Earnings Forecasts and Price Efficiency after Earnings Realizations: Reduction in Information Asymmetry through Learning from Price
Department
School of Accountancy
Document Type
Article
Publication Date
3-1-2021
Abstract
When information asymmetry is a major market friction, earnings forecasts can lead to higher price efficiency even after the information in forecasts completely dissipates upon earnings realizations. We show this in an experimental market that features information asymmetry (i.e., some traders possess differential private information). Earnings forecasts reduce information asymmetry and lead to prices that reflect a greater amount of private information. Traders can learn more about others' information from prices. This information learned from past prices continues to reduce information asymmetry and improve price efficiency even after earnings realizations. We contribute to the disclosure literature by showing the evidence that the learning-from-price effect amplifies the impact of public disclosure on price efficiency.
Journal Title
Contemporary Accounting Research
Journal ISSN
08239150
Volume
38
Issue
1
First Page
654
Last Page
675
Digital Object Identifier (DOI)
10.1111/1911-3846.12615