Earnings Announcements, Differences of Opinion, and Management Guidance

Journal of Business Finance & Accounting, Forthcoming

44 Pages Posted: 17 Feb 2011 Last revised: 3 May 2013

See all articles by Sami Keskek

Sami Keskek

Florida State University

Lynn L. Rees

Utah State University - School of Accountancy; Utah State University - Huntsman School of Business

Wayne B. Thomas

University of Oklahoma

Date Written: May 2, 2013

Abstract

Berkman, Dimitrov, Jain, Koch, and Tice (2009) document a negative relation between differences of opinion and earnings announcement returns, and this relation is more pronounced when short sale constraints are likely to be high. These findings are interpreted as support for the theory in Miller (1977) that binding short sale constraints cause pessimists to be underrepresented in price formation. We conjecture that accounting information (i.e., earnings news) likely plays a role in this returns pattern. After controlling for the level of earnings news, we find that the relation between differences of opinion and stock returns is either eliminated or opposite from what is predicted from Miller’s theory. Further, we present evidence that suggests the confounding effect of earnings news can be explained by (pessimistic) management earnings guidance. Our findings offer an alternative explanation for why low differences of opinion stocks earn greater abnormal returns around earnings announcements.

Keywords: Differences of opinion, short-sale constraints, management earnings guidance, earnings announcements, market efficiency

JEL Classification: D82, G14, G19

Suggested Citation

Keskek, Sami and Rees, Lynn L. and Thomas, Wayne B., Earnings Announcements, Differences of Opinion, and Management Guidance (May 2, 2013). Journal of Business Finance & Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1762771 or http://dx.doi.org/10.2139/ssrn.1762771

Sami Keskek

Florida State University ( email )

Department of Accounting
College of Business
Tallahassee, FL 32306
United States

Lynn L. Rees

Utah State University - School of Accountancy ( email )

College of Business
Logan, UT 84322-3540
United States

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
435-797-2272 (Phone)

Wayne B. Thomas (Contact Author)

University of Oklahoma ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

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