On the Anomalous Stock Price Response to Management Earnings Forecasts


  • Somnath Das,

  • Kyonghee Kim,

  • Sukesh Patro

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    • The first author is from the College of Business Administration, University of Illinois at Chicago, IL, USA. The second author is from the Robert J. Trulaske College of Business, University of Missouri at Columbia, MO, USA. The third author is from the College of Business, Northern Illinois University, DeKalb, IL, USA.

  • This paper has benefited from comments by Anand Desai, Harry Evans, Mei Feng, Yuan Gao, Michael Kimbrough, Donald Moser, Steven Orcutt, Ram Ramakrishnan, Lenny Soffer, Srini Sankaraguruswamy, Yoonseok Zang and seminar participants at Kansas State University, Singapore Management University, the University of Illinois at Chicago, the University of Pittsburgh, the 18th Annual Conference on Financial Economics and Accounting at New York University, and the 2007 Annual Meetings of the Financial Management Association. The authors thank Peter Pope (editor) and an anonymous refree for their valuable input. An earlier version of the paper was titled ‘Management Earnings Forecasts and Subsequent Price Formation’.

Sukesh Patro, College of Business, Northern Illinois University, DeKalb, IL, 60115, USA. e-mail: spatro@niu.edu


Abstract:  This paper examines stock price formation subsequent to management forecasts of quarterly earnings. In the post-announcement period, we find a significant upward price drift for both good news forecasts and bad news forecasts. Combined with the asymmetry in the initial market response, the upward post-guidance drift in stock prices is consistent with a reversal of an initial overreaction to managers’ bad news forecasts and a continuation of an initial underreaction to managers’ good news forecasts. This interpretation is supported by a negative (positive) relationship between the initial market response and the post-guidance drift in the bad news (good news) group. The drift pattern is robust to issues arising from measurement. Trading strategies exploiting the post-announcement drift suggest the existence of economically significant trading profits, net of estimated trading costs.