Management Forecast Credibility and Underreaction to News

49 Pages Posted: 15 Sep 2006 Last revised: 18 Apr 2013

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

A. Irem Tuna

London Business School

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2012

Abstract

In this paper, we first document evidence of underreaction to management forecast news. We then hypothesize that the credibility of the forecast influences the magnitude of this underreaction. Relying on evidence that more credible forecasts are associated with a larger reaction in the short window around the management forecasts and a smaller post-management forecast drift in returns, we show that the magnitude of the underreaction is smaller for firms that provide more credible forecasts. Our paper contributes to the literature by providing out-of-sample evidence of the drift in returns documented in the post-earnings-announcement drift literature, with the credibility of the news being one explanation for the phenomenon.

Keywords: Market efficiency, Management forecasts, Earnings, Disclosure quality

JEL Classification: G12, G14, G30, M41

Suggested Citation

Ng, Jeffrey and Tuna, A. Irem and Verdi, Rodrigo S., Management Forecast Credibility and Underreaction to News (March 1, 2012). Available at SSRN: https://ssrn.com/abstract=930697 or http://dx.doi.org/10.2139/ssrn.930697

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Ayse Irem Tuna (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
100 Main Street E62-666
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)

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