Abstract
Both the popular press and research literature report increasing use of short-horizon earnings guidance (referred to hereafter as warnings), primarily before negative earnings surprises.1 While it is claimed that investors and analysts have little tolerance for disappointments, feel misled by the failure to warn, lose confidence in management, and vote with their feet by selling off their shares in companies which do not warn, Kasznik and Lev [1995] reported findings suggesting the opposite. Specifically, they found that, controlling for the magnitude of the negative earnings surprise, firms that warn tend to experience more negative stock price reactions, and more negative analyst earnings forecast revisions, than those providing no warning. In this paper, we investigate analysts' reactions to qualitative warnings of adverse earnings and attempt to reconcile analysts' more negative forecast revisions, as documented by Kasznik and Lev [1995], and the apparently conflicting anecdotal evidence that suggests more positive responses
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