The effects of forecast specificity on the asymmetric short‐window share market response to management earnings forecasts

Abstract

Purpose

This study aims to test the effects of forecast specificity on the asymmetric short‐window share market response to management earnings forecasts (MEF).

Design/methodology/approach

The paper examines a large sample of hand‐checked Australian data over the period 1994 to 2001. Using an analyst news benchmark, it estimates a series of regressions to investigate whether the short‐term impact from bad news announcements is greater in magnitude than from good news announcements and whether this differs between routine and non‐routine MEFs. Additionally, it examines whether (after controlling for news content of MEF) there is a differential market impact conditional on specificity: minimum versus maximum versus range versus point.

Findings

The results indicate that an asymmetric response is evident for the overall sample and a sub‐set of non‐routine forecasts. Contrary to predictions, the results show that forecast specificity, minimum, maximum, range and point MEFs make no additional contribution to the differences in the market reaction to bad or good news.

Originality/value

The study extends the research investigating the short‐run market impact of MEFs. The main element of innovation derives from the interaction between specificity and news content, as well as distinguishing between routine versus non‐routine cases. Notably, it found little support for the view that more specific forecasts elicit greater market responses. What the results do suggest is that managers appear to choose the form of the forecast to suit the news being delivered. In particular, bad news delivered in a minimum forecast seems to be ignored by the market.

Citation

Chan, H., Faff, R., Kee Ho, Y. and Ramsay, A. (2009), "The effects of forecast specificity on the asymmetric short‐window share market response to management earnings forecasts", Accounting Research Journal, Vol. 22 No. 3, pp. 237-261. https://doi.org/10.1108/10309610911005572