Abstract:
This paper hand-collect the explanations for revisions of management earnings forecast for all companies in the A-share Chinese market from 2002 to 2011. It examines how various explanations that the board of directors is required to disclose affect the stock market reactions to the management forecast revisions. The results show that companies tend to explain the positive news and negative news differently, and that the explanations provided have significant impact to how investors interpret the revisions. When companies attribute the forecast revisions to uncontrollable macro-economic factors, uncontrollable accounting rule changes, or accounting errors discovered by auditors, the market reacts more significantly to positive revisions and less to negative news than under other reasons. Additionally, when companies attribute the forecast revisions to other operating reasons or provide no reasons to explain the forecast revisions, the stock market tends to ignore positive news and punish bad news. This paper provides empirical evidence on the significant economic consequences of disclosing reasons for management earnings forecast revisions by the board of directors.
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