An Empirical Study On Market's Reaction To Earnings Forecast And Its Usefulness Of Reducing Risks

Under the Information Perspective, the information which can change people's anticipation and induce the market's reaction is useful; and all the useful information should be disclosed immediately and accurately. The aim of the security observer's making rules is to help the investors catch information, make right judgment about the value of securities and reduce the asymmetry of information. so , we can examine the reaction of securities prices to the information to know whether the information is useful , whether the rules can achieve its aims. Among all the accounting information, the earnings number is the most sensitive and focal information, and it is often regarded to be the most important information. Stock prices have relations with the earnings numbers. A lot of scholars have already proved that investors reacted obviously to the earnings announcements, as reflected in the volume and price movements of common stocks in the days surrounding the announcing date. To avoid the market's violent reaction and reduce the risks, a lot of countries have made rules for earnings forecast. China has practiced the earnings forecast since 1998, and it is still in practice today, but the forecast details have changed. Then there are a lot of questions left to us, such as whether the investors pay their attentions to earning forecasts and whether it reduces the risks for the announcement day, which is what we want to know in this paper. The study is based on a sample of half-annual earning forecasts released by 195 firms in year 2004. We used the Event study to analysis the market's reaction around both earnings forecasting day and earnings announcing day, we find that before the forecasting day (30 working days) market reacted obviously, which means that the investors can make rational anticipation with the historical accounting information and other information; around the announcing day, "bad news"has a significant negative CAR (Cumulated Abnormal Return) and the "good news"have a significant positive CAR. And we also constructed a model and used it based on a sample of both the companies who issued earning forecasting and the matched companies who didn't issued earning forecasting, we found that to both forecasting companies and the non-forecasting companies the unexpected earnings candevote to the CAR at the announcing day, but the forecasting companies had small CAR compared with the non-forecasting companies by affecting the slope, which means that to some extent earning forecast can reduce market's fluctuation and the risks. In this study we can also get the following conclusions: 1. The half-year financial reports have information content, before the forecasting day the companies with bad news have a lower return than the whole stock market; and the companies with good news have a higher return than the whole stock market, but it is not significant in statistics, which means the investors underestimated the companies with good news. 2. During the [-1,1] window around the forecasting day, the loss group, the decreasing group, the gained group and the increasing group have respectively MCAR (Mean of Cumulate Abnormal Return) -6.70% ,-7.92% ,3.22% ,2.69% ,which is identical to the anticipation; on the forecasting day, MAR (Mean Abnormal Return) for the four groups are -4.23%,-5.68%,1.86%,1.80%, which have the biggest absolute value among the days we examined. And youcan see that the investors reacted to the companies with bad news more obviously compared with the companies with good news. 3. Market's reaction on the announcing day is more moderated than that on the forecasting day, which indicates that the earning forecasts have already released information to the market and reduce the market's fluctuation on the announcing day. 4. To both forecasting companies and non-forecasting companies, the unexpected earning can devote to CAR around the announcing day, which indicated that even if the company issued earnings forecasting, investors would pay their attention to the real earning numbers. 5. To the companies with bad news, earnings forecasts have reduced the influence of unexpected earnings on CAR by affecting the slope in the model. It is concluded that forecast information has information content significantly and plays a very important role in investors'decision-making. In this way, it can reduce the fluctuation of stock...