Earnings Seasonality, Management Earnings Forecasts and Stock Returns

Previous research finds that historical seasonal earnings rank negatively predicts stock returns surrounding earnings announcements (EAs) in China’s A-share markets. We examine whether management earnings forecasts (MEFs) help reduce the stock return seasonality associated with earnings seasonality. We find firms in historically lower earnings seasons outperform firms in higher earnings seasons by 2.1% surrounding MEFs. Firms in historically lower earnings seasons also have higher trading volume and return volatility than their counterparts around EAs and MEFs. MEFs significantly weaken the ability of historical seasonal earnings rank to negatively predict announcement returns, volume, and volatility around EAs. The reduction effects are stronger when MEFs are voluntary or made closer to EAs. The evidence suggests that MEFs facilitate the correction of investors’ tendency to extrapolate earnings seasonality and its induced stock mispricing