Does the market overweight imprecise information? Evidence from customer earnings announcements

Cheng-shing Cheng, John Daniel Eshleman

Research output: Journal article publicationJournal articleAcademic researchpeer-review

12 Citations (Scopus)

Abstract

We examine how supplier-firm shareholders respond to the earnings announcements of their major customers to test the moderated confidence hypothesis, which predicts overreaction to imprecise signals. In our setting, the moderated confidence hypothesis predicts that supplier shareholders will overreact to customer earnings news because that news contains imprecise information about the suppliers' future cash flows. We find evidence that supplier earnings announcement abnormal returns are negatively correlated with supplier abnormal returns at the earlier customers' earnings announcements, consistent with supplier overreaction. We also find evidence that the overreaction declines with the strength of the economic ties between the supplier and the customer.
Original languageEnglish
Pages (from-to)1125-1151
Number of pages27
JournalReview of Accounting Studies
Volume19
Issue number3
DOIs
Publication statusPublished - 1 Jan 2014

Keywords

  • Information transfers
  • Mispricing
  • Price discovery
  • Supply chain

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)

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