 Market Reactions to Warnings of Negative Earnings Surprises: Further EvidenceWeihong Xu Journal of Business Finance & Accounting, 2008, vol. 35, issue 7‐8, 818-836 Abstract: Abstract: This study examines two plausible explanations for Kasznik and Lev's (1995) counterintuitive finding that warning firms are subject to more negative market returns than no‐warning firms. Namely, are the more negative market reactions to warning firms due to their poorer future earnings performance or due to investor overreaction? I find that, compared with no‐warning firms, warning firms experience more severe one‐year‐ahead earnings declines and these earnings declines can explain the stronger market returns to warning firms. However, my results do not support an investor overreaction explanation. The tests of subsequent abnormal returns of warning firms over various windows do not detect stock return reversals due to correction for overreaction. In addition, the greater revisions in analysts' forecasts for warning firms are found to enhance analyst accuracy rather than increase analyst pessimism. Collectively, my results suggest that the more negative market reactions to warning firms reflect investors' rational anticipation of more severe declines in future earnings for warning firms rather than investor overreaction. Date: 2008 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:jbfnac:v:35:y:2008:i:7-8:p:818-836 Ordering information: This journal article can be ordered from Access Statistics for this article Journal of Business Finance & Accounting is currently edited by P. F. Pope, A. W. Stark and M. Walker More articles in Journal of Business Finance & Accounting from Wiley Blackwell |
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