IDEAS home Printed from https://ideas.repec.org/a/wly/coacre/v38y2021i1p654-675.html

Earnings Forecasts and Price Efficiency after Earnings Realizations: Reduction in Information Asymmetry through Learning from Price

Author

Listed:
  • Guojin Gong
  • Hong Qu
  • Ian Tarrant

Abstract

When information asymmetry is a major market friction, earnings forecasts can lead to higher price efficiency even after the information in forecasts completely dissipates upon earnings realizations. We show this in an experimental market that features information asymmetry (i.e., some traders possess differential private information). Earnings forecasts reduce information asymmetry and lead to prices that reflect a greater amount of private information. Traders can learn more about others' information from prices. This information learned from past prices continues to reduce information asymmetry and improve price efficiency even after earnings realizations. We contribute to the disclosure literature by showing the evidence that the learning‐from‐price effect amplifies the impact of public disclosure on price efficiency. Prévisions de bénéfices et efficacité en matière de prix après la matérialisation des bénéfices : Réduction de l'asymétrie de l'information grâce à l'apprentissage à partir des prix Lorsque l'asymétrie de l'information est une source de tension importante sur le marché, les prévisions de bénéfices peuvent entraîner une hausse de l'efficacité en matière de prix même après que l'information fournie dans les prévisions est rendue entièrement caduque par la matérialisation des bénéfices. Nous montrons ce phénomène dans le cadre d'un marché expérimental caractérisé par une asymétrie de l'information (c'est‐à‐dire où certains courtiers possèdent de l'information différentielle confidentielle). Les prévisions de bénéfices réduisent l'asymétrie de l'information et mènent à des prix qui reflètent une information confidentielle plus abondante. Les courtiers peuvent en apprendre davantage sur l'information que possèdent les autres à partir des prix. L'information tirée des anciens prix continue de réduire l'asymétrie de l'information et d'accroître l'efficacité en matière de prix même après la matérialisation des bénéfices. Nous contribuons à la littérature sur la divulgation de l'information en présentant la preuve que l'effet de l'apprentissage à partir des prix amplifie l'impact de la divulgation publique sur l'efficacité en matière de prix.

