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Stock Market Overreaction to Management Earnings Forecasts

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  • Jean-Sébastien Michel
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    Abstract

    I hypothesize that the stock market overreacts to management earnings forecasts. I find that negative management forecast surprises lead to a -5.9% abnormal return around the forecast and a 1.9% correction in the 2-month period after earnings are announced. Positive surprises work in the opposite direction, with a 1.9% abnormal return and a -1.7% correction. The level of the stock market overreaction varies depending on forecast and firm characteristics, but the marginal impact remains the same: a 1% change in the stock market reaction around the forecast is associated with a 0.4% correction. These findings are consistent with the idea that investors overweight their recent experience in situation of increased uncertainty, leading to stock market overreaction.

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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2013/CIRPEE13-19.pdf
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    Bibliographic Info

    Paper provided by CIRPEE in its series Cahiers de recherche with number 1319.

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    Date of creation: 2014
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    Handle: RePEc:lvl:lacicr:1319

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    Related research

    Keywords: Overreaction; information uncertainty; market efficiency; management forecasts; analyst forecasts;

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    1. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
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    15. Cen, Ling & Hilary, Gilles & Wei, K. C. John, 2013. "The Role of Anchoring Bias in the Equity Market: Evidence from Analysts’ Earnings Forecasts and Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(01), pages 47-76, February.
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