Good News Forecasts Research Articles

Do analysts distribute negative opinions earlier?

We examine analysts’ forecast timing when issuing negative opinions. When management withholds bad news, good news become more abundant but relatively uninformative. We theoretically predict and empirically document that analysts treat observed bad news as having higher precision and respond to it by issuing forecasts more quickly and accurately than for good news forecasts. These results hold to various robustness checks. This study improves our understanding of negative information dissemination in capital markets.

Regulation Fair Disclosure and the timeliness of long‐horizon management forecasts

AbstractWe examine the effect of Regulation Fair Disclosure (hereafter Reg FD) on the timeliness of long‐horizon management forecasts of annual earnings, especially those conveying bad news. We expect that managers are less timely in issuing bad news forecasts than good news forecasts prior to Reg FD when they can disclose bad news to selected analysts and institutional investors privately. As Reg FD prohibits private disclosures of material information, managers are expected to accelerate the issuance of long‐horizon bad news forecasts after Reg FD due to concerns of litigation risk from institutional investors and loss of analyst coverage, leading to a decrease in timeliness asymmetry between bad news and good news forecasts. We also expect that the effect of Reg FD is stronger among firms with lower ex‐ante litigation risk or higher information asymmetry as they are more likely to withhold bad news prior to Reg FD. In addition, we expect that investors and analysts react more to bad news forecasts than to good news forecasts prior to Reg FD, and this asymmetry decreases after Reg FD. Our results are consistent with our predictions and suggest that managers provide long‐horizon forecasts conveying bad news more timely after Reg FD.

Do Analysts Distribute Negative Opinions Earlier?

This paper examines analysts’ forecast timing when issuing negative opinions. We are motivated by two findings in the literature. One finding is that management tends to withhold bad news, which would result in good news being more abundant but relatively uninformative and bad news with the opposite features. The other finding is that analysts tend to issue accurate forecasts earlier. Taken together, the two findings suggest that analysts treat observed bad news as having higher precision and respond to it by issuing forecasts more quickly. Our theoretical predictions and empirical evidence support this. We find that relative to good news forecasts 1) bad news forecasts are released earlier, and 2) holding timing fixed, bad news forecasts have lower absolute forecast errors. These results are robust to alternative sample selections and variable measurements.

Prior Forecasting Accuracy and Investor Reaction to Management Earnings Forecasts

ABSTRACT We examine the properties of firms' forecasting records and whether the accuracy of their prior earnings forecasts affects investor response to their subsequent forecasts.Within the context of a Bayesian model of investor learning, we find that the stock price response to management forecast news is increasing in prior forecast accuracy and also in the length of a firm's forecasting record. Further, we document that investors are more responsive to extreme good and bad news forecasts when a firm has an established forecasting record. Overall, these results suggest that a firm's prior forecasting behavior allows it to establish a forecasting reputation, and that market forces encourage accurate forecasting as firms benefit from having a reputation for forecasting accurately. Data Availability: Data are available from public sources cited in the text. JEL Classifications: G19; G39; D89; M40.

Does More Effective Director Monitoring Make Management Guidance More Credible?

Evidence of the impact of governance on disclosure credibility is inconclusive. Based on a large, post-Regulation Fair Disclosure (Reg-FD) sample, we find that increased director monitoring – through increased director independence and director attention – is associated with more credible management guidance, as evidenced by stronger analyst reactions to the news in management guidance. We document additional cross-sectional differences in the monitoring/credibility link, consistent with monitoring being particularly impactful when the role of external verification is largest (good news forecasts, low analyst following). We are able to identify causal effects through exogenous shocks to monitoring associated with (1) director deaths, (2) mandated independence required by Sarbanes-Oxley (SOX), and (3) changes in director attention due to M&A activities that eliminate board positions at other firms. This finding does not appear to be due to a link between effective monitoring and more accurate guidance, as the stronger analyst reactions occur only when guidance is less accurate. Overall, our findings provide strong support for director monitoring influencing the perceived credibility of management forecasts, especially in settings where external validation is needed.

