Management forecast credibility and underreaction to news

Tee Yong Ng, Irem Tuna, Rodrigo Verdi

Research output: Journal article publicationJournal articleAcademic researchpeer-review

44 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)956-986
Number of pages31
JournalReview of Accounting Studies
Volume18
Issue number4
DOIs
Publication statusPublished - 1 Dec 2013
Externally publishedYes

Keywords

  • Credibility
  • Market efficiency
  • Voluntary disclosure

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)

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