A Study of Intraindustry Information Transfer of Management Earnings Forecasts

Abstract

This paper documents intarindustry information transfers associated with managers' voluntary earnings forecasts. The following three main issues are empirically investigated: (1) The associations between nonforecast firms' price reactions and both the changes in earnings expectations and forecast firms' price reactions; (2) The impacts of the nature (good or bad) of earnings forecasts on the magnitude of information transfers; (3) The effects of firm-by-firm earnings comovement on the direction and the magnitude of information transfer.
The data examined contain 148 management forecasts by firms listed in Taiwan Stock Exchange between 1991 and 1994. The firm-to-firm sample design is adopted in order to investigate the more precise effect of information transfers. For firms with multiple management earnings forecasts in a given year, only the first forecast was examined. Regression analysis is used to test the related hypotheses.
The empirical results provide evidence of positive information transfers associated with managers' earnings forecasts. In addition, the differential patterns of information transfers are conditional on the nature of the forecast information. The firm-by-firm earnings comovement determines the direction and magnitude of information transfers.