Investors' Misweighting of Firm-Level Information and the Market's Expectations of Earnings

Prior studies use fundamental earnings forecasts to proxy for the market's expectations of earnings because analyst forecasts are biased and are available for only a subset of firms. We find that as a proxy for market expectations, fundamental forecasts contain systematic measurement errors analogous to those in analysts' biased forecasts. Therefore, these forecasts are not representative of investors' beliefs. The systematic measurement errors from using fundamental forecasts to proxy for market expectations occur because investors misweight the information in many firm-level variables when estimating future earnings, but fundamental forecasts are formed using the historically efficient weights on firm-level variables. Thus, we develop an alternative ex ante proxy for the market's expectations of future earnings (“the implied market forecast”) using the historical (and inefficient) weights, as reflected in stock returns, that the market places on firm-level variables. A trading strategy based on the implied market forecast error, which is measured as the difference between the implied market forecast and the fundamental forecast, generates excess returns of approximately 9 percent per year. These returns cannot be explained by investors' reliance on analysts' biased forecasts. Overall, our results reveal that market expectations differ from both fundamental forecasts and analysts' forecasts.     

Determinants of Managerial Earnings Guidance Prior to Regulation Fair Disclosure and Bias in Analysts' Earnings Forecasts*

Prior to Regulation Fair Disclosure (“Reg FD”), some management privately guided analyst earnings estimates, often through detailed reviews of analysts' earnings models. In this paper I use proprietary survey data from the National Investor Relations Institute to identify firms that reviewed analysts' earnings models prior to Reg FD and those that did not. Under the maintained assumption that firms conducting reviews guided analysts' earnings forecasts, I document firm characteristics associated with the decision to provide private earnings guidance. Then I document the characteristics of “guided” versus “unguided” analyst earnings forecasts. Findings demonstrate an association between several firm characteristics and guidance practices: managers are more likely to review analyst earnings models when the firm's stock is highly followed by analysts and largely held by institutions, when the firm's market‐to‐book ratio is high, and its earnings are important to valuation but hard to predict because its business is complex. A comparison of guided and unguided quarterly forecasts indicates that guided analyst estimates are more accurate, but also more frequently pessimistic. An examination of analysts' annual earnings forecasts over the fiscal year does not distinguish between guidance and no‐guidance firms; both experience a “walk‐down” in annual estimates. To distinguish between guidance and no‐guidance firms, one must examine quarterly earnings news: unguided analysts walk down their annual estimates when the majority of the quarterly earnings news is negative; guided analysts walk down their annual estimates even though the majority of the quarterly earnings news is positive.     

Accounting Policy Disclosures and Analysts' Forecasts

Using an international sample, I investigate whether the extent of firms' disclosure of their accounting policies in the annual report is associated with properties of analysts' earnings forecasts. Controlling for firm‐ and country‐level variables, I find that the level of accounting policy disclosure is significantly negatively related to forecast dispersion and forecast error. In particular, I find that accounting policy disclosures are incrementally useful to analysts over and above all other annual report disclosures. These findings suggest that accounting policy disclosures reduce uncertainty about forecasted earnings. I find univariate but not multivariate support for the hypothesis that accounting policy disclosures are especially helpful to analysts in environments where firms can choose among a larger set of accounting methods.     

Financial Statement Complexity and Meeting Analysts’ Expectations

We examine whether firms with greater financial statement complexity are more likely to meet or beat analysts’ earnings expectations. We proxy for financial statement complexity using the firm's industry and year adjusted accounting policy disclosure length. Firms with more complex financial statements are more likely to just beat expectations than just miss expectations. Firms with complex financial statements appear to use expectations management to beat expectations, but do not use earnings management. Corroborating these findings, we find analysts rely more on management guidance for more complex firms. Firms with complex financial statements are also more likely to have analysts exclude items from actual “street earnings,” but tests suggest this strategy is not specifically used by complex firms to beat expectations. The effect we document is specific to analyst forecasts and not to other alternative benchmarks.     

