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The Bad, the boom and the bust: Profit warnings over the business cycle

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  • Cox, Raymond A.K.
  • Dayanandan, Ajit
  • Donker, Han
  • Nofsinger, John

Abstract

We examine the market reaction of profit warnings (PWs) over the business cycle in the U.S. during 1995–2012. The average PW is associated with a −13.38% abnormal return during the announcement day. This is substantially higher than the abnormal return of firms who announce a negative earnings surprise without previously warning about it. We also find that the PW stock market reactions are asymmetric during the business cycle. Negative stock market reactions are greater in magnitude during expansion periods than during contraction periods. Theory suggests that this is because bad news is not expected during good times, so when it is announced, investors have a greater update to their beliefs.

Suggested Citation

  • Cox, Raymond A.K. & Dayanandan, Ajit & Donker, Han & Nofsinger, John, 2017. "The Bad, the boom and the bust: Profit warnings over the business cycle," Journal of Economics and Business, Elsevier, vol. 89(C), pages 13-19.
    • Handle: RePEc:eee:jebusi:v:89:y:2017:i:c:p:13-19
    DOI: 10.1016/j.jeconbus.2016.09.001
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    Cited by:

    1. Wenjie Hu & Hua Zhao & Tao Dong, 2018. "Dynamic Analysis for a Kaldor–Kalecki Model of Business Cycle with Time Delay and Diffusion Effect," Complexity, Hindawi, vol. 2018, pages 1-11, January.
    2. Adel Almasarwah, 2020. "Stock Price Informativeness and Profit Warnings: Empirical Analysis," Proceedings of the 19th International RAIS Conference, October 18-19, 2020 001aa, Research Association for Interdisciplinary Studies.
    3. Ajit Dayanandan & Han Donker & John Nofsinger, 2018. "Corporate goodness and profit warnings," Review of Quantitative Finance and Accounting, Springer, vol. 51(2), pages 553-573, August.

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