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Prior Forecasting Accuracy and Investor Reaction to Management Earnings Forecasts

46 Pages Posted: 2 Oct 2005 Last revised: 8 Jul 2009

Amy P. Hutton

Boston College - Carroll School of Management

Phillip C. Stocken

Tuck School of Business at Dartmouth

Date Written: June 8, 2009

Abstract

We examine the properties of firms' forecasting records and whether the accuracy of their prior earnings forecasts affects investor response to their subsequent forecasts. Within the context of a Bayesian model of investor learning, we find that the stock price response to management forecast news is increasing in prior forecast accuracy and also in the length of a firm's forecasting record. Further, we document that investors are more responsive to extreme good and bad news forecasts when a firm has an established forecasting record. Overall, these results suggest that a firm’s prior forecasting behavior allows it to establish a forecasting reputation.

Keywords: Management forecasts, reputation, voluntary disclosure

JEL Classification: G12, G18, G38, K22, G39, M41, M45

Suggested Citation

Hutton, Amy P. and Stocken, Phillip C., Prior Forecasting Accuracy and Investor Reaction to Management Earnings Forecasts (June 8, 2009). Available at SSRN: https://ssrn.com/abstract=817108 or http://dx.doi.org/10.2139/ssrn.817108

Amy P. Hutton (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617 552 1951 (Phone)

Phillip C. Stocken

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-2843 (Phone)

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