The stock price effects from downward earnings guidance versus beating analysts' forecasts: which effect dominates? Academic Article uri icon

abstract

  • This paper provides evidence on the net stock price effects associated with managers following a disclosure strategy of guiding earnings down to alevel where they can report a positive earnings surprise. Prior literaturedocuments a stock price premium when firms meet or beat analysts' forecasts.However, studies also show a substantial negative price response to downward earnings guidance that can potentially negate any benefit from reportinga positive earnings surprise. We find that the negative stock price effect for firms that release downward earnings guidance is substantially larger than the stock price premium from meeting analysts' forecasts. Further, thisdownward guidance stock price penalty persists after explicitly controllingfor other news that might be disclosed by managers that voluntarily provideguidance. These findings challenge conclusions made in some prior research that the optimal disclosure strategy is to ensure a positive earnings surprise at the earnings announcement date. 2011 Taylor & Francis.

published proceedings

  • ACCOUNTING AND BUSINESS RESEARCH

author list (cited authors)

  • Rees, L., & Twedt, B.

citation count

  • 6

complete list of authors

  • Rees, Lynn||Twedt, Brady

publication date

  • June 2011