DIFFERENTIAL INTRAINDUSTRY INFORMATION-TRANSFER ASSOCIATED WITH MANAGEMENT EARNINGS FORECASTS

This study proposes that the amount of information about one firm conveyed by management forecasts of another firm in the same industry depends on the earnings covariance between the two firms and the forecast firm's earnings variance. The covariance reflects the competitive relation between the firms and the variance represents noise contained in forecasts. When both variance and covariance are included in regressions, nonforecast firms' abnormal returns are associated with forecast firms' abnormal returns. When they are excluded, no such association is observed. The results are similar, but much weaker, when the independent variable is unexpected management forecasts. © 1990.