The Effect of Analyst Forecasts During Earnings Announcements

on Investor Responses to Reported Earnings

Gerald J. Lobo
University of Houston

Minsup Song
Sogang University

Mary Harris Stanford

Texas Christian University

We thank the editor, Mark Bradshaw, and two anonymous referees. We also thank Dana Zhang
for helpful comments and workshop participants at Fudan University.

Electronic copy available at: https://ssrn.com/abstract=2443623

 The Effect of Analyst Forecasts During Earnings Announcements
on Investor Responses to Reported Earnings

Abstract

Despite the increased frequency of analyst forecasts during earnings announcements, empirical
evidence on the interaction between the information in the earnings announcement and these
forecasts is limited. We examine the implications of reinforcing and contradicting analyst
forecast revisions issued during earnings announcements (days 0 and +1) on the market response
to unexpected earnings. We classify forecast revisions as reinforcing (contradicting) when the
sign of analyst forecast revisions agrees (disagrees) with the sign of unexpected earnings. We
document larger (smaller) earnings response coefficients for announcements accompanied by
reinforcing (contradicting) analyst forecast revisions. Analyses of management forecasts suggest
that analyst revisions and management forecasts convey complementary information. Cross-
sectional tests show that investors react more to earnings announcements accompanied by analyst
forecast revisions when there is greater consensus among analysts (lower dispersion) and that
better earnings quality (higher persistence) mitigates the negative impact of contradictory analyst
forecast revisions.

JEL classification: D82; G29; M41

Keywords: earnings response coefficient; reinforcing analyst forecast revisions; contradicting

analyst forecast revisions; piggyback hypothesis

Electronic copy available at: https://ssrn.com/abstract=2443623

 V. INTRODUCTION

Analytical studies suggest that additional information generated by informed investors

during earnings announcements helps investors better understand the news contained in earnings

announcements and affects their response to earnings announcements (Kim and Verrecchia 1994,

1997). Although many studies examine the earnings-return relation, empirical evidence on how

analyst forecasts issued during the earnings announcement window affect the market response to

earnings is limited. Zhang (2008) finds that stock price reactions to unexpected earnings are

greater when analysts issue forecast revisions within two days following an earnings

announcement. This suggests that the timing of analyst forecast revisions is positively associated

with the speed of stock price adjustment to the news contained in the earnings announcement.

However, Zhang focuses only on the timing of analyst forecasts, not the content. We extend this

line of research by investigating whether and how analyst forecast revisions issued during the

earnings announcement (on days 0 and +1) affect the stock market reaction to the earnings

announcement. Specifically, we allow the information in analyst forecast revisions issued during

the earnings announcement to interact with the information in the earnings report, i.e., whether

the forecast revision reinforces or contradicts unexpected earnings.

We expect analyst forecast revisions to help market participants better understand the

implications of current unexpected earnings for future firm performance (Kim and Verrecchia

1994, 1997). We measure unexpected earnings, as year t earnings-per-share (EPS) less the most

recent analyst forecast for year t issued prior to the earnings announcement, scaled by stock price.

We measure analyst forecast revisions as the difference between the mean of analyst forecasts

for year t+1 earnings, issued on days 0 and +1 relative to the earnings announcement, and the

mean of the pre-announcement forecasts for year t+1 earnings, issued within 30 days prior to the

3
earnings announcement. We label this measure as a reinforcing forecast revision if unexpected

earnings is positive (negative) and the forecast revision is upward (downward). Similarly, we

label the analyst forecast revision as contradicting if unexpected earnings is positive (negative)

but the forecast revision is downward (upward). Intuitively, reinforcing (contradicting) forecast

revisions indicate that analysts view firms current unexpected earnings as more (less) likely to

persist in the future. We provide evidence of higher (lower) earnings response coefficients

(ERCs) for earnings announcements accompanied by reinforcing (contradicting) analyst forecast

revisions. This evidence suggests that investors combine the information in the earnings report

with the accompanying analyst forecast revision in a manner that results in revised expectations of

future performance. In addition, cross-sectional tests show that investors react more to earnings

announcements accompanied by analyst forecast revisions when there is greater consensus among

analysts (less dispersion) and that better earnings quality (higher persistence) mitigates the negative

impact of contradictory analyst forecast revisions. We also document a complementary relation

between management forecasts issued with the earnings report and analyst forecast revisions

issued during the earnings announcement.

Our study examines the market reaction to unexpected earnings rather than the market

reaction to analyst forecast revisions. This approach contrasts with studies that view analyst

forecasts as a separate information source and examine the stock price reaction to either analyst

forecasts or stock recommendations. Our research design is similar to Zhang (2008) who studies

the responsiveness of analysts to earnings announcements and finds that when analysts issue

forecasts during the earnings announcement (days 0 and +1), more of the stock price reaction

occurs around the earnings announcement. Further, firms whose earnings announcements are

accompanied by analyst forecasts have less post-earnings-announcement drift. Our study differs

4
from Zhang (2008) in that we allow analyst forecast revisions made during the earnings

announcement (days 0 and +1) to interact with the news in the earnings announcement.

Specifically, we test for differences in the ERC conditional on whether the analyst forecast

revision reinforces or contradicts the news in the earnings report. Such an interaction between a

public news signal and privately generated information is also supported by theoretical models.

For example, Kim and Verrecchia (1997) refer to private event-period information as new

information created only when a public announcement enables analysts and others to draw new

inferences based on their private information. Our evidence is consistent with market participants

combining the earnings report with both analyst forecast revisions and management forecasts

issued during earnings announcements to draw new conclusions regarding future performance.

Many prior studies examine how the market response to earnings announcements is

associated with the properties of analyst forecasts made during the weeks prior to the earnings

announcement (Imhoff and Lobo 1992; Chen et al. 2010; Francis et al. 2002). Other studies test

whether earnings announcements trigger disagreement among investors by examining the

properties of analyst forecast revisions around earnings announcements (Barron et al. 2002;

Brown and Han 1992; Kandel and Pearson 1995) or the association between properties of

forecast revisions and trading volume (Bamber et al. 1997; Barron et al. 2005; Barron 1995).

These studies focus on analyst forecasts issued in the days and weeks prior to or after earnings

announcements and frequently exclude observations with other information releases during their

event window. However, recent studies document an increase over time in both analyst and

management forecasts issued at the time of the earnings announcement (Kohlbeck and Magilke

2002; Anilowski et al. 2007; Kimbrough 2005; Ivkovi and Jegadeesh 2004).

5
 Other studies examine the timing of analyst forecast revisions relative to corporate

disclosures and provide evidence consistent with analyst forecasts pre-empting the news in

earnings in the weeks before the earnings announcement and interpreting the information in

earnings in the weeks following the earnings announcement (Francis et al. 2002; Ivkovi and

Jegadeesh 2004; Frankel et al. 2006; Chen et al. 2010; Livnat and Zhang 2012). However, recent

studies by Altnkl and Hansen (2009) and Altnkl et al. (2013) dispute these conclusions and

suggest that analysts merely piggyback on public disclosures. Using intra-day data, these authors

find significant stock price reactions only during the 40 minute window around earnings

announcements and no stock price reaction in the 40 minute window around analyst forecast

revisions that follow earnings announcements. Li et al. (2015) and Yezegel (2015) are the first

studies to respond to the piggyback hypothesis with contradictory evidence using stock

recommendations. Our study contributes to the literature on analyst forecasts by providing

evidence that investors combine analysts timely interpretations of earnings reports with

unexpected earnings to generate new private information that results in stronger stock return

reactions to unexpected earnings.

We begin our analysis by documenting a significant increase in the frequency of earnings

announcements accompanied by analyst forecasts, from 53% in 1994 to 93% in 2014. Several

other studies also find an increase over time in both analyst and management forecasts issued at

the time of the earnings announcement (Kohlbeck and Magilke 2002; Anilowski et al. 2007;

Kimbrough 2005; Ivkovi and Jegadeesh 2004; Rogers and Van Buskirk 2013). Consistent with

Landsman and Maydew (2002), we document an increase in trading volume and absolute stock

price change around earnings announcements over time. Further, this increase is more

pronounced for earnings announcements accompanied by analyst forecast revisions than those

6
without such revisions. These results suggest that some of the increase in information content of

earnings announcements over time is attributable to more frequent analyst forecast revisions

issued during the earnings announcement window.

In our primary analyses, we estimate size-adjusted abnormal stock return responses to

unexpected earnings and allow the ERCs to vary across three types of earnings announcements

while controlling for other factors known to affect ERCs. We find a significantly larger ERC

when earnings announcements are accompanied by reinforcing analyst forecast revisions relative

to both announcements with contradicting forecast revisions and those without announcement

window forecast revisions. Similarly, when analysts forecast revisions contradict unexpected

earnings, the ERC is smaller in magnitude. Furthermore, when we restrict the sample to only

earnings announcements accompanied by analyst forecast revisions, mitigating concerns that

analysts decision to issue a concurrent forecast drives our results, the ERC is significantly

greater when forecast revisions are reinforcing than when they are contradicting. When

combined, these results suggest that analyst forecast revisions made during the earnings

announcement window aid market participants interpretation of earnings news. This evidence

supports the conclusion in Li et al. (2015) and Yezegel (2015) that investors value analysts

interpretation of firms disclosures and contrast with Altnkl and Hansens (2009) and

Altnkl et al.s (2013) conclusion that analysts merely piggyback on public news events.

We also investigate how management forecasts issued during the announcement window

affect investors use of analyst forecast revisions. We incorporate management forecasts in two

ways. First, we examine the price reactions to earnings announcements accompanied by analyst

forecast revisions for sub-samples with and without management forecasts issued with the

earnings announcement. Our finding of a stronger market response to earnings announcements

7
accompanied by reinforcing or contradicting analyst forecast revisions issued during the event

window are not affected by this sample partition. Second, we classify management forecasts as

reinforcing and contradicting in a manner similar to the way we classify analyst forecast

revisions. Specifically, we label a management forecast as reinforcing when a firms unexpected

earnings is positive (negative) and the management forecast for year t+1 earnings issued during

the announcement window is higher (lower) than the mean of the pre-announcement analyst

forecasts for year t+1 earnings, issued within 30 days prior to the earnings announcement. We

label a management forecast as contradicting when a firms unexpected earnings is positive

(negative) but the management forecast for year t+1 is lower (higher) than the mean pre-

announcement analyst forecast for year t+1. We find that the magnitude of the ERC is largest

when both management forecasts and analyst forecast revisions are reinforcing. On the other

hand, the ERC is relatively smaller when either the management forecasts or the analyst forecast

revisions are contradicting or both are contradicting. These results suggest that while both

analyst forecast revisions and management forecasts convey additional information relative to

unexpected earnings, the informational effect of each becomes weaker when the other source of

information is contradictory.

Finally, we perform cross-sectional analyses to determine whether analyst forecast

characteristics or earnings quality affect investor responses to earnings announcements

accompanied by analyst forecast revisions. First, we examine whether dispersion in analyst

forecasts affects our conclusions. The results indicate that our inferences hold for both high and

low dispersion subsamples and that the magnitude of the ERC is greater when forecast dispersion

is low for both reinforcing and contradicting forecast revisions. Thus, investors react more to the

information in both reinforcing and contradicting forecast revisions issued in response to the

8
earnings announcement when there is greater consensus among analysts. Second, we examine

earnings persistence as a proxy for earnings quality and find that our primary results hold for

both high and low persistence subsamples and that when persistence is high, investors react less

negatively to contradicting forecast revisions than when persistence is low. Thus, greater

earnings persistence mitigates the negative investor reaction to analyst forecast revisions that

contradict the news in unexpected earnings. Taken together, the cross-sectional tests indicate that

forecasts characterized by greater consensus among analysts provide stronger signals of future

performance. In addition, greater earnings persistence mitigates the impact of contradictory

signals from financial analysts. These results strengthen our conclusion that investors combine

the information in timely analysts forecast revisions with unexpected earnings to assess future

performance.

