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Does the Precision of News Affect Market Underreaction? Evidence from Returns Following Two Classes of Profit Warnings

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  • George Bulkley
  • Renata Herrerias

Abstract

"We evaluate whether the market reacts rationally to profit warnings by testing for subsequent abnormal returns. Warnings fall into two classes: those that include a new earnings forecast, and those that offer only the guidance that earnings will be below current expectations. We find significant negative abnormal returns in the first three months following both types of warning. There is also evidence that underreaction is more pronounced when the disclosure is less precise. Abnormal returns are significantly more negative following disclosures that offer only qualitative guidance than when a new earnings forecast is included". Copyright Blackwell Publishers Ltd, 2005.

Suggested Citation

  • George Bulkley & Renata Herrerias, 2005. "Does the Precision of News Affect Market Underreaction? Evidence from Returns Following Two Classes of Profit Warnings," European Financial Management, European Financial Management Association, vol. 11(5), pages 603-624.
  • Handle: RePEc:bla:eufman:v:11:y:2005:i:5:p:603-624
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1354-7798.2005.00300.x
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    Cited by:

    1. 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.
    2. Dayanandan, Ajit & Donker, Han & Karahan, Gökhan, 2017. "Do voluntary disclosures of bad news improve liquidity?," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 16-29.
    3. Forbes, William & Hudson, Robert & Skerratt, Len & Soufian, Mona, 2015. "Which heuristics can aid financial-decision-making?," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 199-210.
    4. Ammann, Manuel & Frey, Roman & Verhofen, Michael, 2012. "Do Newspaper Articles Predict Aggregate Stock Returns?," Working Papers on Finance 1204, University of St. Gallen, School of Finance.
    5. Moshe Maor, 2014. "Policy persistence, risk estimation and policy underreaction," Policy Sciences, Springer;Society of Policy Sciences, vol. 47(4), pages 425-443, December.

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