Management earnings forecasts and adverse selection cost: Good vs bad news forecast

H. Young Baek, Dong Kyoon Kim, Joung W. Kim

Research output: Contribution to journalArticle

11 Scopus citations

Abstract

Purpose – The aim of this paper is to investigate the effect of management earnings forecasts on the level of information asymmetry around subsequent earnings announcement. Design/methodology/approach – Employing the adverse selection cost method suggested by George et al., the paper compares for each sample firm the adverse selection cost around earnings announcement in forecasting years with that in non-forecasting years. Findings – Consistent with Diamond and Verrecchia is the finding that the earnings announcement in non-forecasting years decreases information asymmetry during a three-day announcement period and increases in a post-announcement period up to seven days. No significant change in information asymmetry between pre- and post-announcement periods when firms released a “good” news forecast is found. The firms that previously released a “bad” news forecast experience a significantly lower information asymmetry than those that did not forecast during announcement or post-announcement days, and experience a decrease in information asymmetry in a five to seven-day post-announcement period. Originality/value – This paper provides the first empirical reports on the different information asymmetry changes around earnings announcements followed by a “good” news management forecast from those followed by a “bad” news forecast.

Original languageEnglish
Pages (from-to)62-73
Number of pages12
JournalInternational Journal of Accounting & Information Management
Volume16
Issue number1
DOIs
StatePublished - 27 Jun 2008

Keywords

  • Adverse selection cost
  • Earnings
  • Financial forecasting
  • Good and bad news
  • Information asymmetry
  • Management forecasts

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