Discretion in Financial Reporting: The Voluntary Disclosure of Compensation Peer Groups in Proxy Statement Performance Graphs*

We examine the 49 Standard & Poor's (S&P) 500 firms that voluntarily disclosed in their 1993 proxy statements, the composition of the comparison group used by each board's compensation committee to set executive compensation policies. We hypothesize that the net benefits of this disclosure are largest when (1) there is a high degree of stakeholder concern about compensation, (2) compensation policies are defensible, and (3) corporate governance is strong. Consistent with our stakeholder concern prediction, disclosing firms have higher compensation levels and are more apt to have received prior shareholder proposals about executive compensation. Contrary to this prediction, we find a negative association between financial press coverage of compensation policies and the probability of disclosure. Additionally, the disclosure decision is unrelated to the defensibility of compensation policies and the firm's corporate governance profile. Industry-adjusted firm performance, managerial entrenchment, CEO tenure, institutional holdings, and compensation committee independence variables are insignificant. We also compare the financial performance and compensation practices of compensation peers to two yardsticks — performance and pay practices at the sample firms and the corresponding S&P industry index firms. The compensation levels of compensation peers exceed those of the firms in the corresponding S&P industry indexes. Because (1) compensation levels and performance sensitivities at sample firms are more similar to those at compensation peers than to those at S&P industry index firms, and (2) the superior financial performance and higher performance sensitivities of disclosing firms justify high pay, this evidence suggests that the compensation peers of disclosing firms are an appropriate comparison group.     

Regulatory Oversight of Financial Reporting: Securities and Exchange Commission Comment Letters

The Securities and Exchange Commission (SEC) reviews company filings (10‐Q, 10‐K, S‐1, etc.) submitted to them. If a review identifies potential deficiencies, the SEC staff sends the company a comment letter seeking clarification, additional information, and ultimately, perhaps, revision of the filing or future filings. We examine the content, resolution, and ensuing informational consequences of SEC comment letters. The content analysis shows that nearly half of all comments involve accounting application, financial reporting, and disclosure issues. More than 17 percent of our sample cases result in immediate amended filings to resolve the issue(s) arising from the comment letters, and financial statements and/or footnotes are frequently revised. Following comment letter resolution, the adverse selection component of the bid‐ask spread declines and Earnings Response Coefficients (ERCs) increase. Our results provide little support for the conjecture that the market interprets the receipt of a comment letter as a signal that the firm has poor reporting quality. Finally, we find no evidence that comment letter firms increase the quantity or change the type of voluntary disclosure, thereby eliminating a possible competing explanation for the improved information environment. We conclude the SEC's oversight has beneficial informational effects.     

Valuation Implications of Unconditional Accounting Conservatism: Evidence from Analysts' Target Prices

We examine whether financial analysts understand the valuation implications of unconditional accounting conservatism when forecasting target prices. While accounting conservatism affects reported earnings, conservatism per se does not have an effect on the present value of future cash flows. We examine whether analysts adjust for the effect of conservatism included in their earnings forecasts when using these forecasts to estimate target prices. We find that signed target price errors (actual minus forecast) have a significant positive association with the degree of conservatism in forward earnings, suggesting that target prices are biased due to accounting conservatism. Cross‐sectional analysis suggests that more sophisticated analysts and superior long‐term forecasters adjust for conservatism to a greater extent than other analysts. In additional analyses, we explore the mechanism through which conservatism leads to bias in target prices. We first show that analysts' earnings forecasts are negatively associated with the degree of conservatism; that is, analysts include the effect of unconditional conservatism in their earnings forecasts. Based on alternative earnings‐based valuation models that analysts may use, our evidence suggests that analysts fail to appropriately adjust their valuation multiple for the effect of conservatism included in their earnings forecasts when using these forecasts to derive target prices. As a consequence, we find that, for extreme changes in conservatism, the bias in analysts' target prices due to conservatism leads to a distortion of market prices. The evidence highlights the concern that analysts may not appreciate the valuation implications of conservative accounting which could inhibit price discovery.     

