Stock Returns Following Profit Warnings: Evidence for Behavioral Finance

We estimate abnormal returns on stocks following profit warnings. Our data set is statements described by CNN as profit warnings. We find negative abnormal returns of approximately 5% in the six months following the warning. Over the period six to eighteen months after the warning we find positive abnormal returns of 18%. After eighteen months there is no evidence of significant abnormal returns. We argue that profit warnings can offer a useful test for several models that have been proposed in behavioral finance. This evidence is consistent with their predictions.