Robustness tests indicate that our results are consistent when we measure stock returns

using market-adjusted abnormal returns over a three-day (days -1 to +1) versus a four-day (days

-1 to +2) window or an alternative sample period to control for the time-stamp error in analyst

forecasts. Additional tests mitigate the concern that measurement error in either unexpected

earnings or analyst forecasts affects our inferences. Similarly, analyses of various subsamples

indicate that our inferences remain when we examine only earnings announcements

accompanied by analyst forecast revisions or earnings announcements for firms with both

reinforcing and contradicting analyst forecast revisions over time. Further, our inferences remain

when we use the Heckman two-step procedure or propensity score matching to control for

analysts decision to issue a concurrent forecast revision.

Our study contributes to the literature in several ways. First, we provide evidence that the

market response to earnings announcements is affected by analyst forecast revisions issued during

9
the earnings announcements. This evidence is consistent with the interpretation role of analysts.

Although there has been a significant shift in the timing of analyst forecast revisions to earnings

announcements (Ivkovi and Jegadeesh 2004; Hahn and Song 2013), there is little empirical

evidence on the information role of these more timely forecasts. Prior studies mainly focus on

analysts development of new information by examining the pricing impact of analyst forecast

revisions (Ramnath et al. 2008). By allowing the forecast revisions to interact with the news in the

earnings announcement, we provide direct evidence that when analysts react quickly to an earnings

announcement, their forecasts help investors interpret the information in the announcement and

result in stronger stock return reactions. This interaction effect has not been shown in prior

research and is consistent with investors generating new private event-period information. Further,

cross-sectional tests indicate that forecast revisions characterized by greater consensus among

analysts provide stronger signals of future performance and better earnings quality (persistence)

mitigates the pricing impact of contradictory signals. Second, we show that the increase in the

information content of earnings over time documented by prior research (Kim and Kross 2005;

Landsman and Maydew 2002) may be partly attributable to reinforcing analyst forecast revisions

during earnings announcement windows. Third, our study provides evidence on the relation

between public firm disclosures and alternative information sources. Our findings suggest that

analyst forecast revisions and management forecasts are complementary information sources.

II. RELATED RESEARCH AND RESEARCH DESIGN

Related Research

Kim and Verrecchia (1994, 1997) model trading volume as a function of public and

private information and their interaction. In this model, investors trading response to a public

signal depends on the following three types of information: (1) the news contained in the public

10
signal; (2) pre-announcement information, which is private information gathered in anticipation

of the news announcement; and (3) private event-period information that results from the

interaction between the information in the public signal and the private information that becomes

useful only in conjunction with the public signal. Intuitively, investors trade around earnings

announcements in response to the value-relevant information in the announcement, because they

have different prior beliefs, and because their private event-period information results in

different interpretations of the earnings announcement.1

In our setting, if analysts use their own information to interpret the news in the earnings

report, then forecast revisions made at the time of the earnings announcement will reflect private

event-period information. Similarly, market participants can use both the information in the

analyst forecast revision and the news in the earnings announcement to assess firm value.

Prior literature suggests that the value of analysts activities in the market stems from two

sources: analysts skill at interpreting public information and their ability to generate private

information. Several studies examine the timing of analyst forecast revisions relative to corporate

disclosures and provide evidence consistent with both interpretation of public news and generation

of private information (Francis et al. 2002; Ivkovi and Jegadeesh 2004; Frankel et al. 2006; Chen

et al. 2010; Livnat and Zhang 2012). Studies attempting to distinguish the relative importance of

analysts dual roles generally compare the stock price reaction to the earnings announcement

with the reaction to analyst forecasts or examine correlations between these market reactions. For

example, Ivkovi and Jegadeesh (2004) find that stock price reactions to analyst forecast

revisions are stronger (weaker) in the period prior to (following) the earnings announcement and

1
Barron et al. (2005) provide empirical evidence that investors trade on private, event-period information around
earnings announcements.

11
conclude that the value of analyst forecasts and stock recommendations comes from their

development of new information rather than from interpretation. Chen et al. (2010) provide

evidence consistent with analysts research pre-empting the news in earnings in the weeks prior

to earnings announcements and interpreting the news in earnings in the weeks after earnings

announcements. These studies focus on the market reaction to analyst forecasts made at different

times relative to earnings announcements and provide evidence that supports generation of

private information by analysts. However, this research design excludes forecasts made during

the earnings announcement, which are the focus of our analysis.

Livnat and Zhang (2012) extend this line of research by showing that the market responds

more to analyst forecast revisions that follow corporate disclosures. They show that over 55% of

analysts forecast revisions occur within three trading days after a corporate disclosure (10-K,

10-Q, or 8-K). Further, the stock price response to forecast revisions following corporate

disclosures are greater than the responses to forecast revisions that do not immediately follow

firm disclosures. This evidence is consistent with analyst forecast revisions aiding market

participants interpretation of firm disclosures. These authors also examine forecast revisions

made in the weeks prior to earnings announcements. They find that around 20% of pre-earnings-

announcement forecast revisions are preceded by another public disclosure and the market

response to these revisions is stronger than the response to other forecast revisions. This

evidence suggests that even forecast revisions made in the weeks leading up to the earnings

announcement provide interpretation of other disclosures rather than new information generated

by the analysts. Overall, the studies discussed above provide evidence consistent with forecast

revisions aiding market participants in interpreting information disclosures.

12
 In contrast to the above literature, Altnkl and Hansen (2009) and Altnkl et al. (2013)

hypothesize and provide evidence that analysts simply echo public disclosures. Consistent with

Livnat and Zhang (2012), these authors provide evidence that almost all analyst forecast

revisions are preceded by some type of public news event. However, they hypothesize that

analysts piggyback on the public news rather than produce useful new information. Altnkl et

al. (2013) analyze intra-day stock returns and document significant returns during the 40 minute

interval around corporate news announcements but no significant return response to revisions in

analyst forecasts or stock recommendations preceded by a news event. Further, when they

examine forecast revisions that are not preceded by a public news announcement they again find

no stock price reaction during the 40 minute interval around the forecast revision. They conclude

that forecast announcements are not a regular source of useful information for public customers

(Altnkl et al. 2013, p 2552).

Yezegel (2015) is among the first to respond to the piggyback hypothesis. He presents

evidence consistent with analysts providing useful information in response to increased demand

from investors. He shows that the timing of revisions in analyst stock recommendations (buy,

sell, and hold) is concentrated after earnings announcements when there is greater demand from

investors for advice, i.e., for firms with larger unexpected earnings, more complex earnings, and

when the earnings surprise contradicts the pre-announcement stock recommendation. In addition,

he finds that analysts are more likely to revise their stock recommendations after earnings

announcements when the likelihood of earnings management is higher, i.e., when mispricing is

more likely. Li et al. (2014) also reexamine the piggyback hypothesis and provide contradictory

evidence. They demonstrate that 70% of analyst revisions in stock recommendations occur after-

hours and that these after-hours revisions are associated with greater stock returns than revisions

13
made during trading hours. Based on these findings, Li et al. conclude that analyst stock

recommendations are a source of new information and that their evidence supports the

information role of analysts. Separately, Bradley et al. (2014) find significant stock responses to

analyst recommendations after adjusting for the time-stamp error in analyst forecast timing. The

results of these studies call into question the Altnkl and Hansen (2009) and Altnkl et al.

(2013) conclusion that analysts merely piggyback on public news rather than produce useful

new information in their forecast revisions or stock recommendations.

We contribute to this literature by providing evidence of higher (lower) ERCs for

earnings announcements accompanied by reinforcing (contradicting) analyst forecasts. By

allowing the forecast revisions to interact with the news in the earnings announcement, we provide

direct evidence that when analysts react quickly to an earnings announcement, their forecast

revisions help investors interpret the information in the announcement and result in stronger stock

return reactions. If the piggyback argument is correct, then neither reinforcing nor contradicting

analyst forecast revisions should affect the market response to unexpected earnings. On the other

hand, evidence that the earnings response coefficients vary with reinforcing and contradicting

forecast revisions is consistent with analyst forecasts aiding market participants in interpreting

the news in the earnings announcements.

Reinforcing and Contradicting Analyst Forecasts

We measure the information in the earnings announcement, i.e., unexpected earnings, as

current year earnings-per-share (reported by I/B/E/S) less the most recent analyst forecast issued

prior to the current (year t) earnings announcement, scaled by fiscal-year-end stock price

14
(O'Brien 1988; Zhang 2008).2 We measure the revision in analyst forecasts as the difference

between the mean of the forecasts for year t+1 earnings (issued on days 0 and +1 relative to the

year t earnings announcement) and the mean of the pre-announcement forecasts for year t+1

earnings, issued within 30 days prior to the year t earnings announcement. We label this measure

as a reinforcing forecast revision (ReinforcingAFR) if unexpected earnings is positive (negative)

and the analyst forecast revision (AFR) is upward (downward). Similarly, we label an analyst

forecast revision as contradicting (ContradictingAFR) if unexpected earnings is positive

(negative) but the AFR is downward (upward).

We estimate the market response to earnings announcements conditional on the presence

of analyst forecast revisions issued in the [0, +1] window using the following model:

CARt-1,t+2 = 1 + 2ReinforcingAFR + 3ContradictingAFR + 4UE + 5UE*ReinforcingAFR

+ 6UE*ContradictingAFR + Control Variables + UE*(Control Variables) (1)
+ Year Dummies +

where,

CAR = size-adjusted cumulative abnormal stock return over the four-day window [-1,
+2], where day 0 is the current year t earnings announcement date;
UE = unexpected earnings, measured as actual EPS (reported in I/B/E/S) minus the
most recent analyst forecast for the current year EPS issued prior to day -1,
divided by fiscal year-end stock price;
ReinforcingAFR = an indicator variable for reinforcing analyst forecast revisions that equals 1 if
unexpected earnings is positive (negative) and the analyst forecast revision for
year t+1 earnings is upward (downward), and 0 otherwise;

2
We use the most recent analyst forecast as a proxy for market expectations to compare our results with Zhang
(2008). Our results are similar when we measure unexpected earnings using the mean of pre-announcement analyst
forecasts issued within 30 days prior to the earnings announcement.

15
ContradictingAFR = an indicator variable for contradicting forecast revisions that equals 1 if
unexpected earnings is positive (negative) and the analyst forecast revision for
year t+1 earnings is downward (upward), and 0 otherwise;
Control Variables: Please see the Appendix for detailed definitions of variables.

We use four-day (days -1 to +2) cumulative size-adjusted abnormal stock returns (CAR)

to capture the market response to both the earnings announcement on day 0 and the analyst

forecasts made on days 0 and 1.3 Because we are interested in differential market reactions to

unexpected earnings conditional on analyst forecast revisions, we allow the coefficients on UE to

differ across earnings announcements without analyst forecast revisions, with reinforcing

revisions, and with contradicting revisions. Thus, the coefficient on UE reflects the ERC for

earnings announcements not accompanied by an analyst forecast revision and the coefficients on

the interaction terms UE*ReinforcingAFR and UE*ContradictingAFR reflect the incremental

response to earnings announcements accompanied by reinforcing and contradicting analyst

forecast revisions, respectively. We predict a greater market response to earnings announcements

accompanied by reinforcing forecast revisions than to those not accompanied by analyst

forecasts or accompanied by contradicting forecast revisions. Similarly, we predict a smaller

market response to earnings announcements accompanied by contradicting forecast revisions.

Specifically, we expect 5 to be positive and 6 to be negative.

