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Stock Market Overreaction to Management Earnings Forecasts

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  • Jean-Sébastien Michel

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.

Suggested Citation

  • Jean-Sébastien Michel, 2014. "Stock Market Overreaction to Management Earnings Forecasts," Cahiers de recherche 1319, CIRPEE.
  • Handle: RePEc:lvl:lacicr:1319
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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2013/CIRPEE13-19.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

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

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • 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
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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