Can Executives Predict How Firm News Affects Stock Price?
57 Pages Posted: 7 Apr 2021 Last revised: 26 Jul 2021
Date Written: July 23, 2021
More than 650 U.S. public company executives predict the stock price response to their quarterly financial reports and share their prediction after under a nondisclosure agreement. Despite having full knowledge of the reports before their release, executives’ estimates differ from realized returns by roughly 100% of the average absolute one-day response (i.e., 600 to 700 basis points) and are directionally wrong in one-third of cases. We do not find evidence that executives learn from the unexpected price movements; rather, executives profitably trade against the market the greater the prediction error. Greater error also reduces window dressing of financial information.
Keywords: public company executives, stock price expectations, market efficiency, insider trading, myopia, learning from price
JEL Classification: D84, G14, G40, M12, M41
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