Implications of Data Restrictions on Performance Measurement and Tests of Rational Pricing

41 Pages Posted: 29 Nov 1999

See all articles by S.P. Kothari

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Jowell S. Sabino

Massachusetts Institute of Technology (MIT)

Tzachi Zach

Ohio State University (OSU) - Department of Accounting & Management Information Systems

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

Kothari, S.P. and Sabino, Jowell S. and Zach, Tzachi, Implications of Data Restrictions on Performance Measurement and Tests of Rational Pricing (November 1999). Available at SSRN: https://ssrn.com/abstract=195509 or http://dx.doi.org/10.2139/ssrn.195509

S.P. Kothari (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Jowell S. Sabino

Massachusetts Institute of Technology (MIT) ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-1959 (Phone)
617-258-6855 (Fax)

Tzachi Zach

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States
614-292-4101 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
766
Abstract Views
4,933
Rank
60,645
PlumX Metrics