Research by FJRG affiliate Shana Clor-Proell (TCU), Eric Hirst (University of Texas-Austin), Lisa Koonce (University of Texas-Austin), and Nick Seybert (University of Maryland) found that investors react to earnings announcements based on the detail that managers provided in the initial earnings forecast. “We know that investors respond favorably to forecasts that include more than just bottom-line earnings, such as those that also forecast sales and gross profit,” Clor-Proell said. “However, this favorable response does not always carry over to the time of the earnings announcement.” Instead, results suggest that the combination of disaggregated forecasts and disaggregated announcements may create greater volatility than if managers provide either forecasts or announcements that include only bottom-line earnings. These results are useful for investors as they try to anticipate the size of market reactions to earnings announcements.

The full-text paper, published in the Journal of Financial Reporting, is available at https://doi.org/10.2308/jfir-52362