Can Executives Predict How Firm News Maps to Stock Price? A Field Study at the Onset of COVID-19

Executives have incentives to predict the price impact of disclosures to inform their insider trades, reporting discretion, and operating decision-making. Yet the extent to which they can do so accurately is unknown. The authors conduct a field study to provide direct evidence on executives’ accuracy, recruiting over 650 U.S. public company executives to share their predictions of the stock price response to their companies’ second quarter 2020 quarterly reports. Despite the market volatility and uncertainty at the onset of COVID-19, executives’ predictions of the one-day price reaction are directionally correct in two-thirds of cases. Further, executives’ short-window expectation errors predict returns. Following their companies’ reports, executives trade against the market in line with their initial error, and stock prices largely converge to their expectations over the subsequent 100 trading days. Collectively, the authors' results provide novel evidence of executives’ superior ability to anticipate how the market prices information in quarterly financial reports, even in periods of extraordinary change.