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Is Bad News Really More Credible than Good News? Evidence from Management Forecasts

Helen Hurwitz, Columbia University

ABSTRACT: This study investigates the relative optimism in good and bad news management forecasts, as well as the role of litigation risk. Contrary to prior belief, I find that long-horizon bad news management forecasts are actually more optimistically biased than good news management forecasts. Further evidence shows that litigation threat reduces the optimism in good news management forecasts, but has no effect on bad news forecasts. This indicates that managers exercise extra caution when issuing good news forecasts due to the higher litigation risk associated with good news. In addition, post-forecast drift is not associated with forecast news for either good or bad news, suggesting that investors correctly perceive the relative credibility of good and bad news management forecasts. Therefore, the stronger short-window market reaction to bad news than good news management forecasts should not be interpreted as investors perceiving bad new as more credible, as claimed in some prior research.

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