Deception by commission or by omission – management forecasts surrounding share repurchases

PurposeIn this study, the authors extend upon Brockman et al. (2008), who provide evidence that managers opportunistically accelerate bad news prior to share repurchases, but provide limited evidence that managers withhold good news until after repurchases. The authors examine management forecasts surrounding share repurchases in periods when companies must disclose detailed repurchase information. The authors argue these disclosures increase managers' legal and reputation risks of accelerating bad news, but have a lesser effect on delaying good news.Design/methodology/approachFirst, the authors examine whether managers alter the information released to the market before buying back shares by comparing managerial forecasts made within 30 days before the beginning of a repurchasing period with those made outside of this window. Second, the authors examine whether managers are more likely to provide good news forecasts, in terms of both magnitude and frequency, after buying back shares. Lastly, the authors examine the impact of CEO stock ownership on managerial forecasting behavior surrounding share buybacks.FindingsConsistent with the authors’ hypotheses and contrary to Brockman et al. (2008), the authors find limited evidence that the likelihood or magnitude of bad news forecasts is greater in the period before share buybacks. Instead, the authors document that the frequency and magnitude of good news forecasts increase in periods following share buybacks and that these associations are positively moderated by managerial equity incentives. The authors also find that the withholding of good news is associated with lower average repurchase prices and greater repurchase volume. The authors further show that, when litigation risk is greater, managers are less likely to accelerate bad news prior to repurchases and more likely to withhold good news until after. Overall, the study results are consistent with managers balancing the benefits of opportunistic repurchase behavior with the costs.Originality/valueThis study contributes to the management forecast and share repurchase literatures by providing evidence consistent with managers opportunistically releasing earnings forecasts in the period after buying back shares. Most importantly, the authors show that after the rule revision, managers refrain from actively disclosing bad news that carry higher legal costs. Instead, they opt for the omission of good news to repurchase stocks at lower prices. The study results reconcile the conflicting evidence of Brockman et al. (2008) and Ge and Lennox (2011).

Short Sellers and Long‐Run Management Forecasts

ABSTRACTWe examine how short sellers affect long‐run management forecasts using a natural experiment (Regulation SHO) that relaxes short‐selling constraints on a group of randomly selected firms (referred to as pilot firms). We find that compared to other firms, the pilot firms issue more long‐run good news forecasts but do not change the frequency of long‐run bad news forecasts. The increase in good news forecasts is greater when the pilot firms have higher‐quality forecasts, greater uncertainty about firm value, or higher manager equity incentives. Overall, these results and the results of additional analyses indicate that the reduction in short‐selling constraints and the increase in short‐selling threat induce managers to enhance disclosures through more long‐run good news forecasts to discourage short sellers.

Short Selling and Firms' Disclosure of Bad News: Evidence from Regulation SHO

ABSTRACT As informed traders, short sellers enhance the informativeness of stock prices, especially related to bad news, potentially reducing the benefits and increasing litigation and reputational costs of withholding bad news by managers. We exploit a quasi-natural experimental setting provided by the introduction of SEC regulation SHO (Reg-SHO), which significantly reduced the constraints faced by short sellers for an effectively randomly selected subsample of U.S. firms (pilot firms). Relative to control firms, we find pilot firms increase the likelihood of voluntary bad news management forecasts, provide these forecasts in a more timely manner, and accelerate the release of quarterly bad earnings news. Each of these effects is stronger for subsamples of moderate (compared with extreme) bad news, firms facing high (relative to low) litigation risks, and firms with a forecasting history. Similar effects are not observed for voluntary good news forecasts. A range of robustness tests reinforce our results. JEL Classifications: G14; D22; K22; K41; M40.

Short Sellers and Long-Run Management Forecasts

We examine how short sellers affect long-run management forecasts using a natural experiment (Regulation SHO) that relaxes short-selling constraints on a group of randomly selected firms (referred to as pilot firms). We find that compared to other firms, the pilot firms issue more long-run good news forecasts but do not change the frequency of long-run bad news forecasts. The increase in good news forecasts is greater when the pilot firms have higher quality forecasts, more uncertainty about firm value, or higher manager equity incentives. Overall, these results and the results of additional analyses indicate that the reduction in short-selling constraints and the increase in short-selling threat induce managers to enhance disclosures through more long-run forecasts, primarily in the case of good news, to discourage short sellers.