Equation (1) controls for other factors known to affect the stock price reaction to earnings

announcements. We also include interaction terms between unexpected earnings and each

control variable to allow the ERC to vary with these variables. Prior studies show that firm size

is related to differences in pre-disclosure information (Atiase 1985; Freeman 1987) and that firm

growth prospects and risk affect the earnings-return relation (Collins et al. 1987; Easton and
3
Inferences and conclusions are the same when we use a three day window (days -1 to +1).

16
Zmijewski 1989; Atiase et al. 2005). We therefore include firm size (Size), market-to-book ratio

(MB), prior return volatility (RetVol), and an indicator variable for positive sales growth

(D_SGrowth) in the model as control variables. Because the timing of analyst forecasts is

positively associated with the number of analysts following a firm, we control for analyst

coverage (Coverage). In addition, we include indicator variables for negative earnings (Loss) and

positive unexpected earnings (D_PUE) and continuous variables for research and development

expense (RD) and restructuring charges (Special), to control for characteristics of earnings news

(Hayn 1995; Lev and Sougiannis 1996), and indicator variables for extreme values of unexpected

earnings (ExtremeUE) to control for non-linearity in ERCs (Freeman and Tse 1992). Finally, we

control for earnings persistence (Persistence) which also affects the ERC (Lipe 1990; Kormendi

and Lipe 1987). We winsorize UE at the 1st and 99th percentile of the sample distribution and the

continuous variables Special, RD, MB, and RetVol at the 99th percentile to reduce the effects of

extreme values on our estimation results.

Since we examine the differential market reaction to unexpected earnings (UE) accompanied by

reinforcing/contradicting analyst forecast revisions, measurement error in UE could be critical as it

can bias the ERC estimates. In a simple regression of abnormal returns on UE, measurement

error in unexpected earnings biases the ERC toward zero (Greene 1999). However, in a

multiple regression setting, the direction and the size of the bias in the ERC depends on the

extent to which the additional variables included in the model are correlated with the

measurement error in UE. We use the most recent analyst forecast as the proxy for market

expectations in our calculation of UE as prior research suggests that unexpected earnings based on

analyst forecasts are less likely to suffer from measurement error (Brown et al. 1987; Collins et al.

1994). However, because this approach does not necessarily completely rule out the possibility of

17
measurement error in UE, we explicitly address measurement error and its potential impact on

our ERC estimates in Section IV.

Because the regression is estimated using pooled panel data, we include year fixed effects.

Furthermore, we compute t-statistics based on robust standard errors clustered by firm, which are

robust to heteroskedasticity and have been adjusted to account for within-cluster correlation

across residuals (Petersen 2008).4

Reinforcing and Contradicting Management Forecasts

Prior literature documents that management forecasts are an important source of

information to securities markets (Hirst et al. 2008, for a review; see Beyer et al. 2010).

Evidence shows that management earnings guidance is associated with stock returns, trading

volume, and analyst earnings forecasts (Patell 1976; Penman 1980; Ajinkya and Gift 1984;

Waymire 1984; Jennings 1987; Hutton et al. 2003). Most of these studies exclude management

forecasts issued in conjunction with news from other sources. However, recent studies show that

managers tend to provide additional disclosures, including management forecasts, along with

earnings announcements but the evidence is mixed (Kimbrough 2005; Hutton et al. 2003;

Matsumoto 2002; Rogers and Van Buskirk 2013; Anilowski et al. 2007). Atiase et al. (2005) do

not find reliable differences in market reactions to stand-alone earnings announcements versus

announcements accompanied by management guidance. However, Kohlbeck and Magilke (2002)

document greater stock price changes and abnormal trading volume during earnings

announcements accompanied by management forecasts in conference calls relative to firms

without such forecasts in the pre-Regulation FD era.

4
In untabulated analyses, we control for self-selection using the Heckman two-stage procedure and propensity score
matching. These analyses are discussed in Section IV.

18
 Given the findings of this research, we investigate whether and how management

forecasts (MF) issued on days 0 and +1 affect the market reaction to earnings announcements in

the presence of analyst forecast revisions also issued on days 0 and +1 using the following

models:

CARt-1,t+2 = 1 + 2ContradictingMF + 3UE + 4UE*ContradictingMF + Control Variables

+ UE*(Control Variables) + Year Dummies + , (2)

CARt-1,t+2 = 1 + 2ReinforcingMF_ContradictingAFR + 3ContradictingMF_ReinforcingAFR

+ 4ContradictingMF_ContradictingAFR + 5UE

+ 6UE*ReinforcingMF_ContradictingAFR + 7UE*ContradictingMF_ReinforcingAFR

+ 8UE*ContradictingMF_ContradictingAFR + Control Variables

+ UE* (Control Variables) + Year Dummies + e (3)

where,

ReinforcingMF = an indicator variable for reinforcing MF that equals 1 if unexpected earnings is

positive (negative) and the management forecast for year t+1 earnings is higher
(lower) than the mean of the pre-announcement analyst forecasts for year t+1
earnings issued within 30 days prior to the earnings announcement, and 0
otherwise;
ContradictingMF = an indicator variable for contradicting MF that equals 1 if unexpected
earnings is positive (negative) and the management forecast for year t+1
earnings is lower (higher) than the mean of the pre-announcement analyst
forecasts for year t+1 earnings issued within 30 days prior to the earnings
announcement, and zero otherwise, and 0 otherwise;
ReinforcingMF_ContradictingAFR = an indicator variable for reinforcing MF and contradicting AFR
that equals 1 if unexpected earnings is positive (negative) and the management
forecast for year t+1 earnings is higher (lower) than the mean of the pre-
announcement analyst forecasts for year t+1 earnings issued within 30 days

19
 prior to the earnings announcement and the analyst forecast revision for year t+1
earnings is downward (upward), and 0 otherwise;
ContradictingMF_ReinforcingAFR = an indicator variable for contradicting MF and reinforcing AFR
that equals 1 if unexpected earnings is positive (negative) and the management
forecast for year t+1 earnings is lower (higher) than the mean of the pre-
announcement analyst forecasts for year t+1 earnings issued within 30 days
prior to the earnings announcement and the analyst forecast revision for year t+1
earnings is upward (downward), and 0 otherwise; and
ContradictingMF_ContradictingAFR = an indicator variable for contradicting MF and contradicting
AFR that equals 1 if unexpected earnings is positive (negative) and the
management forecast for year t+1 earnings is lower (higher) than the mean of
the pre-announcement analyst forecasts for year t+1 earnings issued within 30
days prior to the earnings announcement and the analyst forecast revision for
year t+1 earnings is downward (upward), and 0 otherwise.

All other variables are as defined in equation (1) and Appendix A.

As with analyst forecast revisions, we define a management forecast as reinforcing

(ReinforcingMF) if a firms unexpected earnings is positive (negative) and its management

forecast of next years earnings is higher (lower) than analysts pre-announcement mean forecast

for next years earnings, and as contradicting (ContradictingMF) if a firms unexpected earnings

is positive (negative) and its management forecast of next years earnings is lower (higher) than

analysts pre-announcement mean forecast for next years earnings.

In estimating equations (2) and (3) we restrict the sample to only earnings

announcements accompanied by management forecasts. Equation (2) examines whether the

market response to UE differs for reinforcing/contradicting management forecasts. The

coefficient on UE (3) reflects the ERC for observations with reinforcing MF and the coefficient

20
on UE*ContradictingMF (4) represents the difference in ERCs between observations with

contradicting and reinforcing MFs. We expect 3 to be positive and 4 to be negative.

Equation (3) allows the ERC to differ across reinforcing/contradicting management

forecasts as well as reinforcing/contradicting analyst forecast revisions by including the three

indicator variables, ReinforcingMF_ContradictingAFR, ContradictingMF_ReinforcingAFR, and

ContradictingMF_ContradictingAFR. In equation (3), the coefficient on UE (5) reflects the

ERC for observations with reinforcing MF and reinforcing AFR; the coefficients on the three

interaction terms represent the incremental sensitivity of the stock return response to unexpected

earnings for different combinations of reinforcing and contradicting MF and AFR relative to the

announcements with reinforcing MF and reinforcing AFR. We expect 5, the ERC for observations

with reinforcing MF and reinforcing AFR to be positive and the coefficients on the three

interaction terms with UE (i.e., 6, 7, and 8) to be negative. We also expect 8, the coefficient

on UE*ContradictingMF_ContradictingAFR, to be the most negative of the three coefficients.

Sample Selection

We obtain data on sell-side analyst earnings forecasts for the period January 1994 to

December 2014 from the Institutional Brokers Estimate System (I/B/E/S) detail database. We

begin our sample period in 1994 because the analyst forecast data are less reliable prior to the

early 1990s (Clement and Tse 2003). We focus on one-year-ahead annual EPS forecasts issued

on the day of and/or the day following the current year earnings announcement. We obtain

earnings announcement dates and other financial data from COMPUSTAT5 and stock return data

from CRSP. Management forecasts of annual earnings are from the Company Issued Guidelines

5
If an earnings announcement date in COMPUSTAT is not available, we use the announcement date in I/B/E/S.

21
(CIG) of Thomson Financials First Call Historical Database (FCHD) for the period between

January 1996 and December 2010, the last year management forecast data are available in CIG.

III. EMPIRICAL RESULTS

Univariate Results

Panel A in Table 1 presents details of the sample distribution over time. There are 36,803

firm-year observations that satisfy the data requirements for stock returns and other variables.

The requirement for analyst forecasts for year t and year t+1 to measure unexpected earnings and

forecast revisions is the most restrictive. Among observations satisfying the data requirements,

20% of annual earnings announcements do not have concurrent AFR. About 46% of earnings

announcements have reinforcing AFR and 34% have contradicting AFR. Among firms with

AFR, 57% are reinforcing forecast revisions.

[Insert Table 1 About Here]

Table 1 shows a noticeable increase over time in the number of analyst forecasts issued

concurrently with earnings announcements. By 2014, 93% of earnings announcements in our

sample are accompanied by analyst forecast revisions, compared to 53% in 1994.6 The largest

increase in the percentage of firms with concurrent forecasts occurs around 2001 when

Regulation FD became effective; the percentage of earnings announcements with concurrent

forecasts increases from 65% in 2000 to 76% in 2001 and 83% in 2002. These results are

consistent with Regulation FD affecting firm disclosure policies (Kimbrough 2005) and/or

analysts forecasting behavior (Hahn and Song 2013).

6
The increase in analysts announcement period forecast does not change when we relax the sample requirements of
both one-year and two-year-ahead pre-announcement analyst forecasts for year t+1 earnings. Specifically, in a
sample requiring only one-year-ahead pre-announcement forecasts for year t+1, 61% of earnings announcements are
accompanied by concurrent analyst forecasts in 2014, compared to only 22% in 1994.

22
 Although not the primary focus of our study, we provide descriptive evidence regarding

changes in the information content of earnings announcements conditional on concurrent analyst

forecasts. Landsman and Maydew (2002) document an increase over time in information content

of earnings announcements, measured by trading volume and absolute price change. Consistent

with Landsman and Maydew (2002), we measure trading volume as total number of shares

traded divided by total number of shares outstanding, and stock price change as the absolute

value of unadjusted stock return. We sum the daily percentage of shares traded and absolute

stock returns over the four-day [-1, +2] earnings announcement event window. We then examine

how the time-series change in analyst forecast timing relates to the time-series change in

information content of earnings announcements.

Table 1, Panel B presents the median values of announcement period trading volume

from 1994 to 2014. The evidence shows that trading volume is larger for the earnings

announcements with analyst forecast revisions, i.e., AFR observations versus non-AFR

observations. Wilcoxon tests show that the median values of the three groups significantly differ

from each other at the 0.01 level. Although all earnings announcements exhibit an increase in

trading volume over time, the increase in trading volume for announcements with AFR is

significantly larger. We observe the same pattern in the absolute value of unadjusted stock

returns. Overall, this descriptive evidence shows that the increase in information content

documented by Landsman and Maydew (2002) is more pronounced for the earnings

announcements accompanied by analyst forecast revisions, suggesting that some of the observed

increase in information content of earnings announcements over time may be attributable to

analyst timely interpretations of earnings news.

