How Do Investors Trade When Actual Earnings Are Reported with Management Forecasts?


We use trade size to distinguish between individuals and institutions and then examine their trading behaviors around earnings announcements using data from the Tokyo Stock Exchange. Japanese listed firms have a distinctive financial reporting system in that they report actual earnings for prior and current years, and in addition, almost all of them release management earnings forecasts for the next year. Under this unique setting, we test whether individuals respond differently from institutions to the same earnings news. We document the following results: (1) With regard to current earnings, individuals (institutions) strongly respond to simplistic random walk forecast errors (analyst forecast errors), while do not always respond to analyst forecast errors (simplistic random walk forecast errors). (2) With regard to management earnings forecasts, both individuals and institutions use them, but individuals react to them literally. In contrast to na¨ıve trading by individuals, institutions rationally respond to them with their predicted optimistic bias in mind. Overall, our results suggest that individuals' trading is so na¨ıve as if they use nothing other than the information released at the time of earning announcement, while institutions' trading is so sophisticated.


Katsuhiko MURAMIYA
Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059

Kazuhisa OTOGAWA
Graduate School of Business Administration, Kobe University