Relationship between Voluntary Disclosures and the Economic Cycle: Empirical Research Findings
Journal of Financial Management and Analysis, 28(1):2015(Jan-Jun 2015)
Posted: 17 Oct 2015
Date Written: October 17, 2015
Abstract
This study examines whether investors overreact to bad news during good times and under react to bad news during bad times. We examine investors’ reaction to bad news during economic cycles for a sample of 445 U.S. firms issuing voluntary disclosures of profit warnings prior to a quarterly earnings per share announcement during the 1995 to 2009 period. We find that the immediate price reaction to a firm’s profit warning (bad news) is stronger during periods of economic expansion (good times) than during periods of economic contraction (bad times). However, the reaction is sensitive to the methodology employed and event window selected. We also find less negative stock return reaction during the post Sarbanes-Oxley (SOX) period compared to the pre-SOX period.
Keywords: voluntary disclosures, profit warnings, economic cycles
JEL Classification: C12; C82; E32; M41; O16
Suggested Citation: Suggested Citation