Accounting and the credibility of management forecasts*

Abstract. This paper develops and analyzes a signaling model in which a firm discloses privately held information to investors via a forecast. The forecast is constrained by the extent to which the accounting system reflects the private information, and the extent to which estimates regarding the private information are available from other sources, such as financial analysts. The market assesses the credibility of the forecast in setting the price of the firm's stock. A partially separating equilibrium is presented. The implications of the equilibrium are consistent with empirical regularities concerning the market's reaction to management forecasts. In particular, a majority of management forecasts contain good news, forecasts containing bad news are more credible than forecasts containing good news, and stock price reactions are stronger for firms that are not followed by financial analysts. Analysis of investor returns suggests that although a more effective accounting system reduces the variance of returns, it also skews them to the left. Thus, the largest losses are from investments in firms with the most effective accounting systems. Résumé. L'auteur élabore et analyse un modèle indicateur dans lequel une entreprise communique aux investisseurs, par le truchement d'une prévision, l'information qu'elle détient à titre privilégiée. La prévision est sous contrainte dans la mesure où le système comptable reflète l'information privilégiée et les estimations relatives à l'information privilégiée peuvent être obtenues auprès d'autres sources, comme celle des analystes financiers. Le marché évalue la crédibilité de la prévision en fixant le cours de l'action de l'entreprise. L'auteur présente un équilibre partiellement intercalaire. Les conséquences de cet équilibre sont conformes à celles régulièrement observées dans les études empiriques relatives à la réaction du marché aux prévisions de la direction. On note en particulier que la majorité des prévisions de la direction renferment de l'information positive, que les prévisions qui renferment de l'information négative sont plus crédibles que les prévisions contenant de l'information positive et que les réactions touchant le cours de l'action sont plus fortes pour les entreprises qui ne sont pas suivies par des analystes financiers. L'analyse des rendements obtenus par les investisseurs laisse croire que même si un système comptable plus efficace réduit la variance des rendements, il les rend asymétriques vers la gauche. Les pertes les plus importantes sont donc liées aux investissements dans des entreprises ayant les systèmes comptables les plus efficaces.     

The voluntary inclusion of earnings forecasts in IPO prospectuses*

Abstract. This study examines empirically the role played by direct disclosure in the valuation of initial public offerings (IPOs). We investigate why some firms making an initial public offering in Canada include an earnings forecast in the offering prospectus and others do not, and, in particular, the role of such direct disclosures in IPO valuation. We explore several hypotheses motivated by the voluntary disclosure and signaling literatures. Our results are consistent with the hypotheses that (1) forecasters have “good news” to reveal about future earnings prospects relative to nonforecasters, (2) the earnings forecast signals are valuation relevant, and (3) the market is able to correct for expected forecast error or bias in the earnings forecast. Résumé. Les auteurs font une analyse empirique du rôle que joue la présentation directe d'information dans l'évaluation des premiers appels publics à lépargne. Ils se penchent sur les raisons pour lesquelles certaines sociétés qui font appel public à l'épargne au Canada intègrent à leur prospectus d'émission des prévisions de bénéfices, alors que d'autres ne le font pas, et ils s'intéressent en particulier au rôle de la présentation directe de ce genre d'information dans l'évaluation d'un premier appel public à l'épargne. Ils examinent plusieurs hypothèses inspirées d'ouvrages traitant de présentation volontaire d'information et d'indicateurs. Les résultats obtenus sont conformes aux hypothèses selon lesquelles 1) ceux qui font état de prévisions ont de l'information positive à communiquer au sujet des perspectives de bénéfices, contrairement à ceux qui ne font état d'aucune prévision, 2) les indicateurs que représentent les prévisions de bénéfices sont pertinents à l'évaluation et 3) le marché a la capacité de corriger l'information qu'il reçoit pour tenir compte des erreurs ou des distorsions anticipées dans les prévisions de bénéfices.     

