Can Executives Predict How Firm News Affects Stock Price?

Abstract

More than 650 U.S. public company executives predict the stock price response to their quarterly financial reports and share their prediction after under a nondisclosure agreement. Despite having full knowledge of the reports before their release, executives’ estimates differ from realized returns by roughly 100% of the average absolute one-day response (i.e., 600 to 700 basis points) and are directionally wrong in one-third of cases. We do not find evidence that executives learn from the unexpected price movements; rather, executives profitably trade against the market the greater the prediction error. Greater error also reduces window dressing of financial information.