
Accounting Papers
Document Type
Journal Article
Date of this Version
2-2012
Publication Source
Management Science
Volume
58
Issue
2
Start Page
308
Last Page
319
DOI
10.1287/mnsc.1110.1386
Abstract
This paper shows that an important link between investor sentiment and firm overvaluation is optimistic earnings expectations, and that management earnings guidance helps resolve sentiment-driven overvaluation. Using previously identified firm characteristics, we find that most of the negative returns to uncertain firms in months following high-sentiment periods fall within the three-day window around the issuance of management earnings guidance. Comparisons of guidance months to nonguidance months show that guidance issuance affects the magnitude and not just the daily distribution of negative returns. There is also some evidence of negative returns around earnings announcements for firms that previously issued guidance, suggesting that guidance does not entirely correct optimistic earnings expectations. To provide additional insight into the strength of the guidance effect, we show that the market reacts more strongly to surprises, particularly negative surprises, following high-sentiment periods. Finally, firms with higher transient institutional ownership are less likely to guide, and their guidance is less likely to contain bad news following high-sentiment periods, indicating that managers with a short-term focus are hesitant to correct optimistic market expectations.
Keywords
finance, asset pricing, management, earnings guidance, investor sentiment, market efficiency
Recommended Citation
Seybert, N., & Yang, H. I. (2012). The Party's Over: The Role of Earnings Guidance in Resolving Sentiment-Driven Overvaluation. Management Science, 58 (2), 308-319. http://dx.doi.org/10.1287/mnsc.1110.1386
Included in
Accounting Commons, Business Administration, Management, and Operations Commons, Marketing Commons
Date Posted: 27 November 2017
This document has been peer reviewed.
Comments
At the time of publication, Holly Yang was affiliated with the University of Pennsylvania but she is currently part of the faculty at the Singapore Management University.