Management forecast credibility and underreaction to news

Jeffrey Ng (), İrem Tuna () and Rodrigo Verdi ()
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Jeffrey Ng: Singapore Management University
İrem Tuna: London Business School
Rodrigo Verdi: MIT Sloan School of Management

Review of Accounting Studies, 2013, vol. 18, issue 4, No 3, 956-986

Abstract: 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.

Keywords: Market efficiency; Credibility; Voluntary disclosure (search for similar items in EconPapers)
JEL-codes: G12 G14 G30 M41 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s11142-012-9217-4

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