23
 Table 2 presents descriptive statistics for the variables in our study. The mean value of

ReinforcingAFR (ContradictingAFR) indicates that the sign of analyst revisions agrees (disagrees)

with the sign of unexpected earnings for 46% (34%) of the earnings announcements. The mean

(median) market value (MV) is $8,433 ($1,455) million and 18% of earnings announcements

report losses (Loss). The average number of analysts following our firms (NAnalysts) is 13 and

the mean of market-to-book ratio (MB) is 3.22.

[Insert Table 2 About Here]

In Panel B, we present descriptive statistics after partitioning the sample based on the

sign of unexpected earnings. Sixty-five percent of observations have positive unexpected

earnings, among these 19% are non-AFR earnings announcements, 42% (39%) have reinforcing

(contradicting) AFR. Among the 35% of observations with negative unexpected earnings, 23%

are non-AFR announcements, 54% (24%) have reinforcing (contradicting) AFR. These statistics

indicate that analyst forecast revisions tend to be nearly evenly split between reinforcing and

contradicting when unexpected earnings is positive but are more likely reinforcing when

unexpected earnings is negative. Earnings announcement characterized by positive UE and

reinforcing AFR have higher growth rates as proxied by both market-to-book and sales growth,

lower return volatility, and higher earnings persistence than earnings announcements with

contradicting AFR. Among earnings announcements with negative UE, announcements with

reinforcing AFR have higher return volatility and lower sales growth. In both partitions, earnings

announcements without AFR are more likely to have extreme values for UE.

Panel C reports the distribution reinforcing/contradicting AFR and non-AFR earnings

announcements for our full sample and the subset of firms that have both reinforcing and

contradicting AFRs over time. More than 80% of our sample observations are for firms that meet

24
this criterion, suggesting that our classification is specific to the earnings announcement and not

a firm characteristic.

Approximately 13% of observations have point-estimate management forecasts issued on

days 0 and +1 that allow us to determine if the management forecast is reinforcing or

contradicting; we estimate equations (2) and (3) with these observations. Table 2 Panel D reports

the distribution of earnings announcements with different combinations of AFR and MF. Analyst

and management forecasts tend to agree; either both are reinforcing (44%) or both are

contradicting (33%).

In untabulated results, we compute correlations across firms using average values of

variables for each firm. CAR is significantly positively correlated with UE, ReinforcingAFR,

Coverage, D_PUE, and D_SGrowth, and significantly negatively correlated with Loss, Special,

RD, MB, and VolRet. The highest correlation between ReinforcingAFR and ContradictingAFR

and any of our variables is with Coverage; both are positively correlated with MB and negatively

correlated with ExtremeUE. In general, the signs of these correlations are consistent with prior

literature.

Regression Results for Analysts Forecast Revisions

Table 3 presents results of estimating equation (1) for the full sample and two restricted

samples. Model 1 reports results for the full sample, including earnings announcements with and

without AFR. The coefficient on UE reflects the ERC for firms without concurrent analyst

forecast revisions, and the coefficients on the interaction terms UE*ReinforcingAFR and

UE*ContradictingAFR reflect the incremental ERCs for firms with reinforcing and contradicting

analyst forecast revisions, respectively. As expected, the coefficient on UE is significantly

positive (0.9936, t = 3.83). Consistent with our prediction, the coefficient on

25
UE*ReinforcingAFR is significantly greater than zero (0.2512, t = 3.09), indicating that the

market reacts more positively to earnings announcements accompanied by reinforcing analyst

forecast revisions. The coefficient on UE*ContradictingAFR is significantly negative (-0.2906, t

= -3.02). 7 Further, t-tests (at the bottom of the table) indicate that these coefficients are

significantly different from each other (difference = 0.5417, t = 6.55).

[Insert Table 3 About Here]

Model 2 reports results for the subset of firms that have at least one reinforcing and one

contradicting AFR during the sample period. Thus, in model 2, the coefficient on UE reflects the

ERC for these firms non-AFR earnings announcements and the coefficients on the interaction

terms measure the differential stock return reaction to reinforcing and contradicting AFR

earnings announcements for the same firms over time. The ERC for non-AFR earnings

announcements is significantly positive (0.7620, t = 2.52). The coefficient on

UE*ReinforcingAFR is significantly positive (0.2990, t = 2.33) and the coefficient on

UE*ContradictingAFR is significantly negative (-0.2706, t = -2.10). Similarly, t-tests (at the

bottom of the table) indicate that these coefficients are significantly different from each other

(difference = 0.5696, t = 6.67). This evidence, that ERCs vary across different types of earnings

announcements for the same firm, strengthens the conclusion that analysts announcement period

forecast revisions aid investors in interpreting earnings news.

Model 3 reports results after restricting the sample to AFR earnings announcements in

order to control for potential self-selection issues arising from analysts decision to issue a

7
All inferences are identical when we include interaction terms between all control variables and ReinforcingAFR
and ContradictingAFR, when we use continuous measures of AFR instead of indicator variables, and when we
measure stock returns over days -1 to +1.

26
concurrent forecast. Thus, UE is omitted and the coefficient on UE*ReinforcingAFR

(UE*ContradictingAFR) represents the ERC for earnings announcements accompanied by

reinforcing (contradicting) AFR. The ERC for earnings announcements with reinforcing AFR is

1.4898 (t = 4.58); for announcements with contradicting AFR the ERC is 0.9222 (t = 2.69).

Consistent with models 1 and 2, the difference between these coefficients is significant at 0.01

(difference = 0.5676, t = 6.51) indicating that earnings announcements accompanied by

reinforcing AFR lead to stronger investor reactions.

Overall, the results in Table 3 indicate that investors respond to earnings announcements

more positively (negatively) when the future implications of current period unexpected earnings

are reinforced (contradicted) by concurrent analyst forecast revisions. These results suggest that

the greater sensitivity of the market response to earnings announcements accompanied by analyst

forecasts documented by Zhang (2008) is likely to be driven by the firms with reinforcing

analyst forecasts. This evidence is consistent with analysts timely interpretations of earnings

announcements providing information to market participants that allows investors to draw new

inferences regarding future performance and contradicts the conclusion in Altnkl and Hansen

(2009) and Altnkl et al. (2013) that analysts merely piggyback on public news events. The

results are also consistent with analytical studies that suggest informed investors interpretations

of earnings news can strengthen or weaken the signal in the earnings announcement (Kim and

Verrecchia 1994, 1997).

Regarding the control variables, the coefficient on UE*ExtremeUE is significantly

negative in all the models, indicating that extreme earnings surprises are viewed as less persistent.

The coefficient on UE*D_PUE is significantly positive in all the models, indicating that positive

earnings surprises are viewed as more persistent. The coefficient on UE*RD is significantly

27
negative, indicating that ERCs are lower when R&D expenditures are higher. These results are

consistent with prior research. Although the other control variables are insignificant their signs

are generally consistent with prior research; given our four-day event window compared to the

typical quarterly or annual window in many ERC studies, the lack of significance is not

surprising.

To place these results in the context of the ERC literature, we discuss the predicted ERCs

for selected scenarios calculated with the median value for each control variable from Table 2.

As a baseline, the ERC for an earnings announcement characterized by positive UE and

accompanied by a reinforcing AFR with positive earnings and sales growth, no special items or

R&D, median values for analysts coverage, size, market-to-book, return volatility, and

persistence, and not reporting extreme values for UE is 1.517. 8 An announcement with these

same characteristics but reporting extreme UE is 0.514; this significantly lower predicted ERC is

consistent with Freeman and Tses (1992) evidence that extreme values of UE are less persistent

and have less impact on security prices. Similarly, the predicted ERC for an announcement with

the baseline characteristics (positive UE and reinforcing AFR) but reporting a net loss is 1.496.

The predicted ERC for an earnings announcement with positive UE, contradicting AFR, and

positive earnings is 0.975 compared to 0.954 for the same type of earnings announcement with a

reported loss. The smaller price reactions for loss firms, although not statistically significant, are

consistent with evidence in Hayn (1995). In Table 3 the coefficient on the interaction between

earnings persistence and UE is insignificant. However, cross-sectional tests, discussed later,

show higher persistence strengthens the return reaction to reinforcing AFR and mitigates the

8
In equation 1, analysts coverage is the natural log of one plus the number of analysts following the firm. Thus, in
calculating predicted ERCs we use 2.398, the log of 11, the median number of analysts in Table 2.

28
negative response to contradicting AFR. These results are generally consistent with prior

research that ERCs vary with persistence.

Regression Results for Management Earnings Forecasts

In this section, we examine the market reaction to earnings announcements accompanied

by both analyst forecasts revisions and management forecasts. We first examine whether our

primary results of more positive (negative) market reactions to earnings announcements

accompanied by reinforcing (contradicting) AFR hold after controlling for earnings

announcements accompanied by management forecasts. Panel A of Table 4 reports three

estimations of equation (1). Models 1 and 2 include an indicator variable that equals one for

announcements with any type of management forecast issued on days 0 or +1, and zero

otherwise (D_MF) and an interaction between D_MF and UE. 9 Model 1 includes all earnings

announcements with and without AFR and MF. The coefficient on the interaction term

UE*D_MF is insignificant. More importantly, the coefficients for announcements with

reinforcing (contradicting) AFR remain significantly positive (negative), supporting our primary

inferences. Since the CIG database is incomplete, there could be misclassification, i.e., firms

with management earnings forecasts are identified as not having a management forecast

(Houston et al. 2010; Chuk et al. 2013). Thus in model 2 we limit the sample to earnings

announcements for firms with at least one management forecast during the year and again

include the UE*D_MF interaction term. The results are consistent with those of model 1. Model

3 further restricts the sample to only earnings announcements with management forecasts issued

during the earnings announcement window, regardless of whether these announcements have

concurrent AFR. The coefficient on UE*ReinforcingAFR is significantly positive (1.3209, t =

9
The results are similar when we restrict the management forecast sample to only firms with point estimate
management forecasts or when we define D_MF as firms that management forecasts issued anytime during the year.

29
3.59), indicating a higher ERC for earnings announcements with reinforcing AFR than for

announcements with contradicting AFR or announcements with no analyst forecasts. The

coefficient on UE*ContradictingAFR is significantly negative (-1.0578, t = -2.81). Taken

together, these results confirm that our primary findings are not altered across the three sample

partitions. Specifically, we find significantly higher (lower) ERCs for earnings announcements

with reinforcing (contradicting) AFR relative to announcements without AFR for both

announcements with and without concurrent management forecasts.

[Insert Table 4 About Here]

Next, we test the market response to unexpected earnings for earnings announcements

accompanied by both management forecasts and analyst forecast revisions. Equation (2) tests for

stronger (weaker) market reactions to reinforcing (contradicting) MF. Equation (3) allows us to

assess whether analyst and management forecasts are complements or substitutes. These analyses

require us to limit our sample to firms with point-estimate management forecasts at the time of

earnings announcement, reducing the sample to 4,762 observations.10

In Table 4, Panel B, model 1 reports estimation of equation (2). The coefficient on UE

represents the ERC for earnings announcements with reinforcing MF and is significantly positive

(3.9530, t = 2.68). The coefficient on UE*ContradictingMF, which reflects the difference in

ERC between the contradicting MF and reinforcing MF subsamples, is significantly negative (-

1.6027, t = -5.06), indicating that investors respond to earnings news less when the information

in management forecasts contradicts the information in earnings. Model 2 reports estimation of

equation (3). The coefficient on UE represents the ERC for earnings announcements

10
The number of observations with concurrent management forecasts in Panel B of Table 4 is different from the
number of observations reported in Panel A because, in Panel B, we require managers to issue a point-estimate
forecast, whereas in Panel A we do not require a specific form of management forecast.

