Does past performance matter?

Current-period performance at firms influences investors’ beliefs on whether it is accurate for managers to apply an optimistic strategy for the future, according to insights from Scott A. Emett (Arizona State University). The author’s research conducted three experiments, producing new evidence with these findings and also examined how this impacted investors’ evaluation of whether to focus on the challenges (possible negative affects) or opportunities (possible positive affects) in future orientated disclosures. In instances where firms are performing well, investors believe that investments should be focused on challenges rather than opportunities. While managers of firms that are underperforming, can rectify this by being optimistic and investing more heavily into these opportunities rather than the challenges in their future oriented disclosures.

Read full paper “Investor Reaction to Disclosure of Past Performance and Future Plans” by Scott A. Emett, The Accounting Review (September 2019, Vol. 94, No. 5, pp. 165-188) at aaapubs.

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CFRA aims to provide an effective contribution to scientific research and practice-oriented, pragmatic transfer of knowledge on financial reporting and auditing, as well as financial management more generally. In our Right on the money series, we share easy-to-understand summaries of emerging research in the field.

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