Wednesday, Nov 21, 2018         | 3:30pm-5:00pm |  Room 333, HSBC Business School Building

Abstract

Managers issue forecasts in order to align investor beliefs with their private information. However, management forecasts have an average horizon of only a few months, so investors must judge the long-term persistence of the news revealed by management. Our main finding is that stock returns around unbundled managerial forecast news reverse after the forecast horizon (i.e. the last earnings realization forecasted) and the reversals persist for approximately two years. Further analyses suggest that the return reversals arise because forecast news is associated with below average earnings persistence, and analysts are surprised by the lower (higher) earnings that occur following positive (negative) management forecasts. We also find that increasing the frequency of disclosure attenuates the return reversals, consistent with more frequent disclosure improving investors’ ability to assess the persistence of forecast news. Overall, our findings suggest that for at least some firms, aligning investor beliefs with managers’ private information about short-horizon earnings may lead to misalignment at longer horizons.