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Do investors overreact to earnings warnings?

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  • Oranee Tawatnuntachai
  • Devrim Yaman

Abstract

This study shows that contrary to what many managers argue, there is no overreaction to earnings warnings. Our sample consists of 986 firms that had significantly lower fourth‐quarter earnings than analysts' forecasts during the period of 1983 to 1998. About 9% of these firms released quantitative earnings information while 6.5% of the firms disclosed qualitative earnings information prior to the formal earnings report dates. We find that although these firms experience significant stock price declines during the warning period, their share prices are still higher than the economic values, calculated using Ohlson's residual income model. Further, long‐run operating and stock performance of these firms are not more positive than the performance of firms that do not warn. We also find that investor reaction to both warning and non‐warning firms is positively related to the firms' long‐run stock and operating performance. These findings support the argument that investors do not overreact to the warnings but base their reaction on anticipated long‐term performance of the firms.

Suggested Citation

  • Oranee Tawatnuntachai & Devrim Yaman, 2007. "Do investors overreact to earnings warnings?," Review of Financial Economics, John Wiley & Sons, vol. 16(2), pages 177-201.
    • Handle: RePEc:wly:revfec:v:16:y:2007:i:2:p:177-201
    DOI: 10.1016/j.rfe.2006.02.001
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    References listed on IDEAS

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    Cited by:

    1. Hisham Farag & Robert Cressy, 2010. "Do unobservable factors explain the disposition effect in emerging stock markets?," Applied Financial Economics, Taylor & Francis Journals, vol. 20(15), pages 1173-1183.

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