Does Accounting Conservatism Make Good News Forecasts More Credible and Bad News Forecasts Less Alarming?

I investigate whether conservatism in financial statements helps investors to interpret the information revealed through voluntary disclosure, specifically earnings guidance. Research shows that investor reaction to guidance is affected by two issues. First, managers’ incentives to please the market cause positive guidance to lack credibility. This makes investors underreact initially to good news forecasts. Second, the same incentives cause negative guidance to raise investor uncertainty amid mounting concerns that the bad news disclosure is incomplete and more bad news will soon follow. This makes investors overreact initially to bad news forecasts. I argue that conservatism can increase the credibility of good news forecasts by subjecting good news to stronger verification requirements before being recognized in future reports. Consistent with this argument, I find that, when conservatism is higher, positive forecast news is associated with (a) a more positive initial response and (b) a less positive subsequent drift. I also argue that conservatism, by reassuring investors that the recognition of bad news in periodic reports has been complete and timely, can mitigate the surge in uncertainty that follows negative guidance and contain investor overreaction. Consistent with this argument, I also find that, when conservatism is higher, negative forecast news is associated with (a) a less negative initial response, (b) a less positive subsequent correction, and (c) a smaller increase in investor uncertainty.

Value-Relevance of Good-News Versus Bad-News Management Earnings Forecasts

We posit that the market views bad-news management earnings forecasts as more credible and value-relevant than good-news forecasts not because good-news forecasts tend to be biased, but rather because they are far noisier than bad-news forecasts. After controlling for noise, the difference in market response to good and bad news disappears. We demonstrate that bad-news forecasts show much lower dispersion around final earnings and, unlike good-news forecasts, they become considerably more accurate over time. These results provide direct support for the hypothesis that management perceives incentives to verify information when the news is bad as well as to delay bad-news announcements to allow time to gather additional information. These findings provide a rational explanation, not based on bias, for why on average the market’s reaction to good-news management earnings forecasts is weaker than to bad-news forecasts.

Waiting for guidance: Disclosure noise, verification delay, and the value-relevance of good-news versus bad-news management earnings forecasts

The market views bad-news management earnings forecasts as more credible than good-news forecasts not because good-news forecasts are biased, but rather because they are noisier than bad-news forecasts. After controlling for noise, the difference in market response disappears. Bad-news forecasts have unconditionally lower dispersion around final earnings and, unlike good-news forecasts, bad-news forecasts become more accurate and contain higher magnitude updates as earnings announcement dates approach. The results provide new direct evidence that management differentially seeks to verify bad news, and withholds greater amounts of bad news while it seeks verification. Consistent with rational markets, this mitigation of noise provides a novel explanation for the asymmetric market response to management earnings forecasts.