Suggested Citation

  • Guojin Gong & Hong Qu & Ian Tarrant, 2021. "Earnings Forecasts and Price Efficiency after Earnings Realizations: Reduction in Information Asymmetry through Learning from Price," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 654-675, March.
    • Handle: RePEc:wly:coacre:v:38:y:2021:i:1:p:654-675
    DOI: 10.1111/1911-3846.12615
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1911-3846.12615
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1911-3846.12615?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2018. "Informed traders’ performance and the information environment: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 70(C), pages 1-15.
    2. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    3. J. Richard Dietrich & Steven J. Kachelmeier & Don N. Kleinmuntz & Thomas J. Linsmeier, 2001. "Market Efficiency, Bounded Rationality, and Supplemental Business Reporting Disclosures," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 39(2), pages 243-268, September.
    4. Coller, M & Yohn, TL, 1997. "Management forecasts and information asymmetry: An examination of bid-ask spreads," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 35(2), pages 181-191.
    5. Bloomfield, Robert & Libby, Robert & Nelson, Mark W., 2000. "Underreactions, overreactions and moderated confidence," Journal of Financial Markets, Elsevier, vol. 3(2), pages 113-137, May.
    6. Forsythe, Robert & Lundholm, Russell, 1990. "Information Aggregation in an Experimental Market," Econometrica, Econometric Society, vol. 58(2), pages 309-347, March.
    7. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2008. "What affects the market's ability to adjust for optimistic forecast bias? Evidence from experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 66(2), pages 358-372, May.
    8. Diamond, Douglas W & Verrecchia, Robert E, 1991. "Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-1359, September.
    9. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    10. Alex Edmans & Itay Goldstein & Wei Jiang, 2015. "Feedback Effects, Asymmetric Trading, and the Limits to Arbitrage," American Economic Review, American Economic Association, vol. 105(12), pages 3766-3797, December.
    11. Rogers, Jonathan L. & Skinner, Douglas J. & Van Buskirk, Andrew, 2009. "Earnings guidance and market uncertainty," Journal of Accounting and Economics, Elsevier, vol. 48(1), pages 90-109, October.
    12. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    13. Lennox, Clive S. & Park, Chul W., 2006. "The informativeness of earnings and management's issuance of earnings forecasts," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 439-458, December.
    14. Bloomfield, Robert, 1996. "Quotes, Prices, and Estimates in a Laboratory Market," Journal of Finance, American Finance Association, vol. 51(5), pages 1791-1808, December.
    15. Amiram, Dan & Owens, Edward & Rozenbaum, Oded, 2016. "Do information releases increase or decrease information asymmetry? New evidence from analyst forecast announcements," Journal of Accounting and Economics, Elsevier, vol. 62(1), pages 121-138.
    16. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2002. "Market behavior in the presence of divergent and imperfect private information: experimental evidence from Canada, China, and the United States," Journal of Economic Behavior & Organization, Elsevier, vol. 47(4), pages 435-450, April.
    17. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
    18. Hales, Jeffrey, 2009. "Are investors really willing to agree to disagree? An experimental investigation of how disagreement and attention to disagreement affect trading behavior," Organizational Behavior and Human Decision Processes, Elsevier, vol. 108(2), pages 230-241, March.
    19. Lys, Thomas & Sohn, Sungkyu, 1990. "The association between revisions of financial analysts' earnings forecasts and security-price changes," Journal of Accounting and Economics, Elsevier, vol. 13(4), pages 341-363, December.
    20. Clement, Michael B. & Hales, Jeffrey & Xue, Yanfeng, 2011. "Understanding analysts' use of stock returns and other analysts' revisions when forecasting earnings," Journal of Accounting and Economics, Elsevier, vol. 51(3), pages 279-299, April.
    21. Jeffrey S. Miller, 2006. "Unintended Effects of Preannouncements on Investor Reactions to Earnings News," Contemporary Accounting Research, John Wiley & Sons, vol. 23(4), pages 1073-1103, December.
    22. Plott, Charles R & Sunder, Shyam, 1988. "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Econometrica, Econometric Society, vol. 56(5), pages 1085-1118, September.
    23. Grossman, Sanford J, 1976. "On the Efficiency of Competitive Stock Markets Where Trades Have Diverse Information," Journal of Finance, American Finance Association, vol. 31(2), pages 573-585, May.
    24. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2004. "Asset prices and informed traders' abilities: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 29(7), pages 609-626, October.
    25. Lee, Charles M. C., 2001. "Market efficiency and accounting research: a discussion of 'capital market research in accounting' by S.P. Kothari," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 233-253, September.
