Market revaluation to warnings of negative earnings surprises: Evidence from subsequent earnings performance, stock return performance and analysts' forecast revisions.

摘要

In this study, I attempt to explain the following phenomenon documented by Kasznik and Lev (1995): given equally large negative earnings surprises, firms that issued preemptive warnings experienced more negative market reactions and more negative analysts' forecast revisions than firms that did not warn. Such findings appear counterintuitive. Given the many benefits of voluntary disclosures, investors should reward rather than penalize warning firms.; This study examines whether the stronger market reactions to warning firms are better explained by larger declines in these firms' future earnings performance or by investor overreactions to warnings. I present evidence that, compared to no-warning firms, warning firms experienced larger declines in earnings performance in the year of earnings surprises and in the subsequent three years. Concurrent with the more deteriorated future earnings performance, warning firms experienced lower buy-and-hold returns than no-warning firms for up to a three-year holding period. The underperformance of the warning sample in comparison to the no-warning sample did not end in the year with earnings surprises. Furthermore, analysts' larger forecast revisions to warning firms were found to increase analysts' forecast accuracy rather than to increase their forecast pessimism.; Overall, my results do not support investor overreaction explanation. Instead, they suggest that managers tend to issue warnings when their firms will suffer from more serious earnings problems in the future. When investors react to the information carried by managers' warning decisions, stronger market reactions will be observed as the result of larger changes in investor expectations of warning firms' future earnings.