30
accompanied by reinforcing MF and reinforcing AFR. The coefficient is 4.1851 (t = 2.92),

indicating a significant positive stock price response when both MF and AFR reinforce the news

in unexpected earnings. The coefficients on UE for the other three combinations of MF and

AFR are significantly negative, indicating lower ERCs when either AFR or MF or both are

contradicting. For example, conditional on MF being reinforcing, the ERC for earnings

announcements with contradicting AFR is significantly less than the ERC for announcements

with reinforcing AFR (6 = -1.6446, t = -2.31). Similarly, conditional on AFR being reinforcing,

the ERC for earnings announcements with contradicting MF is significantly less than that for

announcements with reinforcing MF (7 = -0.9903, t = -2.55). These results indicate that when

MF (AFR) reinforce the news in unexpected earnings, contradicting AFR (MF) significantly

reduce the pricing impact of the earnings announcement. When both MF and AFR contradict the

news in unexpected earnings, the incremental stock price response is significantly negative (8 =

-1.8914, t = -4.69). Further, the significant difference between 7 and 8 indicates a negative price

impact between reinforcing versus contradicting AFR when MF is contradicting.

The results in Table 4 show that analyst revisions and management forecasts provide

incremental information that complements the news in both earnings announcements and

forecasts from each other. The pricing impact of earnings is greatest when both management and

analysts convey reinforcing expectations regarding future earnings. Further, when either analyst

or management forecasts contradict the earnings news, the ERC significantly decreases. These

results confirm the additional information conveyed by AFR and MF and indicate that both types

of forecasts complement the information in earnings announcements.

Cross-Sectional Tests

31
 The evidence presented so far indicates that investors employ the information in both

analyst forecast revisions and management forecasts issued during the earnings announcement

when interpreting the information revealed in unexpected earnings. Next we perform cross-

sectional analyses to determine if the properties of analyst forecasts or earnings quality affect

investors perceptions of the information in announcement period forecasts.

First, we examine whether uncertainty or disagreement among analysts affects investors

response to AFR. We use analyst forecast dispersion prior to the earnings announcement as a

proxy for uncertainty. Imhoff and Lobo (1992) find larger and more significant ERCs for firms

with lower pre-announcement dispersion. We measure analyst forecast dispersion as the standard

deviation of analyst annual earnings forecasts for year t, issued within 30 days prior to current

year earnings announcement, deflated by fiscal year end stock price and classify earnings

announcements as high (low) dispersion if estimated dispersion is above (below) the median for

dispersion each year.

Table 5 Panel A, reports results of estimating equation (1) separately for earnings

announcements with high and low dispersion in analyst forecasts. As before, the coefficient on

UE represents the ERC for non-AFR announcements. The coefficient on UE*ReinforcingAFR in

the low dispersion sample is 0.8403 (t = 6.06) compared to 0.2235 (t = 5.83) for the high

dispersion sample. Further, the difference between these coefficients is significantly greater than

zero (0.6169, t = 3.93). The coefficient on UE*ContradictingAFR is also significantly more

negative for the low dispersion earnings announcements, -0.7581 (t = -4.45) versus -0.2250 (t = -

4.50). These results support our primary inference that investors respond more to earnings

announcements accompanied by forecast revisions and in addition, the pricing impact is stronger

when there is less uncertainty in analyst forecasts. Thus, investors react more to the information

32
in both reinforcing and contradicting forecast revisions when there is greater consensus among

analysts. This cross-sectional evidence strengthens our conclusion that the information in

concurrent analyst forecast revisions aids investors interpretation of earnings news.

[Insert Table 5 About Here]

Second, we examine earnings persistence as a proxy for earnings quality. Kormendi and

Lipe (1987) and Lipe (1990) document higher ERCs for firms with higher earnings persistence.

We classify a firm as high (low) persistence if its estimated persistence is greater (less) than the

sample median persistence in each year. Table 5 Panel B, reports results of estimating equation

(1) separately for firms with high and low earnings persistence. The coefficient on

UE*ReinforcingAFR for the high persistence sample is 0.4288 (t = 8.91) compared 0.1586 (t =

3.69) for the low persistence sample, and the difference between these coefficients is significant

(0.2703, t = 4.18), indicating greater persistence significantly increases the pricing impact of

reinforcing AFR. In contrast, greater earnings persistence mitigates the pricing impact when

analysts issue contradicting forecast revisions. The coefficient on UE*ContradictingAFR in the

high persistence sample is -0.1404 (t = -2.28) and is significantly less negative than the

corresponding coefficient of -0.3601 (t = -6.09) for the low persistence sample. These results

support our primary inferences and suggest that higher earnings quality, i.e., greater persistence,

mitigates the negative pricing impact of contradicting forecast revisions.

Taken together, the cross-sectional tests strengthen our inference that investors use the

information in AFR to interpret earnings news. Forecast revisions characterized by greater

consensus among analysts provide stronger signals of future performance. In addition, greater

earnings persistence mitigates the impact of contradictory signals from financial analysts.

IV. ROBUSTNESS AND SENSATIVITY TESTS

33
Measurement error in unexpected earnings

Although prior literature suggests that measurement error in UE is mitigated by using

analyst forecasts as a proxy for market expectations (Collins et al. 1994; Brown et al. 1987), it

does not necessarily eliminate the potential correlation between the information in analyst

forecasts revisions and measurement error in UE. Following Brown et al. (1987) and Collins et al.

(1994), we examine the change in the ERC when our variables of interest and pre-announcement

stock returns are added to the model. If our variables of interest are correlated with the

measurement error in UE we should observe a change in ERC when stock returns are added to

the model.

We estimate four variations of the following model but do not tabulate the results:11

CARt-1,t+2 = 1 + 2UE + 3ReinforcingAFR + 4ContradictingAFR + 5UE*ReinforcingAFR

+ 6UE*ContradictingAFR + 7Return[-k, -2] + Control Variables + (4)

where,

Returnj, (-k,-2) = the average stock return between the most recent analyst forecast issue date used
for unexpected earnings (UE) and day -2 relative to the year t earnings
announcement date.12
All other variables are as defined before.

First, we include only UE as an independent variable. Second, we include UE and its

interactions with ReinforcingAFR and ContradictingAFR. Third, we include UE, its interactions

with ReinforcingAFR and ContradictingAFR, and Returnj, [-k,-2]. Finally, we include all the

variables in model three as well as the control variables from equation (1). We estimate each

model each year and compare the average estimated yearly coefficients using a t-test. The

average ERC in model 1 is 0.2586 (t = 6.10). When we add the interaction terms in model 2, the

11
These results are reported in the supplemental materials available online.
12
We also use a pre-announcement returns window of [-120, -2] and the results are similar.

34
ERC for earnings announcements without AFR is 0.1570 (t = 2.95) and the coefficients on

UE*ReinforcingAFR and UE*ContradictingAFR are significantly positive and negative,

respectively, consistent with the results in Table 3. In model 3, the coefficient on pre-

announcement stock return is -0.1935 (t = -2.65). More importantly, t-tests indicate no reliable

differences in the model 3 coefficients on UE, UE*ReinforcingAFR, and UE*ContradictingAFR

than the respective coefficients in model 2. These results reduce concerns that measurement

error in UE biases our primary tests. In model 4 we include all the other control variables and

find similar results. Untabulated results using management forecasts lead to similar conclusions.

Measurement Error in Analyst Forecasts

Prior studies document that analysts tend to issue optimistic long-term forecasts (Kang et

al. 1994; Richardson et al. 2004) and that analyst responses to earnings announcements are

incomplete as evidenced by post-earnings announcement drift (Abarbanell and Bernard 1992;

Easterwood and Nutt 1999). Such bias in analyst forecasts could lead to error in measuring

analyst forecast revisions. We conduct several tests to mitigate this concern.

First, we conduct a falsification test by examining analyst forecasts that do not include

the information in current period UE but are potentially positively correlated with bias in

announcement period analyst forecasts. More specifically, we construct AFR2 as the difference

between the current year earnings and the average analyst forecast for year t+1 earnings issued

within 30 days prior to the current earnings announcement date (i.e., the pre-announcement

forecast mean). We define reinforcing (contradicting) forecasts if UE and AFR2 have the same

(different) sign. Intuitively, AFR2 should not have an incremental effect on the ERC because

pre-announcement forecasts do not include information from the earnings announcement.

However, if our measure of analyst forecast revisions suffers from bias, we expect AFR2 to have

35
an incremental effect on ERC to the extent that pre-announcement and announcement period

forecasts are correlated.

When we repeat the analyses reported in Table 3 using AFR2 (untabulated), we find a

significantly positive ERC (1.3683, t = 5.24) and negative coefficients on both

UE*ReinforcingAFR2 (-0.3311, t = -1.63) and UE*ContradictingAFR2 (-0.3980, t=-2.25). The

difference in coefficients on UE*ReinforcingAFR2 and UE*ContradictingAFR2 is insignificant.

Similarly, when we restrict our sample observations to those with AFR, the difference in

coefficients on UE*ReinforcingAFR2 and UE*ContradictingAFR2 is also insignificant. The

lack of significant results for AFR2 supports our conclusion that concurrent analyst forecast

revisions affect ERCs because they include analysts interpretation of unexpected earnings and

reduce concerns that bias in analyst forecasts affects our results.

Second, prior research documents asymmetric market reactions to positive and negative

earnings news (e.g., Hayn 1995, Skinner and Sloan 2002). Although we include an interaction

term between UE and an indicator variable for positive UE in the earlier models, we further

investigate the potential impact of the sign of unexpected earnings by allowing the coefficients

on the interaction terms between UE and ReinforcingAFR/ContradictingAFR to vary with the

sign of UE. Consistent with our main results, the ERC for reinforcing AFR announcements is

significantly more positive than the ERC for contradicting AFR announcements for positive

unexpected earnings. Similarly, the ERC for reinforcing AFR announcements is significantly

more negative than the ERC for contradicting AFR announcements for negative unexpected

earnings. Thus, the stronger return response to reinforcing AFR is not affected by the sign of

unexpected earnings.

Time-Stamp Errors

36
 Forecast timing is important in our study because we focus on analyst forecasts issued at

the time of earnings announcement. Bradley et al. (2014) and Hoechle et al. (2013) document

that some of the analyst forecast release dates in the I/B/E/S database are inaccurate and

systematically delayed. While it is possible that these incorrectly dated forecasts may adversely

affect our results, we note that this is unlikely for the following reasons. First, time-stamp errors

will work against our finding a greater market reaction to earnings announcements with

concurrent analyst forecasts. Late time-stamps will lead to incorrectly classifying AFR

announcements as non-AFR announcements, which results in greater market reactions to UE for

non-AFR announcements. Second, Bradley et al. (2014) and Hoechle et al. (2013) document

that time-stamp errors are relatively small after 2002. When we repeat our main tests using a

sample spanning 2003-2014 all inferences are identical to those reported in Table 3.

Self-selection Related to Analysts and Managers Decision to Issue Concurrent Forecasts

As discussed above, analysts decision to issue concurrent forecast revisions may be

associated with firm characteristics that are correlated with ERCs. Similarly, a managers

decision to bundle management forecasts with the earnings announcement may also be due to

economic firm characteristics that are correlated with ERCs. To address this concern, in

untabulated analyses, we estimate a Heckman two-stage regression that first predicts analysts or

managers decision to issue a concurrent forecast using the sign and magnitude of UE, Loss,

Special, RD, Coverage, Size, MB, VolRet, ExtremeUE, and Persistence. In addition to these

variables, we include the absolute value of returns (AbsRetY_1) and trading volume (VolumeY_1)

around the year t-1 earnings announcement and pre-announcement analyst forecast dispersion

(Dispersion), because analysts and managements incentives to issue concurrent forecasts may

be affected by characteristics of earnings announcements. When we include the inverse-Mills

37
ratio for the analyst forecast prediction model in equation (1) the inferences are the same as those

reported in Table 3. When we include the inverse-Mills ratio for the management forecast

prediction model in equation (3), the inferences are the same as those reported in Table 4 Panel B,

with one exception. The ERC for a reinforcing AFR combined with a contradicting MF is no

longer significantly negative, suggesting that the reinforcing news in the AFR mitigates the

investor response to contradicting management forecasts.