    26. Libby, R & Tan, HT, 1999. "Analysts' reactions to warnings of negative earnings surprises," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 37(2), pages 415-435.
    27. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
    28. Foster, F Douglas & Viswanathan, S, 1996. "Strategic Trading When Agents Forecast the Forecasts of Others," Journal of Finance, American Finance Association, vol. 51(4), pages 1437-1478, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ye Chen & Naiding Yang, 2023. "The effect of corporate donation motive attribution on investors' judgments of future earnings prospects: The moderating role of individual moral orientation," Business Ethics, the Environment & Responsibility, John Wiley & Sons, Ltd., vol. 32(2), pages 435-453, April.
    2. Lin, Le & Li, Nongwen, 2026. "Investor risk concern and opportunistic insider sales," Journal of Business Research, Elsevier, vol. 205(C).
    3. Stirnkorb, Sebastian, 2024. "Transaction cost unbundling and investors’ reliance on investment research: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 112(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    2. Jiang, Jinglin & Nanda, Vikram & Xiao, Steven Chong, 2021. "Stock-market disruptions and corporate disclosure policies," Journal of Corporate Finance, Elsevier, vol. 66(C).
    3. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2018. "Informed traders’ performance and the information environment: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 70(C), pages 1-15.
    4. Aliyev, Nihad & Huseynov, Fariz & Rzayev, Khaladdin, 2022. "Algorithmic trading and investment-to-price sensitivity," LSE Research Online Documents on Economics 118844, London School of Economics and Political Science, LSE Library.
    5. Evgeny Petrov, 2020. "Voluntary Disclosure and Informed Trading," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 2257-2286, December.
    6. Yangyang Chen & Jeffrey Ng & Emmanuel Ofosu & Xin Yang, 2024. "Tick Size and Earnings Guidance in Small-Cap Firms: Evidence from the SEC’s Tick Size Pilot Program," Management Science, INFORMS, vol. 70(8), pages 5386-5407, August.
    7. Dan Amiram & Zahn Bozanic & Mark Bradshaw & Oded Rozenbaum, 2025. "Distribution channels of analyst research: new evidence," Review of Accounting Studies, Springer, vol. 30(4), pages 3421-3463, December.
    8. Asriyan, Vladimir & Fuchs, William & Green, Brett, 2021. "Aggregation and design of information in asset markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 191(C).
    9. Huang, Sheng & Maharjan, Johan & Nanda, Vikram, 2024. "Liquid stock as an acquisition currency," Journal of Corporate Finance, Elsevier, vol. 85(C).
    10. Kristian D. Allee & Theodore E. Christensen & Bryan S. Graden & Kenneth J. Merkley, 2021. "The Genesis of Voluntary Disclosure: An Analysis of Firms’ First Earnings Guidance," Management Science, INFORMS, vol. 67(3), pages 1914-1938, March.
    11. Nicolas S. Lambert & Michael Ostrovsky & Mikhail Panov, 2018. "Strategic Trading in Informationally Complex Environments," Econometrica, Econometric Society, vol. 86(4), pages 1119-1157, July.
    12. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
    13. Martin, Rachel, 2019. "Examination and implications of experimental research on investor perceptions," Journal of Accounting Literature, Elsevier, vol. 43(C), pages 145-169.
    14. Jianguo Chen & David Smith, 2024. "Disclosure policy choice, stock returns and information asymmetry: Evidence from capital expenditure announcements," Australian Journal of Management, Australian School of Business, vol. 49(2), pages 192-213, May.
    15. Itay Goldstein, 2023. "Information in Financial Markets and Its Real Effects," Review of Finance, European Finance Association, vol. 27(1), pages 1-32.
    16. Vahid Biglari & Ervina Binti Alfan & Rubi Binti Ahmad & Najmeh Hajian, 2013. "The Ability of Analysts' Recommendations to Predict Optimistic and Pessimistic Forecasts," PLOS ONE, Public Library of Science, vol. 8(10), pages 1-10, October.
    17. Ertimur, Yonca & Sletten, Ewa & Sunder, Jayanthi, 2014. "Large shareholders and disclosure strategies: Evidence from IPO lockup expirations," Journal of Accounting and Economics, Elsevier, vol. 58(1), pages 79-95.
    18. Robert Stoumbos, 2023. "The Growth of Information Asymmetry Between Earnings Announcements and Its Implications for Reporting Frequency," Management Science, INFORMS, vol. 69(3), pages 1901-1928, March.
    19. Martin Barner & Francesco Feri & Charles R. Plott, 2005. "On the microstructure of price determination and information aggregation with sequential and asymmetric information arrival in an experimental asset market," Annals of Finance, Springer, vol. 1(1), pages 73-107, January.
    20. Rogers, Jonathan L. & Van Buskirk, Andrew, 2013. "Bundled forecasts in empirical accounting research," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 43-65.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:coacre:v:38:y:2021:i:1:p:654-675. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1111/(ISSN)1911-3846 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.