The Effect of Enterprise Systems Implementation on the Firm Information Environment

This study uses an archival research design to assess the impact of enterprise systems on a firm's internal information environment as reflected in the production of management earnings forecasts. Specifically, the authors hypothesize that, if enterprise systems improve management's access to decision‐relevant internal information, higher quality management earnings forecasts should ensue. Consistent with disclosure theory and the purported technical characteristics of enterprise systems, the authors find a positive association between enterprise system implementations and subsequent increases in the likelihood of management forecast issuance and the accuracy of the forecasts. Additional robustness tests support the argument that improvements in management forecasts are due to improvements in the firm's internal information environment rather than to enhancements in management's ability to manage earnings. Beyond accumulating financial reporting information, the authors note that such systems provide management with information to make day‐to‐day operational decisions. Moreover, the paper provides a basis for considering management forecast qualities as a measurable proxy for improvements in the firm's internal information environment that result from information technology investments.     

Trading Prior to the Disclosure of Material Information: Evidence from Regulation Fair Disclosure Form 8‐Ks*

Regulation Fair Disclosure (Reg FD) Form 8‐K filings provide a venue where managers release information to the market as a whole that they designate as being material. Using this setting, we study trading patterns immediately prior to the public disclosure of material information. We offer three main results. First, using both intraday and daily trading data, we find abnormal trading volume of 21 percent (13 percent) in the hour (day) prior to the public disclosure, respectively. Second, we find that this pre‐disclosure abnormal trading volume is concentrated in firms that are smaller, have more growth opportunities, issue fewer voluntary disclosures, and have weaker external monitoring. Finally, we find that this pre‐disclosure volume is concentrated in subsamples in which the information relates to a firm's material contracts, a firm holds investor/analyst conferences, and there is insider trading activity in a firm's shares. Our results do not concentrate in a small number of firms or industries, and do not appear to be explained by the form through which managers first release the material information (e.g., Form 8‐K, press release, website posting, or social media). Our results are also robust to controlling for the firm's other filings and peer filings that occur around the disclosure. Overall, the trading patterns we document may show that, inconsistent with the spirit of Reg FD, a subset of investors trade on information managers deem material prior to its broad, public release.     

美国年报风险披露的现状和启示

会计报表的风险披露在我国尚未形成专门的规范。文章通过对美国上市公司2002年度的年报进行风险披露的调查,比较了两国报表在披露内容和披露形式方面的差异,并对其原因进行了分析,提出了几种可能的对策。     

