The first author is at the Walton College of Business, University of Arkansas, USA. The second author is at the Mays Business School, Texas A&M University, USA. The third author is at the John T. Steed School of Accounting, Price College of Business, University of Oklahoma, USA. The authors are grateful for comments from workshop participants at Arizona State University, University of Arkansas, University of Hawaii, and University of Texas at Arlington. (Paper received October, 2012; revised version accepted March, 2013).
Earnings Announcements, Differences of Opinion and Management Guidance
Article first published online: 2 AUG 2013
© 2013 John Wiley & Sons Ltd
Journal of Business Finance & Accounting
Volume 40, Issue 7-8, pages 769–795, September/October 2013
How to Cite
Keskek, S., Rees, L. and Thomas, W. B. (2013), Earnings Announcements, Differences of Opinion and Management Guidance. Journal of Business Finance & Accounting, 40: 769–795. doi: 10.1111/jbfa.12037
- Issue published online: 21 OCT 2013
- Article first published online: 2 AUG 2013
- differences of opinion;
- short-sale constraints;
- management earnings guidance;
- earnings announcements;
- market efficiency
Berkman, Dimitrov, Jain, Koch, and Tice (2009) document a negative relationship between differences of opinion and earnings announcement returns, and this relationship is more pronounced when short-sale constraints are likely to be high. These findings are interpreted as support for the theory in Miller (1977) that binding short sale constraints cause pessimists to be underrepresented in price formation. We conjecture that accounting information (i.e., earnings news) is likely to play a role in this returns pattern. After controlling for the level of earnings news, we find that the relationship between differences of opinion and stock returns is either eliminated or opposite from what is predicted by Miller's theory. Further, we present evidence that suggests the confounding effect of earnings news can be explained by (pessimistic) management earnings guidance. Our findings offer an alternative explanation for why low differences of opinion stocks earn greater abnormal returns around earnings announcements.