Research Of Investor Reaction On Management Earnings Forecast And Its Prior Accuracy

As the main basis for investors to know companies’ situation, accountinginformation plays a vital role in the capital market. Maintain the information to be fairand impartial, and improve the efficiency of information is the key to protectinvestors. Earnings forecast, as a beneficial supplement of the annual report, aims atreducing the information asymmetry caused by annual report and protecting theinterests of the investors. The existing research generally thought that earningsforecast has certain information content, and can bring the market reaction. Butmanagement earnings forecast is always revealed unilaterally, without auditing byexternal third party, so its reliability is questionable. Company’s forecasting historyshows the forecast ability and reputation of managers. Whether investors can use thecompany’s record of forecasting accuracy and assess the credibility of currentforecast and make a different response is a problem worth of studying.This paper choose898annual forecasts of A-share listed companies in2009-2012as sample, use SPSS and Eviews statistical software, examine the marketreaction of management earnings forecast and its prior accuracy through The EventStudy and regression analysis. The result show that management earnings forecast dohas information content and can brings market reaction. For good news, there hassignificant positive market reaction in a certain time before and after it is revealed,and for bad news, there has significant negative abnormal returns. Further, this paperaccounts for prior accuracy of these forecasts, and examine its impact to currentforecast. The results show, for good news, prior accuracy has significant effect onmarket reaction, the stock price decreases with a firm’s record of offering inaccurateforecasts. It indicates that investors react to the forecast not only base on currentforecast, but also its prior record. But for bad news, prior accuracy doesn’t havesignificant effect on stock price; investors react to the forecast only base on its currentforecast. These empirical results show, current management earnings forecast givesuseful information to the capital market, and so does its prior records. For investors can use company’s history forecasts to judge whether its currentforecast can be trusted and react to it, it remind manages should in line with theattitude of cautions when they revealed the earnings forecast, rather than disclosingfalse forecast and pursing short-term interests. And for securities regulators, in orderto protect investors and ensure an orderly securities market, they should strengthensupervision and focus on quality of revealed management earnings forecasts, andformulate effective measure to penalize false disclosure.