Stock Price Behavior Associated with Managers' Earnings and Revenue Forecasts

Abstract

Managers' earnings forecasts are associated with statistically significant stock price reactions. While nearly half of all earnings forecasts are released with revenue forecasts, the motivation for and the effects associated with revenue forecasts are unknown. This paper proposes and tests hypotheses involving the stock price informativeness of both earnings and revenue forecasts. The expectations adjustment hypothesis advanced by Ajinkya and Gift [1984], and generalized by King, Pownall, and Waymire [1990], predicts that managers release forecasts to align equilibrium prices of common stocks with those of managers. Under this view, both earnings and revenue forecasts are mechanisms by which managers adjust expectations. Since releasing forecasts entails costs, revenue forecasts will accompany earnings forecasts when the latter are insufficient to adjust stock prices consistent with managers' expectations. This yields our paper's primary hypotheses: (1) earnings forecasts released without revenue forecasts are more price informative, and (2) revenue forecasts are price informative. Since the magnitude and opportunities for trading gains from foreknowledge of information is greater for large firms, we