“The tale of silent dogs: Do stock prices fully reflect the implicatin of news withholding?” by Dr. Frank ZHOU
Dr. Frank ZHOU
Assistant Professor of Accounting
The Wharton School
University of Pennsylvania
We investigate whether investors exhibit limited strategic thinking when interpreting the lack of a management forecast. We show that firms that do not provide management forecasts experience negative stock returns around the earnings announcement. Using two measures of rational investors' response to the implications of non‐guidance, we show that cumulative stock returns prior to the earnings announcement are higher than economic rationality implies. The results are consistent with limited strategic thinking: investors underestimate the relation between management's strategic incentive to withhold information and the private information they have, which leads to an initial overpricing of the implication of non‐guidance and a subsequent correction around the earnings announcement which (at least partially) reveals the news. We contribute to the literature by showing that investors are constrained in understanding managers' strategic disclosure decisions, even when such decisions are salient to investors and repeated over time, and analysts and sophisticated institutional investors exist.