We also replicate the analyses in Table 3 and Table 4 Panel B using a propensity score

matched sample based on the prediction models for analysts and managers decision to issue a

concurrent forecast discussed above. 13 The inferences are unchanged. Overall, these analyses

suggest that our results are not driven by firm characteristics that influence analysts or managers

decision to issue concurrent forecast revisions and support our conclusion that concurrent AFR

and MF aid investors interpretation of earnings information.

V. CONCLUSION

We provide evidence that investors respond more positively (negatively) when the future

implications of current period unexpected earnings are reinforced (contradicted) by analyst

forecast revisions issued during the earnings announcement window. For the subset of earnings

announcements accompanied by both analyst and management forecasts, we also present

evidence that the magnitude of the ERC is greatest when concurrent management forecasts and

analyst forecast revisions both reinforce the news in unexpected earnings. In addition, the ERC is

smaller when either management forecasts or analyst forecast revisions contradict the news in

unexpected earnings. This evidence is consistent with analyst and management forecasts issued

13
These results are reported in the supplemental materials available online.

38
during the earnings announcement window providing complementary information that aids

investors interpretation of the information in unexpected earnings.

Our study contributes to the literature by demonstrating that investors combine the

information in concurrent analyst forecast revisions and management forecasts with the news in

the earnings announcements to assess future performance. Further, cross-sectional analyses show

that investors react more to earnings announcements accompanied by analyst forecast revisions

when there is greater consensus among analysts, and that better earnings quality (persistence)

mitigates the negative impact of contradictory analyst forecast revisions. Given the increasing

frequency over time of concurrent analyst and management forecasts, our results highlight the

importance of controlling for information contemporaneously released with earnings

announcements. We also show that the differential market reactions to earnings announcements

documented by prior research may be partly attributable to the increasing frequency of analyst

announcement-period forecasts.

39
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44
 APPENDIX A
Variable Definitions

Dependent Variable Definition

CAR Size-adjusted cumulative abnormal stock return over the four-

day window (-1, 2), where day 0 is the current year earnings
announcement date. Data source: CRSP.

Independent Variables
UE Unexpected earnings, measured as actual EPS (reported in
I/B/E/S) minus the most recent analyst forecast for the current
year EPS issued prior to day -1, divided by fiscal year-end
stock price. Data sources: Compustat and I/B/E/S.
AFR Analyst forecast revisions, measured as the difference between
the mean of analyst forecasts for year t+1 earnings, issued on
days 0 and +1 relative to the earnings announcement, and the
mean of the pre-announcement forecasts for year t+1
earnings, issued within 30 days prior to the earnings
announcement. Data sources: I/B/E/S.
ReinforcingAFR An indicator variable for reinforcing analyst forecast revisions
that equals one if UE is positive (negative) and the analyst
forecast revision for year t+1 earnings is upward (downward),
and zero otherwise. Data sources: Compustat and I/B/E/S.
ContradictingAFR An indicator variable for contradicting analyst forecast
revisions that equals one if UE is positive (negative) and the
analyst forecast revision for year t+1 earnings is downward
(upward), and zero otherwise. Data sources: Compustat and
I/B/E/S.
ReinforcingMF An indicator variable for reinforcing management forecasts that
equals one if UE is positive (negative) and the management
forecast for year t+1 earnings is higher (lower) than the mean
of the pre-announcement analyst forecasts for year t+1
earnings, issued within 30 days prior to the earnings
announcement, and zero otherwise. Data sources: Compustat
and FirstCall.
ContradictingMF An indicator variable for contradicting management forecasts
that equals one if UE is positive (negative) and the
management forecast for year t+1 earnings is lower (higher)
than the mean of the pre-announcement analyst forecasts for
year t+1 earnings, issued within 30 days prior to the earnings
announcement, and zero otherwise, and zero otherwise. Data
sources: Compustat and FirstCall.

45
ReinforcingAFR2 An indicator variable for falsified reinforcing analyst forecast
revisions that equals one if UE is positive (negative) and the
difference between the current year earnings and the average
analyst forecast for year t+1 earnings issued within 30 days
prior to the current earnings announcement date is positive
(negative), and zero otherwise. Data sources: Compustat and
I/B/E/S.
ContradictingAFR2 An indicator variable for falsified contradicting forecast
revisions that equals one if UE is positive (negative) and the
difference between the current year earnings and the average
analyst forecast for year t+1 earnings issued within 30 days
prior to the current earnings announcement date is negative
(positive), and zero otherwise. Data sources: Compustat and
I/B/E/S.
ReinforcingMF_ContradictingAFR An indicator variable for reinforcing MF and contradicting AFR
that equals 1 if UE is positive (negative) and the management
forecast for year t+1 earnings is higher (lower) than the mean
of the pre-announcement analyst forecasts for year t+1
earnings issued within 30 days prior to the earnings
announcement and the analyst forecast revision for year t+1
earnings is downward (upward), and 0 otherwise. Data
sources: Compustat , I/B/E/S and FirstCall.
ContradictingMF_ReinforcingAFR An indicator variable for contradicting MF and reinforcing AFR
that equals 1 if UE is positive (negative) and the management
forecast for year t+1 earnings is lower (higher) than the mean
of the pre-announcement analyst forecasts for year t+1
earnings issued within 30 days prior to the earnings
announcement and the analyst forecast revision for year t+1
earnings is upward (downward), and 0 otherwise. Data
sources: Compustat , I/B/E/S and FirstCall.
ContradictingMF_ContradictingAFR An indicator variable for contradicting MF and contradicting
AFR that equals 1 if UE is positive (negative) and the
management forecast for year t+1 earnings is lower (higher)
than the mean of the pre-announcement analyst forecasts for
year t+1 earnings issued within 30 days prior to the earnings
announcement and the analyst forecast revision for year t+1
earnings is downward (upward), and 0 otherwise. Data
sources: Compustat , I/B/E/S and FirstCall.
Control Variables
Loss An indicator variable that equals one if current year earnings
are negative, and zero otherwise. Data source: Compustat.
Special The absolute value of Compustat special items deflated by
sales; set to zero if special items is missing. Data source:
Compustat.

46
RD The absolute value of research and development expenses
deflated by sales; set to zero if research and development
expense is missing. Data source: Compustat.
Coverage The log of one plus the number of analysts who issue EPS
forecasts between year t and t+1 earnings announcement
dates. Data source: Compustat.
Size The log of total market value of equity at the end of the fiscal
year t. Data source: Compustat.
MB The equity market-to-book ratio at the end of fiscal year t. Data
source: Compustat.
VolRet The standard deviation of daily stock returns between 130 days
and 10 days prior to the current earnings announcement date.
Data source: CRSP.
ExtremeUE An indicator variable that equals one if a firms UE is below the
5th percentile or greater than the 95th percentile, zero
otherwise. Data source: Compustat.
Persistence Earnings persistence, measured as the slope coefficient from the
following model: Ej,t+1 = Ej,t + j,t+1. The model is
estimated each year using the preceding five years of annual
earnings with a requirement of a minimum of three
observations. Because may be negative for some firms, we
standardize the coefficients to range between 0 and 1. Data
source: Compustat.
D_PUE An indicator variable that equals one if a firms UE is positive,
zero otherwise. Data source: Compustat.
D_SGrowth An indicator variable that equals one if year t sales are greater
than year t-1 sales, zero otherwise. Data source: Compustat.
Forecast Dispersion Standard deviation of analysts annual earnings forecasts for year
t, issued within 30 days of the earnings announcement, deflated
by fiscal year end stock price. Data source: I/B/E/S.

47
 TABLE 1

Distribution of Analyst Forecasts Revisions and Volume Reactions

to Earnings Announcements

Panel A: Number of Earnings Announcements with Reinforcing, Contradicting, and no

Analyst Forecast Revision Issued on Days 0 and +1 Relative to the Earnings Announcement

Announcements without Announcements with Announcements with

Year Total AFR Reinforcing AFR Contradicting AFR
N N % N % N %
1994 1,388 653 (47.0) 422 (30.4) 313 (22.6)
1995 1,551 723 (46.6) 493 (31.8) 335 (21.6)
1996 1,596 728 (45.6) 508 (31.8) 360 (22.6)
1997 1,594 689 (43.2) 530 (33.2) 375 (23.5)
1998 1,496 564 (37.7) 531 (35.5) 401 (26.8)
1999 1,504 543 (36.1) 591 (39.3) 370 (24.6)
2000 1,445 510 (35.3) 498 (34.5) 437 (30.2)
2001 1,592 386 (24.2) 723 (45.4) 483 (30.3)
2002 1,595 279 (17.5) 738 (46.3) 578 (36.2)
2003 1,745 270 (15.5) 892 (51.1) 583 (33.4)
2004 1,937 322 (16.6) 905 (46.7) 710 (36.7)
2005 1,982 249 (12.6) 965 (48.7) 768 (38.7)
2006 1,981 223 (11.3) 1,028 (51.9) 730 (36.9)
2007 2,121 249 (11.7) 1,121 (52.9) 751 (35.4)
2008 1,923 210 (10.9) 892 (46.4) 821 (42.7)
2009 1,966 187 (9.5) 1,087 (55.3) 692 (35.2)
2010 2,017 181 (9.0) 1,108 (54.9) 728 (36.1)
2011 1,946 167 (8.6) 1,060 (54.5) 719 (36.9)
2012 2,002 161 (8.0) 1,021 (51.0) 820 (41.0)
2013 1,849 121 (6.5) 945 (51.1) 783 (42.3)
2014 1,573 107 (6.8) 772 (49.1) 694 (44.1)
Total 36,803 7,522 (20.4) 16,830 (45.7) 12,451 (33.8)

