimental market that features information asymmetry (i.e., some traders possess differential private information). Earnings forecasts reduce information asymmetry and lead to prices that reflect a greater amount of private information. Traders can learn more about others’ information from prices. This information learned from past prices continues to reduce information asymmetry and improve price efficiency even after earnings realizations. We contribute to the disclosure literature by showing the evidence that the learning-from-price effect amplifies the impact of public disclosure on price efficiency.

Keywords: Public Forecast, Information Aggregation, Information Asymmetry, Price Efficiency, Learning From Price, Experimental Market

Suggested Citation

Gong, Guojin and Qu, Hong and Tarrant, Ian M., Earnings Forecasts and Price Efficiency after Earnings Realizations: Reduction in Information Asymmetry through Learning from Price (April 28, 2020). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3634516

Guojin Gong

University of Connecticut ( email )

Storrs, CT 06269
United States

Hong Qu (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States

HOME PAGE: http://https://works.bepress.com/hong-qu/

Ian M. Tarrant

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States

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