Management Earnings Forecasts and Financial Distress by Credit Ratings

Many prior works have already investigated what sagacious managers’ incentives on selective/opportunistic management forecasts disclosures such as managerial job securities at risk (Brochet, F., Faurel, L., McVay, S., 2011), corporations wounding up and bankruptcies in high, the probability of anti-takeover by outsiders on rising (Morck et al., 1990; Brennan, 1999), executive compensations upside down (Miller and Piotroski, 2000; Nagar et al., 2003; Bebchuk and Grinstein, 2005), litigation risk likely in danger (Miller and Piotroski, 2000; Brown et al., 2005; Rogers and Stocken, 2005), proprietary costs no longer going down (Verrecchia, 2001 and Dye, 2001), firm performance in downward (Miller, 2002) and even inside trading (Cheng and Lo, 2006; Rogers and Stocken, 2005) are. In additional to those, this paper incrementally contributes to precedented management forecasts literature. However, to my knowledge, this probably is first paper to document that cunning managers likely tempt to disclose management earnings forecasts outside in bias when they face the struggling fiscal condition credit ratings nearly to be downgraded by credit rating agencies such as Moody's, S&P and Fitch Ratings. When firms are potentially facing enormous pressure of financial distress from credit raters proxied by crediting ratings likely to be downgraded and managers also predict their firm performance will be improved in forthcoming, because they hold more insider information relative to outsiders, thereby being more likely to voluntarily deliver forecast disclosures outside reducing the degree of uncertainty of information asymmetry, especially good-news forecasts, to alleviate public's nerves about a plump for corporate credit ratings though influencing the recessive perception of credit rating agencies. Therefore, this can fill in this gap in prior management forecast archives. Jung, Soderstrom and Yang (2013) argue that shrewd managers attempt to alter credit ratings agencies' perceptions towards companies worsening borrowing creditability through long-term earnings smoothing activities (i.e. reduction in earnings volatility across horizons). Smoothing techniques include that managers change their accounting disclosing policies by releasing more good-news revenue and better-than-expect earnings forecasts to public prior to credit ratings being slumped/bumped. Furthermore, it also tremendously contributes to voluntary disclosure literature in as much as it can provide additional empirical evidence to support the relation between corporate voluntary disclosures and crediting ratings after controlling macroeconomic, institutional factors and other fixed effects.This paper uses S&P 1500 firms in testing periods to examine the relation between management forecast policy and firm financial distress proxied by credit ratings. Using S&P 1500 firms as those firms' market value can cover over 80% of the U.S. market capitalization and the reasons of those firm higher coverage by financial analysts, to prevent biased-collection from database. In this paper, I examine how downgrade risks of credit ratings the managers faced influence management earnings forecast policy i.e. whether firms with currently facing downgrade risk of their credit ratings and that in concurrent with the condition that being forecast to have better future performance, managers of those are likely to issue good-news management guidance and whether those firms will have a change in cost of debts after their management forecast policy being changed in prior period. More importantly, this paper will deal with the results potentially suffering from the endogeneity/simultaneity through 2 stage regressions to estimate the like hood in upside down possibility of credit ratings & 3 stage regressions to estimate both Management forecast incentives and like hood in change in credit ratings, thereby finding the effect of like hood of downward of credit ratings on change in managers' forecast incentives and the effect of the managers' forecast incentive on corporate cost of capital.

On the Anomalous Stock Price Response to Management Earnings Forecasts

Abstract: This paper examines stock price formation subsequent to management forecasts of quarterly earnings. In the post‐announcement period, we find a significant upward price drift for both good news forecasts and bad news forecasts. Combined with the asymmetry in the initial market response, the upward post‐guidance drift in stock prices is consistent with a reversal of an initial overreaction to managers’ bad news forecasts and a continuation of an initial underreaction to managers’ good news forecasts. This interpretation is supported by a negative (positive) relationship between the initial market response and the post‐guidance drift in the bad news (good news) group. The drift pattern is robust to issues arising from measurement. Trading strategies exploiting the post‐announcement drift suggest the existence of economically significant trading profits, net of estimated trading costs.

On the Anomalous Stock Price Response to Management Earnings Forecasts

This paper examines stock price formation subsequent to management forecasts of quarterly earnings. In the post-announcement period, we find a significant upward price drift for both good news forecasts and bad news forecasts. Combined with the asymmetry in the initial market response, the upward post-guidance drift in stock prices is consistent with a reversal of an initial overreaction to managers’ bad news forecasts and a continuation of an initial under-reaction to managers’ good news forecasts. This interpretation is supported by a negative (positive) relationship between the initial market response and the post-guidance drift in the bad news (good news) group. The drift pattern is robust to issues arising from measurement. Trading strategies exploiting the post-announcement drift suggest the existence of economically significant trading profits, net of estimated trading costs.

