How important are semi-annual earnings announcements? An information event perspective

Using a method that avoids the need to specify earnings expectations, we demonstrate that the period surrounding the semi-annual announcement of Australian firms' earnings is, on average, an important source of information. Although there is substantial year-to-year variation, we observe no evidence of any significant time trend, and also conclude that a shift from Australian domestic generally accepted accounting principle to International Financial Reporting Standards did not impact the association between earnings announcement windows and stock returns. We also find no evidence that the informativeness of earnings announcements varies systematically with firm size, analyst following or economic news (i.e., positive vs. negative stock returns, profits vs. losses), although we do observe significant variation across industries. Our conclusion is further supported by contrasting the earnings release date with the days immediately prior to release, or high information days other than earnings announcement windows. Using a more precise event window relative to prior studies (i.e., 3 h vs. 3 days), we confirm that earnings announcements contain significant new information about fundamentals.     

Firm Size and the Information Content of Annual Earnings Announcements: Australian Evidence

Abstract:   We investigate the effect of firm size on the market's short‐window response to annual earnings announcements for a large sample of Australian listed companies. Our research design involves regressions of unexpected earnings against unexpected returns. Non‐linearity in the returns‐earnings relationship is incorporated and other factors known to affect the response to earnings announcements are controlled for. Contrary to prior US research, our results show that firm size has either no effect on the response to earnings announcements (3 day window) or the response is significantly stronger for larger firms (twenty‐one day window). The information content of earnings announcements is present across firm size categories but the nature of the response differs with firm size and context.     

Information Asymmetry Around Earnings Announcements

This study examines bid-ask spreads to determine how the anticipation and release of earnings announcements affect information asymmetry in the stock market. I use regression analysis and find that bid-ask spreads are negatively related to public information availability and positively related to earnings variability and the market reaction to prior unexpected earnings. The results suggest that firms for which earnings is expected to yield a relatively larger stock market reaction have greater information asymmetry than firms for which earnings are expected to yield a smaller market reaction.I also find that bid-ask spreads gradually increase in the four days prior to earnings announcements, and increase sharply the day prior to, the day of and the day after the earnings announcements. Bid-ask spreads seven to ten days after earnings announcements are not significantly different from bid-ask spreads seven to ten days prior to earnings announcements.     

Information of Unusual Trading Volume

This article investigates the information content of stock unusual trading volume from the aspect of firm fundamental information revealed by both earnings formal announcements and preannouncements. By using the stock market data of China from the second quarter of 2003 to the end of 2015, this article provides evidence that, in general, stocks that experience unusually low trading volume over the week prior to earnings announcements have more unfavorable earnings surprises. However, because of the feature of mandatory pre-disclosure policy in China, this article further finds that the relation between unusually low trading volume and unfavorable earnings surprises only exists in the stocks without earnings preannouncements, because fundamental information is incorporated in the stock prices timely around preannouncements date. In addition, unusually low trading volume signals negative fundamental changes revealed by preannouncements, and this effect is more pronounced among stocks with higher short-selling constraints, but unusually high trading volume is value-irrelevant.     

Financial Analysts' Earnings Forecast Dispersion and Intraday Stock Price Variability Around Quarterly Earnings Announcements

This study investigates the relationship between the dispersion of analysts' earnings forecasts and stock price variability around quarterly earnings announcements. Consistent with theoretical predictions, the empirical analysis shows that stock price variability at the time of earnings announcements is positively related to the degree of analysts' predisclosure earnings forecast dispersion. Additionally, firms with high levels of forecast dispersion exhibit significant increases in price variability for longer periods prior to and following earnings announcements than do firms with low levels of forecast dispersion. These results suggest that there is information about the earnings announcement that becomes available to at least a subset of investors prior to the earnings release and that market participants take different amounts of time to process the information conveyed by the earnings announcement.     

