Profit Warnings and Stock Price Development
Abstract: When a firm's estimate of its financial result deviate significantly from that of the market, the firm is obliged to issue a profit warning. Over the years 2004-2014, only 100 profit warnings were issued on Nasdaq OMX Stockholm Stock Exchange. The low number of profit warnings indicates a reluctance by firms to warn. This study was aimed at investigating whether or not this reluctance was motivated, by analysing stock price development following profit warnings. 2,404 quarterly observations for 198 firms, out of which 27 issued one or more profit warnings, were studied through a linear regression. The findings show that there is a clear difference in quarterly cumulative abnormal returns (CAR) between warning and non-warning firms, in line with reports from the American market. The Swedish stock market punishes the issuance of a profit warning by an 11.2% decline in CAR. This seems to hold true regardless of the magnitude of the deviation of firm net income from analyst estimates. It was found that, in cases of too optimistic estimates, the market provides a premium for convergence of analyst estimates towards actual outcome, which can be seen as reward for openness. However, this was heavily outweighed by the punishment for mere issuance of a profit warning.
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