Implications of Data Restrictions on Performance Measurement and Tests of Rational Pricing
41 Pages Posted: 29 Nov 1999
Date Written: November 1999
Abstract
We argue that the previously documented association between ex ante information (e.g. earnings forecasts) and the subsequent, apparently predictable security price performance is exaggerated. The exaggeration stems from non-random deletion of data, especially in highly right-skewed distributions of long-horizon security returns. Our simulations demonstrate that both forecast optimism and negative abnormal returns are induced when "extreme" observations of ex post long-horizon performance are truncated from samples of rationally priced, unbiased earnings forecasts. Our results suggest caution in interpreting the results of the accounting and finance research that examines the predictability of long-horizon performance based on ex ante information.
JEL Classification: G14, M41, C24
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Detecting Earnings Management: A New Approach
By Patricia Dechow, Amy P. Hutton, ...
-
A Review of the Earnings Management Literature and its Implications for Standard Setting
-
Errors in Estimating Accruals: Implications for Empirical Research
By Daniel W. Collins and Paul Hribar
-
The Economic Implications of Corporate Financial Reporting
By John R. Graham, Campbell R. Harvey, ...
-
The Economic Implications of Corporate Financial Reporting
By John R. Graham, Campbell R. Harvey, ...
-
On the Association between Voluntary Disclosure and Earnings Management
By Ron Kasznik
-
Performance Matched Discretionary Accrual Measures
By S.p. Kothari, Andrew J. Leone, ...
-
The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors
By Ilia D. Dichev and Patricia Dechow