Informativeness of Annual Reports for Firms in Financial Distress*

Abstract. This article reports the results of an investigation into the informativeness of financial communications with shareholders when the level of market uncertainty regarding future firm performance varies. Specifically, it is hypothesized that the informativeness of annual reports is positively associated with the level of market uncertainty. The informativeness of annual reports is measured by the extent of price reaction, regardless of direction, at the time of disclosure. To obtain a sample of firms with temporal variation in the level of market uncertainty, the article investigates firms nearing financial distress. Financial distress is represented by the firm's receipt of a going-concern audit report from the external auditor. Time periods immediately preceding receipt of the going-concern report are presumed to exhibit changing market uncertainty regarding future firm prospects. The empirical evidence is consistent with the article's hypothesis in that price reactions to annual reports systematically vary the nearer the firms are to financial distress. Specifically, price reactions to annual reports for the three years preceding distress are more than 35 percent larger than the price reactions to reports from earlier periods. This evidence is consistent with the informativeness of financial disclosures being dependent on the level of market uncertainty and advances our understanding of the usefulness of accounting disclosures to market participants. To the extent that accounting regulatory agencies are interested in environmental factors that determine the usefulness of accounting information to shareholders, this article offers evidence on one important factor. Résumé. Les auteurs exposent les résultats d'une analyse du contenu informationnel des renseignements financiers communiqués aux actionnaires lorsque varie le degré d'incertitude du marché relativement aux perspectives de rendement d'une entreprise. Ils posent plus précisément l'hypothèse selon laquelle le contenu informationnel des rapports annuels est en relation positive avec le degré d'incertitude du marché. Le contenu informationnel des rapports annuels est mesuré en termes d'importance de la réaction du cours des actions, peu importe l'orientation, au moment de la communication des renseignements financiers. Pour constituer un échantillon d'entreprises à l'égard desquelles le degré d'incertitude du marché a varié dans le temps, les auteurs ont choisi d'analyser des entreprises sur le point de connaître des difficultés financières. La réception, par l'entreprise, d'un rapport des vérificateurs externes mettant en question la continuité de l'exploitation témoigne de ces difficultés financières. Les auteurs posent l'hypothèse selon laquelle on enregistre, au cours des exercices qui précèdent immédiatement la réception d'un rapport de cette nature, une variation du degré d'incertitude du marché relativement aux perspectives d'avenir de l'entreprise. Les constatations empiriques confirment l'hypothèse formulée, en ce sens que la réaction du cours des actions à la publication des rapports annuels varie de façon systématique lorsque les entreprises se rapprochent des difficultés financières. Plus précisément, la réaction du cours des actions à la publication des rapports annuels pour les trois exercices précédant les difficultés financières est plus de 35 pour cent supérieure à la réaction du cours des actions à la publication des rapports des exercices antérieurs. Cette constatation vient confirmer le fait que le contenu informationnel des renseignements financiers publiés dépend du degré d'incertitude du marché, et elle nous permet de mieux comprendre l'utilité de la publication d'information comptable à l'intention des participants au marché. Dans la mesure où les organismes de réglementation comptable sont intéressés aux facteurs liés à l'environnement qui déterminent l'utilité de l'information comptable pour les actionnaires, les auteurs nous permettent d'acquérir certaines certitudes à l'égard d'un facteur important.     

Disclosure Policy and Market Liquidity: Impact of Depth Quotes and Order Sizes*

This paper investigates the relation between disclosure policy and market liquidity. Our tests examine two key aspects of market liquidity, the effective bid‐ask spread and quoted depth, and how they relate to financial analysts' ratings of firms' disclosure policies. We introduce a method of combining order sizes and depth quotes to yield more precise estimates of effective spreads on trades likely constrained by quoted depth. We find that while firms with higher rated disclosures are charged lower effective spreads, they are also quoted lower depth, consistent with the notion that better disclosures reduce information asymmetry but also cause some liquidity suppliers to exit the market. Therefore, a simple examination of spreads and depths yields ambiguous inferences on the relation between disclosure policy and market liquidity. We resolve this ambiguity by estimating depth‐adjusted effective spreads, and find that firms with higher rated disclosures have lower depth‐adjusted effective spreads across all trade sizes. Consequently, our results reveal a robust inverse relation between disclosure ratings and effective trading costs. This implies that a policy of enhanced financial disclosure is related to improved market liquidity.     

Voluntary Disclosure,Information Asymmetry,and Insider Selling through Secondary Equity Offerings*

This paper examines the relation of voluntary disclosure of management earnings forecasts and information asymmetry to insider selling through secondary equity offerings. We hypothesize that the pattern of voluntary disclosure and level of information asymmetry prior to secondary equity offerings differs systematically based on the identity of the seller. Specifically, we predict a greater frequency of voluntary disclosure and decreased level of information asymmetry when managers sell their stock through a secondary offering. We examine this hypothesis in a cross-sectional analysis of 210 secondary equity offerings from 1984-91, using a two-stage conditional maximum likelihood simultaneous equations estimation procedure, which allows for possible endogeneity in the manager's decision to sell stock. Consistent with our predictions, we document a significantly positive association between managerial participation and voluntary disclosure of earnings forecasts in the nine-month period prior to registration of the offering. We also document a significantly negative association between managerial participation and two proxies for information asymmetry. The findings provide evidence that managers act as if reduced information asymmetry correlates with a reduced cost of capital.     

