An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Yoel Beniluz
Rutgers University

Abstract: This paper hypothesizes that when disappointing information regarding a firm’s performance is released, its management faces particularly strong incentives to counter the disappointing news with overly optimistic forward-looking statements. The paper predicts and finds that the more disappointing the earnings announcement news, the higher the optimistic bias in the simultaneously released management longer horizon forecasts of annual earnings. The paper provides further evidence by documenting a significantly negative association between the news contained in the short-horizon forecasts of quarterly earnings and the optimistic bias in the simultaneously released management long-horizon forecast of annual earnings. The paper also investigates the link between management decision to issue earnings guidance and the contemporaneous earnings announcement news. Finally, market participants are aware about management tendency to counter disappointing news with overly optimistic forecasts.

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