Do Firms Learn from Pre-announcement Experience? Evidence from Optimistic Pre-announcements and Market Responses

Abstract

In this study, we examine whether firms learn from pre-announcement experience by focusing on optimistic pre-announcements and market responses. Optimistic pre-announcements are pre-announced Earnings Per Share (EPS) higher than or equal to actual EPS. Based on organizational learning theory, we hypothesize that firms experiencing negative market responses to positive pre-announcements (pre-announced EPS higher than or equal to analysts' consensus) are less likely to make another pre-announcement during subsequent time periods. Our findings support this hypothesis. For firms making another pre-announcement, we find that the experience of a negative market response to a positive pre-announcement is negatively related to making an optimistic pre-announcement. Taken together, our findings suggest that firms learn from the previous experience of pre-announcements and the corresponding market responses.