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Earnings Forecasts and Price Efficiency after Earnings Realizations: Reduction in Information Asymmetry through Learning from Price

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  • Guojin Gong
  • Hong Qu
  • Ian Tarrant

Abstract

When information asymmetry is a major market friction, earnings forecasts can lead to higher price efficiency even after the information in forecasts completely dissipates upon earnings realizations. We show this in an experimental market that features information asymmetry (i.e., some traders possess differential private information). Earnings forecasts reduce information asymmetry and lead to prices that reflect a greater amount of private information. Traders can learn more about others' information from prices. This information learned from past prices continues to reduce information asymmetry and improve price efficiency even after earnings realizations. We contribute to the disclosure literature by showing the evidence that the learning‐from‐price effect amplifies the impact of public disclosure on price efficiency. Prévisions de bénéfices et efficacité en matière de prix après la matérialisation des bénéfices : Réduction de l'asymétrie de l'information grâce à l'apprentissage à partir des prix Lorsque l'asymétrie de l'information est une source de tension importante sur le marché, les prévisions de bénéfices peuvent entraîner une hausse de l'efficacité en matière de prix même après que l'information fournie dans les prévisions est rendue entièrement caduque par la matérialisation des bénéfices. Nous montrons ce phénomène dans le cadre d'un marché expérimental caractérisé par une asymétrie de l'information (c'est‐à‐dire où certains courtiers possèdent de l'information différentielle confidentielle). Les prévisions de bénéfices réduisent l'asymétrie de l'information et mènent à des prix qui reflètent une information confidentielle plus abondante. Les courtiers peuvent en apprendre davantage sur l'information que possèdent les autres à partir des prix. L'information tirée des anciens prix continue de réduire l'asymétrie de l'information et d'accroître l'efficacité en matière de prix même après la matérialisation des bénéfices. Nous contribuons à la littérature sur la divulgation de l'information en présentant la preuve que l'effet de l'apprentissage à partir des prix amplifie l'impact de la divulgation publique sur l'efficacité en matière de prix.

Suggested Citation

  • Guojin Gong & Hong Qu & Ian Tarrant, 2021. "Earnings Forecasts and Price Efficiency after Earnings Realizations: Reduction in Information Asymmetry through Learning from Price," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 654-675, March.
    • Handle: RePEc:wly:coacre:v:38:y:2021:i:1:p:654-675
    DOI: 10.1111/1911-3846.12615
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    References listed on IDEAS

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    1. Stirnkorb, Sebastian, 2024. "Transaction cost unbundling and investors’ reliance on investment research: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 112(C).

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