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Effects of Preannouncements on Analyst and Stock Price Reactions to Earnings News

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  • Jeffrey Miller

Abstract

This study examines the effects of earnings preannouncements on financial analyst and stock price reactions to earnings news. Prior experimental research documents that when the signs of a preannouncement surprise and subsequent earnings announcement surprise are consistent (i.e., both either positive or negative), analysts make larger magnitude revisions to their future period earnings forecasts in response to the total earnings news conveyed in the preannouncement and earnings announcement than when the surprise signs are inconsistent. This study extends this research by examining a sample of actual preannouncements from 1993–1997 to determine whether the effects documented in laboratory settings manifest at the aggregate market level in stock prices and consensus analyst forecast revisions. Results indicate that after controlling for the sign of earnings news, sign of earnings, and sign of the earnings announcement surprise, stock prices and analyst forecast revisions respond more strongly when a preannouncement and subsequent earnings announcement elicit the same surprise signs than when the surprise signs are inconsistent. Further analysis indicates that the consistency of the signs of a preannouncement surprise and earnings announcement surprise is not associated with future earnings, suggesting that the magnified reaction of investors and analysts to consistent surprise signs is not a rational reaction to associations observed in market settings. Copyright Springer Science + Business Media, Inc. 2005

Suggested Citation

  • Jeffrey Miller, 2005. "Effects of Preannouncements on Analyst and Stock Price Reactions to Earnings News," Review of Quantitative Finance and Accounting, Springer, vol. 24(3), pages 251-275, May.
    • Handle: RePEc:kap:rqfnac:v:24:y:2005:i:3:p:251-275
    DOI: 10.1007/s11156-005-6866-4
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    References listed on IDEAS

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    1. Freeman, Rn & Tse, Sy, 1992. "A Nonlinear Model Of Security Price Responses To Unexpected Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 30(2), pages 185-209.
    2. Skinner, Dj, 1994. "Why Firms Voluntarily Disclose Bad-News," Journal of Accounting Research, Wiley Blackwell, vol. 32(1), pages 38-60.
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    4. Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 3-37, December.
    5. Trueman, Brett, 1986. "Why do managers voluntarily release earnings forecasts?," Journal of Accounting and Economics, Elsevier, vol. 8(1), pages 53-71, March.
    6. David C. Burgstahler & Michael J. Eames, 2003. "Earnings Management to Avoid Losses and Earnings Decreases: Are Analysts Fooled?," Contemporary Accounting Research, John Wiley & Sons, vol. 20(2), pages 253-294, June.
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    Cited by:

    1. Stephen Dempsey & David Harrison & Kimberly Luchtenberg & Michael Seiler, 2012. "Financial Opacity and Firm Performance: The Readability of REIT Annual Reports," The Journal of Real Estate Finance and Economics, Springer, vol. 45(2), pages 450-470, August.
    2. Youngdeok Lim & Hyung Il Oh, 2022. "Do Firms Learn from Pre‐announcement Experience? Evidence from Optimistic Pre‐announcements and Market Responses," Abacus, Accounting Foundation, University of Sydney, vol. 58(2), pages 365-392, June.
    3. Aaron Crabtree & Thomas Kubick, 2014. "Corporate tax avoidance and the timeliness of annual earnings announcements," Review of Quantitative Finance and Accounting, Springer, vol. 42(1), pages 51-67, January.
    4. Jeffrey S. Miller, 2006. "Unintended Effects of Preannouncements on Investor Reactions to Earnings News," Contemporary Accounting Research, John Wiley & Sons, vol. 23(4), pages 1073-1103, December.

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    Keywords

    preannouncements; voluntary disclosure;

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