Do Fundamentals Convey Ex Ante Information about Profit Warnings?

There is along tradition of research using fundamentals to forecast the performance offirms. More recently some studies have suggested that managers tend to delaythe disclosure of bad news. Combining these two facets, fundamentals shouldhave some success in forecasting upcoming profit warnings. A profit warningusually triggers a big downward movement in the firm’s share price, sopredicting these disclosures beforehand would be of value. To answer theresearch question, if fundamentals can be used to predict profit warnings,accounting variables and share price movements are analyzed in a quarterlysetting around profit warnings. The findings show that firms’ profitabilitytends to decrease and their accrual accounts to increase already in the quarterbefore the profit warning is issued.