Abstract
This study examines the effects of earnings preannouncements on financial analyst and stock price reactions to earnings news. Prior experimental research documents that when the signs of a preannouncement surprise and subsequent earnings announcement surprise are consistent (i.e., both either positive or negative), analysts make larger magnitude revisions to their future period earnings forecasts in response to the total earnings news conveyed in the preannouncement and earnings announcement than when the surprise signs are inconsistent. This study extends this research by examining a sample of actual preannouncements from 1993–1997 to determine whether the effects documented in laboratory settings manifest at the aggregate market level in stock prices and consensus analyst forecast revisions. Results indicate that after controlling for the sign of earnings news, sign of earnings, and sign of the earnings announcement surprise, stock prices and analyst forecast revisions respond more strongly when a preannouncement and subsequent earnings announcement elicit the same surprise signs than when the surprise signs are inconsistent. Further analysis indicates that the consistency of the signs of a preannouncement surprise and earnings announcement surprise is not associated with future earnings, suggesting that the magnified reaction of investors and analysts to consistent surprise signs is not a rational reaction to associations observed in market settings.
Similar content being viewed by others
References
Ajinkya, B. B. and M. J. Gift, “Corporate Managers’ Earnings Forecasts and Symmetrical Adjustments of Market Expectations.” Journal of Accounting Research 22(2), 425–444 (1984).
Baginski, S. P. and J. M. Hassell, “The Market Interpretation of Management Earnings Forecasts as a Predictor of Subsequent Financial Analyst Forecast Revision.” The Accounting Review 65, 175–190 (1990).
Baginski, S. P., E. J. Conrad, and J. M. Hassell, “The Effects of Management Forecast Precision on Equity Pricing and on the Assessment of Earnings Uncertainty.” The Accounting Review 68, 913–927 (1990).
Basu, S., “The Conservatism Principle and the Asymmetric Timeliness of Earnings.” Journal of Accounting and Economics 24, 3–37 (1997).
Beaver, W. H., R. Clarke, and W. F. Wright, “The Association Between Unsystematic Security Returns and the Magnitude of Earnings Forecast Errors.” Journal of Accounting Research 17(2), 316–339 (1979).
Belsley, D. A., E. Kuh, and R. E. Welsch, Regression Diagnostics. New York: John Wiley and Sons, Inc., 1980.
Brown, P., G. Foster, and E. Noreen, “Security Analyst Multi-Year Earnings Forecasts and the Capital Markets.” American Accounting Association. Sarasota, FL, 1985.
Burgstahler, D. and M. Eames, “Earnings Management to Avoid Losses and Earnings Decreases: Are Analysts Fooled?” Contemporary Accounting Research 20(2), 253–294 (2003).
Das, S. and B. Lev, “Nonlinearity in the Returns-Earnings Relation: Tests of Alternative Specifications and Explanations.” Contemporary Accounting Research 11(1), 353–379 (1994).
Freeman, R. N. and S. Tse, “A Nonlinear Model of Security Price Responses to Unexpected Earnings.” Journal of Accounting Research 0(2), 185–209 (1992).
Hayn, C., “The Information Content of Losses.” Journal of Accounting and Economics 20, 125–153 (1995).
Hirst, E., L. Koonce, and J. Miller, “The Joint Effect of Management Credibility and the Form of Their Financial Forecasts on Investor Judgment.” Journal of Accounting Research 37(Supplement), 101–124 (1999).
Ip, G., “Rise in Profit Guidance Dilutes Positive Surprises.” Wall Street Journal (January 16), 1997.
King, R. G., G. Pownall, and G. Waymire, “Expectations Adjustment Via Timely Management Forecasts: Review, Synthesis, and Suggestions for Future Research.” Journal of Accounting Literature 9, 11–144 (1990).
Libby, R. and H. Tan, “Analysts” Reactions to Warnings of Negative Earnings Surprises.” Journal of Accounting Research 37(2), 415–436 (1999).
McCafferty, J., “Speaking of Earnings. Why Managing Earnings Expectations Often Doesn’t Work.” CFO, The Magazine for Senior Financial Executives (October 1997).
McGee, S., “As Stock Market Surges Ahead, “Predictable” Profits are Driving It.” Wall Street Journal (May 5, 1997).
McNichols, M., “Evidence of Informational Asymmetries from Management Earnings Forecasts and Stock Returns.” Accounting Review 64(1), 1–27 (1989).
Miller, J. S., “Unintended Effects of Preannouncements on Investor Reactions to Earnings News.” Working Paper, University of Notre Dame, 2004.
Pownall, G., C. Wasley, and G. Waymire, “The Stock Price Effects of Alternative Types of Management Earnings Forecasts.” Accounting Review 68(4), 896–912 (1993).
Skinner, D. J., “Why Firms Voluntarily Disclose Bad News.” Journal of Accounting Research 2(1), 38–60 (1994).
Soffer, L. C., S. R. Thiagarajan, and B. R. Walther, “Earnings Preannouncement Strategies.” Review of Accounting Studies 5(1), 5–26 (2000).
Stone, A., “Bad Quarter? Don’t Keep Shareholders Guessing.” Business Week 120 (April 6, 1998).
Tan, H., R. Libby, and J. E. Hunton, “Analysts’ Reactions to Earnings Preannouncement Strategies.” Journal of Accounting Research 40(1), 223–246 (2002).
Tasker, S. C., “Bridging the Information Gap: Quarterly Conference Calls as a Medium for Voluntary Disclosure.” Review of Accounting Studies 3, 137–167 (1998).
Trueman, B., “Why Do Managers Voluntarily Release Earnings Forecasts?” Journal of Accounting and Economics 8, 53–71 (1986).
Williams, P. A., “The Relation Between a Prior Earnings Forecast by Management and Analyst Response to a Current Management Forecast.” The Accounting Review 71(1), 103–113 (1996).
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Miller, J.S. Effects of Preannouncements on Analyst and Stock Price Reactions to Earnings News. Rev Quant Finan Acc 24, 251–275 (2005). https://doi.org/10.1007/s11156-005-6866-4
Issue Date:
DOI: https://doi.org/10.1007/s11156-005-6866-4