A Re-Examination of Financial Analysts' Differential Earnings Forecast Accuracy*

Abstract. This research re-examines whether there are differences in the forecast accuracy of financial analysts through a comparison of their annual earnings per share forecasts. The comparison of analyst forecast accuracy is made on both an ex post (within sample) and an ex ante (out of sample) basis. Early examinations of this issue by Richards (1976), Brown and Rozeff (1980), O'Brien (1987), Coggin and Hunter (1989), O'Brien (1990), and Butler and Lang (1991) were ex post and suggest the absence of analysts who can provide relatively more accurate forecasts over multiple years. Contrary to the results of prior research and consistent with the belief in the popular press, we document that differences do exist in financial analysts' ex post forecast accuracy. We show that the previous studies failed to find differences in forecast accuracy due to inadequate (or no) control for differences in the recency of forecasts issued by the analysts. It has been well documented in the literature that forecast recency is positively related to forecast accuracy (Crichfield, Dyckman, and Lakonishok 1978; O'Brien 1988; Brown 1991). Thus, failure to control for forecast recency may reduce the power of tests, making it difficult to reject the null hypothesis of no differences in forecast accuracy even if they do exist. In our analysis, we control for the differences in recency of analysts' forecasts using two different approaches. First, we use an estimated generalized least squares estimation procedure that captures the recency-induced effects in the residuals of the model. Second, we use a matched-pair design whereby we measure the relative forecast accuracy of an analyst by comparing his/her forecast error to the forecast error of another randomly selected analyst making forecasts for the same firm in the same year on or around the same date. Using both approaches, we find that differential forecast accuracy does exist amongst analysts, especially in samples with minimum forecast horizons of five and 60 trading days. We show that these differences are not attributable to differences in the forecast issuance frequency of the financial analysts. In sum, after controlling for firm, year, forecast recency, and forecast issuance frequency of individual analysts, the analyst effect persists. To validate our findings, we examine whether the differences in the forecast accuracy of financial analysts persist in holdout periods. Analysts were assigned a “superior” (“inferior”) status for a firm-year in the estimation sample using percentile rankings on the distribution of absolute forecast errors for that firm-year. We use estimation samples of one- to four-year duration, and consider two different definitions of analyst forecast superiority. Analysts were classified as firm-specific “superior” if they maintained a “superior” status in every year of the estimation sample. Furthermore, they were classified as industry-specific “superior” if they were deemed firm-specific “superior” with respect to at least two firms and firm-specific “inferior” with respect to no firm in that industry. Using either definition, we find that analysts classified as “superior” in estimation samples generally remain superior in holdout periods. In contrast, we find that analysts identified as “inferior” in estimation samples do not remain inferior in holdout periods. Our results suggest that some analysts' earnings forecasts should be weighted higher than others when formulating composite earnings expectations. This suggestion is predicated on the assumption that capital markets distinguish between analysts who are ex ante superior, and that they utilize this information when formulating stock prices. Our study provides an ex ante framework for identifying those analysts who appear to be superior. When constructing weighted forecasts, a one-year estimation period should be used because we obtain the strongest results of persistence in this case.     