The effect of stock price on discretionary disclosure

I examine the impact of exogenous changes in stock prices on voluntary disclosure. Specifically, I investigate whether stock price declines prompt managers to voluntarily disclose firm-value-related information (management forecasts) that was withheld prior to the decline because it was unfavorable but became favorable at a lower stock price. Consistent with my predictions, I find that managers are more likely to release good-news forecasts following larger stock price declines but that there is no association between the likelihood of releasing good-news forecasts and the magnitude of stock price increases. Additional evidence indicates that the good-news forecasts eventually conveyed by withholding firms after negative price shocks would likely have resulted in negative market reactions had they been released before the shocks. More generally, I provide evidence that managers withhold bad news and that exogenous stock price declines can induce its disclosure.

Voluntary disclosure and the cost of equity capital: Evidence from management earnings forecasts

This paper examines the directional effects of management earnings forecasts on the cost of equity capital. We find that forecasters of bad news experience a significant increase in the cost of equity capital in the month after their disclosure. Conversely, the cost of equity capital for good news forecasters does not change significantly in the same period. We also indicate that the magnitude of changes in the cost of capital for good news forecasters is significantly lower than that for bad news forecasters and non-forecasters, which suggests that investors may view good news forecasts less credible. Finally, we show that the effect of the subsequent earnings announcement on the cost of equity capital is preempted by the management forecasts for bad news firms, and that the combined effects of the management earnings forecasts and the earnings announcement are not significant for both good news and bad news forecasters. Our paper contributes to the literature by adding evidence on directional effects of voluntary disclosures and on long-term economic consequences of management earnings forecasts.

Management Forecasts Subsequent to Financial Restatement Disclosures

We examine the impact of financial restatements on managers’ subsequent forecast behavior. We find that managers reduce their propensity to issue forecasts, especially good news forecasts, after restatements. The quality of forecasts improves after restatements (i.e. forecasts have smaller errors and less optimistic bias). We find that managers are more likely to provide less precise forecasts following restatements (i.e. fewer point forecasts, more range forecasts). Managers’ propensity to issue forecasts following restatements varies with forecast time horizons. Specifically, managers reduce their propensity to issue long-term forecasts, but not to issue earnings warnings or short-term bad news forecasts. Overall our results suggest that managers are more concerned about increased personal risk following restatements, than they are interested in reducing information asymmetry between themselves and investors.

Disaggregation and the Quality of Management Earnings Forecasts

In recent years, a substantial percentage of managers voluntarily choose to provide disaggregated earnings forecasts, i.e., earnings forecasts supplemented with additional numerical forecasts for other line items on the income statement. We examine whether such disaggregation yields higher-quality (i.e., more accurate and less biased) management earnings forecasts, and whether market reactions to disaggregated vs. aggregated forecasts are consistent with the quality of these forecasts. We find that: (1) for good news forecasts, earnings forecasts with disaggregated information are no different from aggregated earnings forecasts in either bias or accuracy; (2) for bad news forecasts, earnings forecasts with disaggregated information are significantly less accurate and, on average, more optimistic than aggregated earnings forecasts; 3) stock market reactions to disaggregated good news forecasts are no different from stock market reactions to aggregated good news forecasts, but stock market reactions to disaggregated bad news forecasts are more negative than stock market reactions to aggregated bad news forecasts. Taken together, our results suggest that disaggregated earnings forecasts are no better than and sometimes even worse than aggregated earnings forecasts and that investors anticipate and adjust for the biases associated with disaggregation in management earnings forecast.

Asymmetric Market Reactions of Growth and Value Firms with Management Earnings Forecasts*

ABSTRACTWe study the market reaction of Australian firms issuing management earnings forecasts (MEF). Specifically, we measure and distinguish between the immediate and post‐earnings announcement impact of MEF. Our analysis is conditioned on growth/value characteristics and news surprise and we test for asymmetric effects on these two conditioning variables. We find that the 3‐day returns following non‐routine bad news forecasts are significantly more negative for growth firms than value firms. No significant differences are found for good news forecasts. In the post‐earnings announcement period, both growth and value firms have significant negative post‐earnings announcement drift following non‐routine bad news forecasts but they are not significantly different from each other.