Description:
<jats:sec><jats:title content-type="abstract-heading">Purpose</jats:title><jats:p>The aim of this paper is to investigate the effect of management earnings forecasts on the level of information asymmetry around subsequent earnings announcement.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-heading">Design/methodology/approach</jats:title><jats:p>Employing the adverse selection cost method suggested by George <jats:italic>et al.</jats:italic>, the paper compares for each sample firm the adverse selection cost around earnings announcement in forecasting years with that in non‐forecasting years.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-heading">Findings</jats:title><jats:p>Consistent with Diamond and Verrecchia is the finding that the earnings announcement in non‐forecasting years decreases information asymmetry during a three‐day announcement period and increases in a post‐announcement period up to seven days. No significant change in information asymmetry between pre‐ and post‐announcement periods when firms released a “good” news forecast is found. The firms that previously released a “bad” news forecast experience a significantly lower information asymmetry than those that did not forecast during announcement or post‐announcement days, and experience a decrease in information asymmetry in a five to seven‐day post‐announcement period.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-heading">Originality/value</jats:title><jats:p>This paper provides the first empirical reports on the different information asymmetry changes around earnings announcements followed by a “good” news management forecast from those followed by a “bad” news forecast.</jats:p></jats:sec>