The informative impact of profit warnings on annual earnings announcements

This paper aims to study the impact of profit warnings on market reaction around annual earnings announcements. Relatively few works have investigated this issue. Our empirical survey based on an event study, points out strong negative stock returns as well as abnormally high trading volume around warnings of negative earnings surprises. Market reaction depends on the size of the firm, the P/E ratio and on its risk level. Moreover, we observe positive abnormal returns at the date of earnings announcements for companies having previously released a profit warning. Our results testify that both disclosures convey an informative content for investors. Those findings may arise from financial communication strategy. Managers are more likely to disclose voluntarily bad news (i.e., profit warnings for example) as early as possible and postpone good news disclosures for annual press conferences. This explains the negative market reaction around profit warnings and the positive market reaction around earnings announcements.