48
Panel B: Median Value of Cumulative Trading Volume around Earnings Announcements
With and Without Concurrent Analyst Forecast Revisions
Rein- Contra-
All Non-
Year forcing dicting Wilcoxon Median Difference Test
Obs. AFR
AFR AFR
(1) (2) (3) (2) (1) (2) (3) (3) (1)
1994 0.0135 0.0114 0.0149 0.0147 0.0035 *** 0.0002 0.0033 ***
1995 0.0174 0.0156 0.0209 0.0165 0.0052 *** 0.0043 *** 0.0009
1996 0.0177 0.0150 0.0214 0.0189 0.0064 *** 0.0025 0.0039 ***
1997 0.0184 0.0135 0.0236 0.0219 0.0102 *** 0.0017 ** 0.0084 ***
1998 0.0190 0.0132 0.0231 0.0213 0.0099 *** 0.0018 0.0080 ***
1999 0.0259 0.0181 0.0316 0.0317 0.0136 *** -0.0001 0.0136 ***
2000 0.0264 0.0153 0.0348 0.0293 0.0195 *** 0.0055 *** 0.0140 ***
2001 0.0250 0.0142 0.0321 0.0311 0.0180 *** 0.0010 0.0170 ***
2002 0.0286 0.0156 0.0339 0.0309 0.0183 *** 0.0031 0.0152 ***
2003 0.0392 0.0238 0.0445 0.0414 0.0208 *** 0.0031 0.0176 ***
2004 0.0394 0.0201 0.0444 0.0442 0.0242 *** 0.0001 0.0241 ***
2005 0.0453 0.0247 0.0482 0.0494 0.0235 *** -0.0012 0.0248 ***
2006 0.0496 0.0293 0.0533 0.0511 0.0240 *** 0.0023 0.0217 ***
2007 0.0604 0.0395 0.0642 0.0659 0.0247 *** -0.0017 0.0264 ***
2008 0.0638 0.0350 0.0658 0.0681 0.0308 *** -0.0023 0.0331 ***
2009 0.0541 0.0197 0.0570 0.0587 0.0373 *** -0.0017 0.0390 ***
2010 0.0497 0.0286 0.0535 0.0499 0.0249 *** 0.0035 0.0213 ***
2011 0.0490 0.0297 0.0497 0.0525 0.0200 *** -0.0028 0.0228 ***
2012 0.0434 0.0239 0.0450 0.0454 0.0211 *** -0.0005 0.0216 ***
2013 0.0510 0.0243 0.0513 0.0543 0.0269 *** -0.0030 0.0300 ***
2014 0.0464 0.0259 0.0516 0.0457 0.0257 *** 0.0058 0.0198 ***
Mean 0.0379 0.0177 0.0447 0.0434 0.0270 ** 0.0013 *** 0.0258 ***
***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively (two-tailed).
Panel A presents the sample distribution by year. We require two consecutive annual earnings announcement dates
and other financial data from COMPUSTAT during the sample period, 1994 to 2014. We measure unexpected
earnings as current year earnings per share (EPS) reported in I/B/E/S minus the most recent analyst forecast issued
prior to day -1. We measure analyst forecast revisions (AFR) as the difference between the mean of analyst forecasts
for year t+1 earnings, issued on days 0 and +1 relative to the year t earnings announcement, and the mean of pre-
announcement analyst forecasts for year t+1 earnings, issued within 30 days prior to the year t earnings
announcement. We classify AFR as reinforcing if unexpected earnings is positive (negative) and the forecast
revision is upward (downward), and AFR as contradicting if unexpected earnings is positive (negative) and the
forecast revision is downward (upward). Panel B presents trading volume around the current year annual earnings
announcement, and Wilcoxon tests of differences in medians. Trading volume is the four-day (days -1, +2)
cumulative total number of shares traded divided by total number of shares outstanding.
The remaining variables are defined in Appendix A.

49
 TABLE 2

Descriptive Statistics
Panel A: Descriptive Statistics for the Full Sample
Variable N Mean Std Min 25th 50th 75th Max.
CAR 36,803 0.0027 0.0827 -1.0514 -0.0359 0.0023 0.0417 0.9292
ReinforcingAFR 36,803 0.4573 0.4982 0.0000 0.0000 0.0000 1.0000 1.0000
ContradictingAFR 36,803 0.3383 0.4731 0.0000 0.0000 0.0000 1.0000 1.0000
ReinforcingMF 29,308 0.1005 0.3010 0.0000 0.0000 0.0000 0.0000 1.0000
ContradictingMF 29,308 0.0794 0.2706 0.0000 0.0000 0.0000 0.0000 1.0000
UE 36,803 -0.0016 0.0290 -0.8174 -0.0010 0.0004 0.0024 0.1623
Loss 36,803 0.1775 0.3821 0.0000 0.0000 0.0000 0.0000 1.0000
Special 36,803 0.0050 0.0263 0.0000 0.0000 0.0000 0.0000 0.4522
RD 36,803 0.0621 0.2473 0.0000 0.0000 0.0000 0.0322 4.2312
NAnalysts 36,803 12.98 9.30 1 6 11 18 67
626,55
MV (millions) 36,803 8,433 25,770 3 448 1,455 5,131 0
23.825
MB 36,803 3.2182 3.3858 0.0592 1.4400 2.2018 3.5906 7
VolRet 36,803 0.0273 0.0157 0.0041 0.0163 0.0235 0.0337 0.1369
ExtremeUE 36,803 0.1228 0.3282 0.0000 0.0000 0.0000 0.0000 1.0000
Persistence 36,803 0.4195 0.1009 0.0028 0.3586 0.4128 0.4718 0.9989
D_PUE 36,803 0.6523 0.4763 0.0000 0.0000 1.0000 1.0000 1.0000
D_SGrowth 36,803 0.7648 0.4241 0.0000 1.0000 1.0000 1.0000 1.0000

Panel B: Comparison of Earnings Announcements With and Without Concurrent Analyst

Forecast Revisions Conditional on the Sign of Unexpected Earnings.

Positive Without Reinforcing Contradicting

Mean Difference Test
UE AFR (1) AFR (2) AFR (3)
N = 24,006 N=4,631 N=9,953 N=9,422 (2) (1) (2) (3) (3) (1)
CAR 0.0067 0.0337 -0.0070 0.0270*** 0.0407*** -0.0137***
UE 0.0069 0.0048 0.0044 -0.0021*** 0.0004** -0.0025***
Loss 0.1464 0.1281 0.1577 -0.0183*** -0.0296*** 0.0113*
Special 0.0049 0.0040 0.0049 -0.0009** -0.0009** 0.0000
RD 0.0457 0.0590 0.0612 0.0133*** -0.0022 0.0155***
NAnalysts 6.5791 15.0552 15.2239 8.4760*** -0.1688 8.6448***
MV 3,559 9,817 9,525 6,258*** 292 5,966***
MB 2.7377 3.5366 3.2650 0.7990*** 0.2716*** 0.5273***
VolRet 0.0291 0.0259 0.0267 -0.0031*** -0.0007*** -0.0024***
ExtremeUE 0.1695 0.1028 0.0906 -0.0667*** 0.0121*** -0.0789***

50
 Persistence 0.4194 0.4204 0.4172 0.0011 0.0033** -0.0022
D_SGrowth 0.7966 0.8038 0.7525 0.0072 0.0513*** -0.0441***
Panel B (continued)
Negative Without Reinforcing Contradicting
Mean Difference Test
UE AFR (1) AFR (2) AFR (3)
N = 12,797 N=2,891 N=6,877 N=3,029 (2) (1) (2) (3) (3) (1)
CAR -0.0064 -0.0304 0.0086 -0.0240*** -0.0390*** 0.0150***
UE -0.0214 -0.0120 -0.0114 0.0094*** -0.0006 0.0100***
Loss 0.2750 0.2386 0.2172 -0.0364*** 0.0214** -0.0578***
Special 0.0072 0.0053 0.0056 -0.0019*** -0.0004 -0.0016**
RD 0.0648 0.0724 0.0738 0.0076 -0.0015 0.0090
NAnalysts 5.7371 13.8130 13.9498 8.0759*** -0.1368 8.2127***
MV 4,426 8,726 11,099 4,300*** -2,373*** 6,673***
MB 2.6278 3.2183 3.3248 0.5905*** -0.1065 0.6970***
VolRet 0.0304 0.0280 0.0262 -0.0025*** 0.0018*** -0.0042***
ExtremeUE 0.2062 0.1239 0.1354 -0.0823*** -0.0115 -0.0708***
Persistence 0.4193 0.4211 0.4207 0.0018 0.0003 0.0014
D_SGrowth 0.7271 0.7272 0.7478 0.0001 -0.0206** 0.0207*

Panel C: Distribution of Reinforcing, Contradicting and Non-AFR Earnings

Announcements for the Full and Restricted Samples

Reinforcing Contradicting Total Non-

Sample Partition Total
AFR AFR AFR AFR
16,830 12,451 29,281 7,522 36,803
Full Sample (45.7%) (33.8%) (79.5%) (20.4%) (100%)

Restricted Sample:
Earnings announcements for 14,530 11,318 25,848 3,827 29,675
firms with at least one (39.5%) (30.8%) (70.2%) (10.4%) (80.6%)
reinforcing AFR and one
contradicting AFR

Panel D: Distribution of Reinforcing/Contradicting Analyst Forecast Revisions and

Reinforcing/Contradicting Management Forecasts

Reinforcing AFR Contradicting AFR Total MF

Reinforcing MF 2,078 (43.6%) 573 (12.0%) 2,651 (55.7%)

Contradicting MF 540 (11.3%) 1,571 (33.0%) 2,111 (44.3%)

Total AFR 2,618 (55.0%) 2,144 (45.0%) 4,762 (100.0%)

***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively (two-tailed).
Panel A reports summary statistics for variables used in the study. Panel B reports mean statistics for observations

51
with positive and negative UE and tests of differences between AFR and non-AFR earnings announcements. Panel
C reports the distribution of reinforcing, contradicting, and non-AFR earnings announcements for the full sample
and for a restricted sample that includes only earnings announcements for firms that have at least one reinforcing
and one contradicting AFR over time. Panel D reports the distribution of reinforcing and contradicting AFR and MF.
All variables are defined in Appendix A.

52
 TABLE 3

Stock Price Response to Unexpected Earnings Conditional on Analyst Forecast Revisions

CARt-1,t+2 = 1 + 2ReinforcingAFR + 3ContradictingAFR + 4UE + 5UE*ReinforcingAFR

+ 6UE*ContradictingAFR + Control Variables + UE*(Control Variables) + Year Dummies +

Restricted sample:
Full Sample: Announcements for firms with
Announcements at least one reinforcing AFR Restricted Sample:
with and without AFR and one contradicting AFR Announcements with AFR
Variables Model 1 Model 2 Model 3
Coef. t-value Coef. t-value Coef. t-value
Intercept -0.0177 -4.65*** -0.0172 -3.87***
ReinforcingAFR 0.0070 5.38*** 0.0086 5.76*** -0.0169 -3.56***
ContradictingAFR -0.0086 -6.30*** -0.0077 -5.00*** -0.0332 -6.96***
UE 0.9936 3.83*** 0.7620 2.52**
UE*ReinforcingAFR 0.2512 3.09*** 0.2990 2.33** 1.4898 4.58***
UE*ContradictingAFR -0.2906 -3.02*** -0.2706 -2.10** 0.9222 2.69***
Loss -0.0047 -2.95*** -0.0033 -1.85* -0.0056 -3.05***
Special -0.0152 -0.82 -0.0005 -0.02 -0.0137 -0.63
RD -0.0019 -0.88 -0.0015 -0.58 -0.0022 -0.88
Coverage 0.0022 2.57*** 0.0008 0.85 0.0018 1.73*
Size -0.0014 -3.97*** -0.0016 -4.23*** -0.0016 -3.81***
MB -0.0001 -0.59 0.0000 -0.24 0.0000 0.16
VolRet -0.0179 -0.31 0.0385 0.58 -0.0508 -0.74
ExtremeUE 0.0057 2.68*** 0.0048 1.95* 0.0060 2.32**
Persistence 0.0052 1.14 0.0054 1.10 0.0094 1.81*
D_PUE 0.0225 18.62*** 0.0234 18.42*** 0.0270 19.95***
D_SGrowth 0.0019 1.73* 0.0034 2.96*** 0.0029 2.35**
UE*Loss -0.0213 -0.29 0.0808 0.91 -0.0206 -0.20
UE*Special 0.3488 0.65 -0.4366 -0.68 -0.4554 -0.61
UE*RD -0.1907 -2.79*** -0.2672 -3.38*** -0.1863 -2.75***
UE*Coverage 0.0155 0.36 0.0522 0.86 0.0920 1.37
UE*Size -0.0076 -0.41 -0.0061 -0.26 -0.0381 -1.36
UE*MB 0.0206 1.06 0.0340 1.13 -0.0054 -0.57
UE*VolRet 1.6838 1.07 1.4202 0.73 0.0342 0.02
UE*ExtremeUE -1.0029 -6.62*** -1.0150 -6.25*** -1.1329 -6.66***
UE*Persistence -0.1848 -0.79 -0.0878 -0.27 -0.2231 -0.73
UE*D_PUE 0.2535 2.52** 0.3015 2.52** 0.3987 3.08***
UE*D_SGrowth 0.0283 0.48 0.0078 0.09 0.0611 0.79

N 36,803 29,675 29,281

53
R2 0.0463 0.0506 0.0586

Test of 5 6 Difference t-value Difference t-value Difference t-value

0.5417 6.55*** 0.5696 6.67*** 0.5676 6.51***
***, **, * denote significance at the 1%, 5%, and 10% levels, respectively (two-tailed).
This table reports the results of estimating equation (1). Model 1 includes all earnings announcements with concurrent
analyst forecast revisions (AFR) and announcements without AFR. Model 2 includes only earnings announcements for
firms with at least one reinforcing and one contradicting AFR during the sample period. Model 3 includes only earnings
announcements with AFR during the announcement window and excludes observations without such forecasts The t-tests
compare the difference in the coefficients on UE conditional on reinforcing AFR and on contradicting AFR. All test
statistics and significance levels are calculated based on standard errors clustered by firm.
All variables are defined in Appendix A.

