The Bad, the boom and the bust: Profit warnings over the business cycle

We examine the market reaction of profit warnings (PWs) over the business cycle in the U.S. during 1995-2012. The average PW is associated with a −13.38% abnormal return during the announcement day. This is substantially higher than the abnormal return of firms who announce a negative earnings surprise without previously warning about it. We also find that the PW stock market reactions are asymmetric during the business cycle. Negative stock market reactions are greater in magnitude during expansion periods than during contraction periods. Theory suggests that this is because bad news is not expected during good times, so when it is announced, investors have a greater update to their beliefs.