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Management forecast credibility and underreaction to news

Author

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  • Jeffrey Ng

    (Singapore Management University)

  • İrem Tuna

    (London Business School)

  • Rodrigo Verdi

    (MIT Sloan School of Management)

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.

Suggested Citation

  • Jeffrey Ng & İrem Tuna & Rodrigo Verdi, 2013. "Management forecast credibility and underreaction to news," Review of Accounting Studies, Springer, vol. 18(4), pages 956-986, December.
    • Handle: RePEc:spr:reaccs:v:18:y:2013:i:4:d:10.1007_s11142-012-9217-4
    DOI: 10.1007/s11142-012-9217-4
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    References listed on IDEAS

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    Cited by:

    1. William Ciconte & Marcus Kirk & Jennifer Wu Tucker, 2014. "Does the midpoint of range earnings forecasts represent managers’ expectations?," Review of Accounting Studies, Springer, vol. 19(2), pages 628-660, June.

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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