Investors’ Reactions to Retractions and Corrections of Management Earnings Forecasts

48 Pages Posted: 28 Jul 2010 Last revised: 24 Jun 2011

See all articles by Seet-Koh Tan

Seet-Koh Tan

Nanyang Technological University (NTU) - Division of Accounting

Lisa Koonce

University of Texas

Multiple version iconThere are 2 versions of this paper

Date Written: June 23, 2011

Abstract

Timely voluntary disclosure of information by companies sometimes results in erroneous disclosure that must be later retracted (i.e., withdrawn) and/or corrected (i.e., replaced with a corrected disclosure). Although such retractions and corrections appear to be relatively easy and costless ways to fix the erroneous disclosure, our results generally show that both actions have unexpected effects on investor judgment. The results of four experiments, which are consistent with affect theory from psychology, indicate when a company provides a retraction of a previous erroneous voluntary disclosure, investors’ judgments continue to reflect the implications of the initial erroneous information. That is, investors under-adjust. In contrast, when a company provides a correction (alone or with a prior retraction) with an opposite earnings implication, investors tend to over-adjust. Our results also show that if investors do not form a strong initial affective reaction to the initial erroneous forecast, they are less prone to over-adjustment when the correction is later received. Implications for regulators and standard setters are provided.

Keywords: Earnings Forecasts, Corrections, Investor Reaction

JEL Classification: M40

Suggested Citation

Tan, Seet-Koh and Koonce, Lisa L., Investors’ Reactions to Retractions and Corrections of Management Earnings Forecasts (June 23, 2011). Available at SSRN: https://ssrn.com/abstract=1650096 or http://dx.doi.org/10.2139/ssrn.1650096

Seet-Koh Tan (Contact Author)

Nanyang Technological University (NTU) - Division of Accounting ( email )

Singapore, 639798
Singapore

Lisa L. Koonce

University of Texas ( email )

Dept. of Accounting
McCombs School of Business
Austin, TX 78712
United States
512-471-5576 (Phone)
512-471-3904 (Fax)

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