Dr. Zabihollah Rezaee accepted for publication in the Global Finance Journal
For release: April 6, 2018
Dr. Zabihollah Rezaee, Thompson-Hill Chair of Excellence and professor of Accountancy, was recently accepted for publication in the Global Finance Journal. His paper is entitled "Waiting for Guidance: Disclosure noise, verification delay, and the value-relevance of good-news versus bad-news management earnings forecasts." Dr. Rezaee coauthored this paper with Hassan Tehranian and Alan Marcus of Boston College and Lee Cohen of University of Georgia.
This paper argues that management earnings forecasts (MEFs) provide valuable information about firms' prospects and posit a different and comparatively unexplored dimension of credibility to explain why MEF good-news and bad-news forecasts are received so differently by examining differences in the noise that surrounds these forecasts. The market views bad-news management earnings forecasts as more credible than good-news forecasts not because good-news forecasts are biased, but rather because they are noisier than bad-news forecasts. After controlling for noise, the difference in market response disappears. Bad-news forecasts have unconditionally lower dispersion around final earnings and, unlike good-news forecasts, bad-news forecasts become more accurate and contain higher magnitude updates as earnings announcement dates approach. The results provide new direct evidence that management differentially seeks to verify bad news, and withholds greater amounts of bad news while it seeks verification. Consistent with rational markets, this mitigation of noise provides a novel explanation for the asymmetric market response to management earnings forecasts.