54
 TABLE 4

Stock Price Response to Unexpected Earnings Conditional on Analyst Forecast Revisions

and Management Forecasts
Panel A: Stock Price Response to Unexpected Earnings Conditional on Analyst Forecast
Revisions and Controlling for Management Forecasts
CARt-1,t+2 = 1 + 2ReinforcingAFR + 3ContradictingAFR + 4UE + 5UE*ReinforcingAFR
+ 6UE*ContradictingAFR + Control Variables + UE*(Control Variables) + Year Dummies +

Restricted Sample: Restricted Sample:

Full Sample:
Only announcements with Only announcements with
1994 to 2010
Management Forecasts during Concurrent Management
the Year Forecasts
Variables Model 1 Model 2 Model 3
Coef. t-value Coef. t-value Coef. t-value
Intercept -0.0188 -4.52*** -0.0232 -3.09*** 0.0042 0.06
ReinforcingAFR 0.0072 5.05*** 0.0095 3.58*** 0.0127 3.33***
ContradictingAFR -0.0091 -6.12*** -0.0129 -4.88*** -0.0118 -3.12***
UE 0.8986 3.16*** 2.1252 3.52*** 2.1692 1.89*
UE*ReinforcingAFR 0.2238 2.27** 0.7276 4.14*** 1.3209 3.59***
UE*ContradictingAFR -0.3947 -3.70*** -0.6101 -2.61*** -1.0578 -2.81***
D_MF -0.0001 -0.11 -0.0021 -1.07
UE*D_MF 0.0217 0.28 0.0963 0.58
Loss -0.0048 -2.63*** -0.0080 -2.16** -0.0094 -1.75*
Special -0.0149 -0.71 0.0017 0.06 0.0113 0.29
RD -0.0036 -1.52 0.0059 0.77 0.0088 0.83
Coverage 0.0027 2.82*** 0.0025 1.24 0.0028 0.96
Size -0.0014 -3.55*** -0.0014 -1.69* -0.0028 -2.52**
MB -0.0002 -0.94 -0.0003 -0.90 0.0001 0.23
VolRet -0.0283 -0.45 0.1285 1.27 -0.1409 -0.84
ExtremeUE 0.0055 2.28** 0.0085 1.65* 0.0027 0.35
Persistence 0.0061 1.22 0.0093 1.15 0.0041 0.39
D_PUE 0.0227 16.62*** 0.0251 10.68*** 0.0324 10.38***
D_SGrowth 0.0021 1.63 0.0002 0.10 -0.0025 -0.92
UE*Loss 0.0206 0.27 0.1307 0.77 -0.1711 -0.59
UE*Special 0.4694 0.62 -0.2298 -0.17 -0.6688 -0.38
UE*RD -0.1859 -2.33** -0.3228 -0.78 -1.5886 -3.12***
UE*Coverage 0.0409 0.81 0.1190 0.95 -0.1913 -0.77
UE*Size -0.0057 -0.24 -0.1652 -2.14** -0.2885 -2.21**
UE*MB 0.0260 1.04 0.0000 0.00 0.1182 1.40
UE*VolRet 1.5821 0.89 -2.0912 -0.73 0.2328 0.06

55
UE*ExtremeUE -1.0032 -5.84*** -1.5943 -4.46*** -1.2184 -2.62***
UE*Persistence -0.1691 -0.68 0.4996 1.15 1.7873 1.44
UE*D_PUE 0.2530 2.20** 0.3153 1.33 1.0807 2.09**
UE*D_SGrowth 0.0356 0.51 -0.1522 -0.95 -0.0439 -0.22

N 29,433 10,749 5,398

R2 0.0453 0.0603 0.0917

T-test Difference t-value Difference t-value Difference t-value

5 6 0.6185 7.12*** 1.3377 6.30*** 2.3787 7.51***

Panel B: Stock Price Response to Unexpected Earnings Conditional on both Analyst

Forecast Revisions and Management Forecasts

Model 1: CARt-1,t+2 = 1 + 2ContradictingMF + 3UE + 4UE*ContradictingMF

+ Control Variables + UE* (Control Variables) + Year Dummies + ,

Model 2: CARt-1,t+2 = 1 + 2ReinforcingMF_ContradictingAFR + 3ContradictingMF_ReinforcingAFR +

4ContradictingMF_ContradictingAFR + 5UE + 6UE*ReinforcingMF_ContradictingAFR
+ 7UE*ContradictingMF_ReinforcingAFR + 8UE*ContradictingMF_ContradictingAFR
+ Control Variables + UE* (Control Variables) + Year Dummies + e

Model 1 Model 2
Variables Coef. t-value Coef. t-value
Intercept 0.1152 9.69*** 0.1078 8.78***
ContradictingMF -0.0203 -8.60***
ReinforcingMF_ContradictingAFR -0.0201 -5.73***
ContradictingMF_ReinforcingAFR -0.0087 -2.49**
ContradictingMF_ContradictingAFR -0.0303 -10.83***
UE 3.9530 2.68*** 4.1851 2.92***
UE*ContradictingMF -1.6027 -5.06***
UE*ReinforcingMF_ContradictingAFR -1.6446 -2.31**
UE*ContradictingMF_ReinforcingAFR -0.9903 -2.55**
UE*ContradictingMF_ContradictingAFR -1.8914 -4.69***
Loss -0.0070 -1.16 -0.0060 -0.99
Special 0.0274 0.63 0.0298 0.69
RD 0.0028 0.23 0.0040 0.34
Coverage 0.0016 0.48 0.0012 0.36
Size -0.0019 -1.59 -0.0020 -1.65*
MB 0.0004 0.77 0.0003 0.57
VolRet -0.0795 -0.42 -0.1005 -0.54
ExtremeUE 0.0022 0.26 0.0030 0.35
Persistence 0.0109 0.98 0.0103 0.93
D_PUE 0.0333 9.68*** 0.0366 10.43***
D_SGrowth 0.0008 0.28 -0.0001 -0.03

56
UE*Loss 0.2441 0.61 0.0516 0.13
UE*Special -4.5343 -1.84* -3.7570 -1.66*
UE*RD -1.1772 -2.02** -1.2756 -2.08**
UE*Coverage 0.1879 0.48 0.3084 0.76
UE*Size -0.4441 -2.38** -0.5136 -2.80***
UE*MB 0.0617 0.79 0.0394 0.49
UE*VolRet -0.7745 -0.11 -0.7228 -0.09
UE*ExtremeUE -1.2059 -1.94* -1.1190 -1.85*
UE*Persistence 1.4535 0.89 1.6067 0.93
UE*D_PUE 0.7138 1.42 0.7925 1.45
UE*D_SGrowth -0.2275 -0.73 -0.1154 -0.36

N 4,762 4,762
R2 0.0848 0.1000

T-test Difference t-value

6 8 0.2467 0.36
7 8 0.9011 2.02**
***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively (two-tailed).
Panel A presents the results of estimating equation (1) for three partitions of the sample. The sample period is from 1994-
2010 because management forecasts are only available through 2010. Management earnings forecasts are obtained from
the FirstCall database. Model 1 includes all earnings announcements with and without AFR and MF (29,433
observations), Model 2 includes only the 10,749 observations that have a MF at some time during the year, and Model 3
includes only the 5,398 observations that have either a qualitative or a quantitative MF during the earnings announcement
window. D_MF is an indicator variable that equals one if the earnings announcement has a management forecast during
the earnings announcement window, and zero otherwise. Panel B reports the results of estimating equations (2) and
(3) using only the 4,762 observations that have quantitative announcement period MF so that we can classify these
forecasts as reinforcing or contradicting. The t-tests compare the difference in coefficients on UE conditional on
reinforcing and contradicting AFR and MF. All test statistics and significance levels are calculated based on
standard errors clustered by firm.
All variables are defined in Appendix A.

57
 TABLE 5

Cross-sectional Differences in Stock Price Responses to Earnings Announcements

Conditional on Analyst Forecast Revisions

CARt-1,t+2 = 1 + 2ReinforcingAFR + 3ContradictingAFR + 4UE + 5UE*ReinforcingAFR

+ 6UE*ContradictingAFR + Control Variables + Year Dummies +

Panel A: Analyst Forecast Uncertainty

Sample Partition based on Forecast Dispersion and Tests of Differences
Variables Low High Low - High
Coeff. t-value (t-test) Coeff. t-value Difference t-value
Intercept -0.0225 -4.85 *** -0.0114 -2.24 ** -0.0112 -1.61
ReinforcingAFR 0.0080 4.51 *** 0.0075 3.77 *** 0.0006 0.22
ContradictingAFR -0.0079 -4.24 *** -0.0074 -3.56 *** -0.0005 -0.20
UE -0.0604 -0.51 0.0544 1.86 * -0.1148 -0.86
UE*ReinforcingAFR 0.8403 6.06 *** 0.2235 5.83 *** 0.6169 3.93 ***
UE*ContradictingAFR -0.7581 -4.45 *** -0.2250 -4.50 *** -0.5330 -2.76 ***
Control Variables yes yes
Year Dummies yes yes
N 17,950 17,959
R-square 0.0529 0.0366

Panel B: Earnings Quality

Sample Partition based on Earnings Persistence and Tests of Differences
Low High High - Low
Variables Coeff. t-value (t-test) Coeff. t-value Difference t-value
Intercept -0.0156 -3.78 *** -0.0119 -3.00 *** 0.0037 0.65
ReinforcingAFR 0.0067 3.57 *** 0.0094 5.13 *** 0.0027 1.04
ContradictingAFR -0.0099 -5.07 *** -0.0053 -2.76 *** 0.0046 1.69 *
UE 0.1279 4.09 *** -0.0902 -2.63 *** -0.2181 -4.69 ***
UE*ReinforcingAFR 0.1586 3.69 *** 0.4288 8.91 *** 0.2703 4.18 ***
UE*ContradictingAFR -0.3601 -6.09 *** -0.1404 -2.28 ** 0.2197 2.57 **
Control Variables yes yes
Year Dummies yes yes
N 21,699 21,708
R-square 0.0418 0.0422
***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively (two-tailed).
Panel A reports results of estimating equation (1) for samples with high and low (above and below the median) levels of
dispersion in analyst forecasts. Dispersion is measured as the standard deviation of analysts annual earnings forecasts for
year t, issued within 30 days of the earnings announcement, deflated by fiscal year end stock price. Panel B reports results
of estimating equation (1) for samples with high and low levels of earnings persistence. Persistence is measured as the
slope coefficient in the following model: Ej,t+1 = Ej,t+1+ j,t, estimated over the preceding five years. We require
a minimum of three observations. Earnings announcements are classified as high (low) persistence if is above (below)
the median for each year. We do not report estimated coefficients on the control variables for brevity.

58
All other variables are defined in the Appendix.

59