No abstract

This paper examines how overconfidence affects the properties of management forecasts. Using both the "over-optimism" and "miscalibration" dimensions of overconfidence to generate our predictions, we examine three research questions. First, we examine whether overconfidence increases the likelihood of issuing a forecast. Second, we examine whether overconfidence increases the amount of optimism in management forecasts. Third, we examine whether overconfidence increases the precision of the forecast. Using both optionsand press-based measures to proxy for individual overconfidence, we find support for all three research questions. Exc es de confiance du DG et pr evisions de la direction R ESUM ELes auteurs s'interrogent sur la fac ßon dont l'exc es de confiance influe sur les caract eristiques des pr evisions de la direction. En utilisant a la fois les manifestations de l'exc es de confiance que sont l'« exc es d'optimisme » et l'« erreur de calibrage » dans la formulation de leurs pr edictions, ils se penchent sur trois questions. Ils se demandent 1) si l'exc es de confiance accroît la probabilit e de publication d'une pr evision, 2) s'il accroît le degr e d'optimisme qui caract erise les pr evisions de la direction et 3) si l'exc es de confiance accroît la pr ecision des pr evisions. En utilisant a la fois des indicateurs fond es sur la d etention d'options et sur les descriptions contenues dans la presse comme variables de substitution a l'exc es de confiance du DG, les auteurs obtiennent des r esultats qui permettent de r epondre par l'affirmative a ces trois questions. * Accepted by Patricia O'Brien. We would like to thank Sanjeev

This study examines the effect of the mandatory adoption of International Financial Reporting Standards (IFRS) on voluntary disclosure. Using a difference-in-differences analysis, we document a significant increase in the likelihood and frequency of management earnings forecasts following mandatory IFRS adoption, consistent with the notion that IFRS adoption alters firms' disclosure incentives in response to increased capital-market demand. We find the increase to be larger among firms domiciled in code-law countries, suggesting a catching-up effect among firms facing low disclosure incentives pre-adoption. We then propose and test three channels through which IFRS adoption could alter firms' disclosure incentives: improved earnings quality, increased shareholder demand, and increased analyst demand. We find evidence consistent with all three channels.

This paper studies the capital market consequences of managers establishing an individual forecasting style. Using a manager-firm matched panel dataset, I examine whether and when manager-specific credibility matters. If managers' forecasting styles affect their perceived credibility, then the stock price reaction to forecast news should increase with managers' prior forecasting accuracy. Consistent with this prediction, I find that the stock price reaction to management forecast news is stronger when information uncertainty is high and when the manager has a history of issuing more accurate forecasts, indicating that individual managers benefit from establishing a personal disclosure reputation. This paper studies the capital market consequences of managers establishing an individual forecasting style. Using a manager-firm matched panel dataset, I examine whether and when manager-specific credibility matters. If managers' forecasting styles affect their perceived credibility, then the stock price reaction to forecast news should increase with managers' prior forecasting accuracy. Consistent with this prediction, I find that the stock price reaction to management forecast news is stronger when information uncertainty is high and when the manager has a history of issuing more accurate forecasts, indicating that individual managers benefit from establishing a personal disclosure reputation.

This paper shows that an important link between investor sentiment and firm overvaluation is optimistic earnings expectations, and that management earnings guidance helps resolve sentiment-driven overvaluation. Using previously identified firm characteristics, we find that most of the negative returns to uncertain firms in months following high-sentiment periods fall within the three-day window around the issuance of management earnings guidance. Comparisons of guidance months to nonguidance months show that guidance issuance affects the magnitude and not just the daily distribution of negative returns. There is also some evidence of negative returns around earnings announcements for firms that previously issued guidance, suggesting that guidance does not entirely correct optimistic earnings expectations. To provide additional insight into the strength of the guidance effect, we show that the market reacts more strongly to surprises, particularly negative surprises, following high-sentiment periods. Finally, firms with higher transient institutional ownership are less likely to guide, and their guidance is less likely to contain bad news following high-sentiment periods, indicating that managers with a short-term focus are hesitant to correct optimistic market expectations. THE PARTY'S OVER: THE ROLE OF EARNINGS GUIDANCE IN RESOLVING SENTIMENT-DRIVEN OVERVALUATION AbstractThis paper shows that an important link between investor sentiment and firm overvaluation is optimistic earnings expectations, and that management earnings guidance aids in resolving sentimentdriven overvaluation. Using the firm characteristics identified by Baker and Wurgler (2006), we find that most of the negative returns to uncertain firms in months following high sentiment periods fall within the three-day window around management earnings guidance issuance. Comparisons of guidance months to non-guidance months show that guidance issuance affects the magnitude and not just the daily distribution of negative returns. There is also some evidence of negative returns around earnings announcements for firms that previously issued guidance, suggesting that guidance does not entirely correct optimistic earnings expectations. To provide additional insight into the strength of the guidance effect, we show that the market reacts more strongly to surprises and particularly negative surprises following high sentiment periods. Finally, firms with higher transient institutional ownership are less likely to guide and their guidance is less likely to contain bad news following high sentiment periods, indicating that managers with a short-term focus are hesitant to correct optimistic market expectations.