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Review of Accounting Studies

, Volume 18, Issue 4, pp 956–986 | Cite as

Management forecast credibility and underreaction to news

  • Jeffrey Ng
  • İrem Tuna
  • Rodrigo Verdi
Article

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 

JEL Classification

G12 G14 G30 M41 

Notes

Acknowledgments

We thank Brian Bushee, Gavin Cassar, Tarun Chordia, Vicki Dickinson, S.P. Kothari, Ryan LaFond, Kin Lo, Rick Mendenhall, Ray Pfeiffer, Scott Richardson, Jonathan Rogers, Tjomme Rusticus, Praveen Sinha, Siew Hong Teoh, Joseph Weber, and workshop participants at Barclays Global Investors, University of California at Berkeley, Bristol University, Lancaster University, London Business School, University of Mannheim, University of Minnesota, MIT, Tilburg University, 2006 FEA conference, 2007 FARS Midyear Meeting, 2007 Maryland Finance Symposium, 2007 WFA conference, and 2007 AAA conference for their helpful comments. We appreciate financial support from the London Business School, the MIT Sloan School of Management, and the Wharton School. Jeffrey Ng and Rodrigo Verdi are also grateful for financial support from the Deloitte & Touche Foundation.

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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.School of AccountancySingapore Management UniversitySingaporeSingapore
  2. 2.London Business SchoolLondonUK
  3. 3.MIT Sloan School of ManagementCambridgeUSA

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