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Profit Warnings and Timing

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  • Dave Jackson
  • Jeff Madura

Abstract

We find that profit‐warning announcements elicit a strong negative market response that is not sensitive to timing the warning in advance of the earnings announcement. Share prices begin to adjust about five days before a profit warning, and the market response is not complete until about five days after the warning. The accumulated response over the 11‐day period ending five days after the announcement is −21.7%. The profit warning effect over the two‐day announcement period is 32 times the valuation effect upon subsequent release of the actual earnings. There is no evidence of a reversal after this period, and therefore no sign that the market response is excessive.

Suggested Citation

  • Dave Jackson & Jeff Madura, 2003. "Profit Warnings and Timing," The Financial Review, Eastern Finance Association, vol. 38(4), pages 497-513, November.
    • Handle: RePEc:bla:finrev:v:38:y:2003:i:4:p:497-513
    DOI: 10.1111/1540-6288.00057
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    Cited by:

    1. Abdullah Alajmi & Mahammad Alfaraj, 2022. "The Impact of Profit Warnings on Stock Prices in Kuwaiti Firms," International Business Research, Canadian Center of Science and Education, vol. 15(6), pages 1-28, June.
    2. Tom Berglund & P. Joakim Westerholm, 2010. "Foreign Investors' Reaction to Lower Profitability – The Role of Information Asymmetry," International Review of Finance, International Review of Finance Ltd., vol. 10(4), pages 455-483, December.
    3. Adel Almasarwah, 2020. "Stock Price Informativeness and Profit Warnings: Empirical Analysis," Proceedings of the 19th International RAIS Conference, October 18-19, 2020 001aa, Research Association for Interdisciplinary Studies.
    4. Ilyas El Ghordaf & Abdelbari El Khamlichi, 2021. "Profit Warnings And Stock Returns: Evidence From Moroccan Stock Exchange," Post-Print hal-03420284, HAL.
    5. Elisabeth Dedman, 2004. ""Discussion of" Reactions of the London Stock Exchange to Company Trading Statement Announcements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(1-2), pages 37-47.
    6. Agapova, Anna & Madura, Jeff & Volkov, Nikanor, 2020. "Information leakage of ADRs Prior to company issued guidance," Research in International Business and Finance, Elsevier, vol. 54(C).
    7. Matthew Church & Han Donker, 2010. "Profit warnings: will openness be rewarded?," Applied Economics Letters, Taylor & Francis Journals, vol. 17(7), pages 633-637.
    8. Donker, Han & Ng, Alex & Shao, Pei, 2020. "Borrower distress and the efficiency of relationship banking," Journal of Banking & Finance, Elsevier, vol. 112(C).
    9. Cox, Raymond A.K. & Dayanandan, Ajit & Donker, Han & Nofsinger, John, 2017. "The Bad, the boom and the bust: Profit warnings over the business cycle," Journal of Economics and Business, Elsevier, vol. 89(C), pages 13-19.
    10. Cox, Raymond A.K. & Dayanandan, Ajit & Donker, Han, 2016. "The Ricochet Effect of Bad News," The International Journal of Accounting, Elsevier, vol. 51(3), pages 385-401.
    11. Shuxing Yin & Khelifa Mazouz & Abdelhafid Benamraoui & Brahim Saadouni, 2018. "Stock price reaction to profit warnings: the role of time-varying betas," Review of Quantitative Finance and Accounting, Springer, vol. 50(1), pages 67-93, January.
    12. Kamil Polak, 2018. "Investors’ Reaction to a Published Recommendation (Wplyw opublikowanej rekomendacji na reakcje inwestorow)," Research Reports, University of Warsaw, Faculty of Management, vol. 1(27), pages 127-135.
    13. Dayanandan, Ajit & Donker, Han & Karahan, Gökhan, 2017. "Do voluntary disclosures of bad news improve liquidity?," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 16-29.
    14. Ilyas El Ghordaf & Abdelbari El Khamlichi, 2021. "Profit warnings and stock returns: Evidence from moroccan stock exchange," Papers 2111.06655, arXiv.org.
    15. Elisabeth Dedman, 2004. "Discussion of Reactions of the London Stock Exchange to Company Trading Statement Announcements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(1‐2), pages 37-47, January.

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