Do market prices reflect biased information? Evidence from voluntary corporate disclosures

Abstract

Using a high-frequency identification approach, we establish stock prices don't fully incorporate biased information. We study the announcements of easily quantifiable value-relevant news during voluntary corporate disclosure events where bias has been widely documented. For a large cross-section, we observe that market prices move in the same direction when the manager communicates cash-flow projections and when the same estimates are repeated by analysts the day after. Our findings are consistent with models in which investors have a heterogeneous interpretation of managerial announcements due to unknown reporting bias. We discuss alternative explanations and the implications of our results for market efficiency.

Keywords: High-frequency identification, price discovery, market efficiency, management forecasts, disclosure quality

JEL Classification: G12, G14, G30