Profit Warnings and Timing

Abstract

We find that profit-warning announcements elicit a strong negative market response that is not sensitive to timing of the warning in advance of the earnings announcement. Share prices begin to adjust about five days before a profit warning, and the market response is not complete until about five days after the warning. The accumulated response over the 11-day period ending five days after the announcement is -21.7%. The profit warning effect over the two-day announcement period is 32 times the valuation effect upon subsequent release of the actual earnings. There is no evidence of a reversal after this period, and therefore no sign that the market response is excessive.