Voluntary financial disclosure in an entry game with continua of types*

Abstract. A key characteristic of the reporting of private management information is that managers do not always report their information, and they reveal or withhold both “good” and “bad” news. Several recent papers provide models of managers' voluntary disclosure decisions. These models are typically constructed so that managers do not always disclose or withhold their information, despite rational behavior by both the privately informed managers and interested uninformed parties external to the firm. Our paper seeks to contribute further to this literature by developing a richer model of the forces that might influence a manager's decision to disclose private information. Our model is a direct extension of the model in Darrough and Stoughton (1990). In our model, there is a continuum of possible private incumbent signals and the entrant may be privately informed about the cost of entry. Partial disclosure of private information results from the tension that exists between an informed manager's desire to communicate good news to (and hide bad news from) the capital market and his desire to communicate bad news to (and hide good news from) competitors in the firm's product market. Résumé. La communication par la direction de l'information privilégiée qu'elle détient présente une caractéristique déterminante: les gestionnaires ne font pas toujours état de cette information, et ils révèlent ou retiennent l'information aussi bien «positive» que «négative ?. Dans plusieurs études récentes sont proposés des modèles décisionnels en matière de présentation volontaire d'information par les gestionnaires. Ces modèles sont habituellement construits de telle sorte que les gestionnaires ne communiquent ou ne retiennent pas toujours l'information, malgré le comportement rationnel affiché tant par les gestionnaires dépositaires de l'information privilègiée que par les parties intéressées extérieures à l'entreprise qui ne disposent pas de cette information. Les auteurs ont voulu ici enrichir ces études en élaborant un modèle plus étoffé des forces susceptibles d'influer sur la décision du gestionnaire de communiquer l'information privilégiée dont il dispose.     

An Approach to Adjusting Analysts' Consensus Forecasts for Selection Bias*

Many recent empirical studies have concluded that analysts' earnings forecasts are optimistic on average. In this paper, we attempt to undo the effect of one potential source of optimistic bias in analysts' earnings forecasts. Assuming forecasts come from a truncated normal distribution, we estimate the “true” population mean using maximum likelihood. We find that our estimates of earnings are more accurate and less biased than standard measures of sample mean and median. However, we do not find a closer relationship between excess market returns and forecast errors from our maximum likelihood estimate than from the sample mean. This may suggest that the market does not fully incorporate analysts' incentives in generating expectations about future earnings.     

Price and Volume Reactions to Public Information Releases: An Experimental Approach Incorporating Traders' Subjective Beliefs*

This paper examines how market prices, volume, and traders' dividend expectations respond to public information releases in laboratory markets for a long-lived financial asset. The objective is to study deviations from the symmetric information risk-neutral rational expectations (RE) benchmark, which predicts no trade in such settings. The results of a series of double-auction and call markets are reported in which traders manage a portfolio of cash and asset shares over 15 rounds of trading. A public signal regarding the value of the liquidating dividend is released every third round, and traders' subjective expectations of the liquidating dividend are elicited each round as cash-motivated forecasts. We find that, despite the public dividend signal, traders' dividend forecasts are heterogeneous. Forecasts and prices both underreact to the public signals, with prices under-reacting more than forecasts. In general, price changes are not closely associated with public signals, and there is greater excess price volatility in double auctions than in call markets. Forty-three percent of trades are inconsistent with the trader's forecasts, and inconsistent trades occur more frequently in the double-auction markets. On average, approximately 10 percent of the outstanding shares are traded in each round, and trading volume is increasing in the mean absolute forecast revision and decreasing in the contemporaneous dispersion in forecasts. These results suggest that differential processing of the public signal and/or speculative trading for short-term gain may help to explain why symmetric information RE predictions are often not supported in empirical and experimental settings. They also suggest that market reactions to public information releases may be influenced by market microstructure.     

Stock Performance and Intermediation Changes Surrounding Sustained Increases in Disclosure*

This paper investigates whether firms benefit from expanded voluntary disclosure by examining changes in capital market factors associated with increases in analyst disclosure ratings for 97 firms. The disclosure rating increases are accompanied by increases in sample firms' stock returns, institutional ownership, analyst following, and stock liquidity. These findings persist after controlling for contemporaneous earnings performance and other potentially influential variables, such as risk, growth, and firm size. While it is difficult to draw unambiguous causal conclusions, these results are consistent with disclosure model predictions that expanded disclosure leads investors to revise upward valuations of the sample firms' stocks, increases stock liquidity, and creates additional institutional and analyst interest in the stocks.