On the Use of Intra-Industry Information to Improve Earnings Forecasts

We investigate whether earnings forecasts are improved by earlier earnings disclosures by firms in the same industry. We find improvements for time series forecasts, but not for analysts' forecasts. Considering prior earnings announcements reduces correlations between forecast errors and security price reactions to earnings announcements, even when incorporating these announcements improves forecast accuracy. Our explanation for this anomaly, which is supported by additional analysis, is that intra-industry information facilitates predicting transitory, rather than permanent, earnings components. The question of whether information transfers improve earnings forecasts provides the context for the analysis, but the primary contribution is the documentation of intra-industry information transfers in a setting other than capital markets.     

Information content of earnings announcements in the New Zealand equity market,a longitudinal analysis

We compute abnormal return variance and abnormal trading volume in the 3‐day window surrounding earnings announcements to examine the information content of earnings announcements in the New Zealand equity market over the past 16 years. We find that the information content of earnings announcements has increased significantly over time, and this finding holds true for both interim and preliminary earnings announcements. We find evidence that earnings announcements with June year‐ends exhibit a higher level of information content and experience a more pronounced rising trend as compared to earnings announcements with non‐June year‐ends. Several firm characteristics appear to relate to the level of the information content of earnings announcements as well as to compound the trend over time. We document an important finding that the information content of earnings announcements increases remarkably in the period after the adoption of the International Financial Reporting Standards (IFRS).     

Public Predisclosure Information, Firm Size, Analyst Following, and Market Reactions to Earnings Announcements

Abstract:   This study examines the effects of public predisclosure information on market reactions to earnings announcements. We develop an empirical measure of public predisclosure information impounded in price prior to earnings announcements by cumulating abnormal returns on public news release dates during the quarter. Consistent with prior literature, we document a negative association between this measure and market reactions to subsequent earnings announcements. Moreover, we find that after controlling for this measure, firm size and analyst following are significantly positively associated with market reactions to earnings announcements. Contrary to prior empirical evidence, our results suggest that, after controlling for actual predisclosure information impounded in price, market reactions to earnings announcements are greater in magnitude for larger, more widely-followed firms than for smaller, less widely-followed firms.     

INTERIM EARNINGS MANAGEMENT AND THE FOURTH QUARTER GOOD NEWS EFFECT

This paper presents evidence of a larger return reaction (variance) to fourth quarter announcements that induce contemporaneously positive returns. The results are consistent with: (i) audited annual announcements being marginally more informative for reports that corroborate previously unaudited interim good news claims, and (ii) the level of marginal informativeness being a decreasing function of interim auditor involvement (proxied by firm size). The good news effect is robust over time, and sensitivity analyses fail to support competing explanations for the effect attributable to report timing differences or comparatively noisy fourth quarter bad news reports.     

我国上市公司盈余管理时间选择的实证研究

本文研究了我国上市公司在不同季度进行盈余管理的时间选择行为。我们首先采用可操控性应计利润来识别上市公司中期报告中的盈余管理行为,然后进一步通过考察季度间盈余反转来识别。研究结果表明,我国上市公司虽在各个季度都存在盈余管理行为,但第四季度利润中包含了比其他季度更多的盈余管理行为。特别的,巨额冲销的公司在第四季度进行盈余管理调低利润,前三季度表现欠佳而年末好转的公司在第四季度通过盈余管理调高利润。     

Event study with imperfect competition and private information: earnings announcements revisited

Although prior research documents that prices respond to earnings announcements, only a little of the price variation is explained by these announcements. To further investigate the properties of the information environment around these announcements we use NYSE TAQ data and compute the maximum likelihood estimates (MLEs) of the primitive parameters of a Kyle (Econometrica 53(6):1315–1336, 1985) type model within and around earnings announcement windows. These include the precision of fundamentals given only public information, the precision of private signals, and the variance of uninformed liquidity trading (noise). We find that liquidity noise is higher while the precision of beliefs given only public information is lower within an earnings announcement window. The precision of private information is higher in an event window, consistent with greater information acquisition to try and interpret a public announcement. We also document that Kyle’s λ is higher in an event window, showing an overall increase in information asymmetry. Our overall findings suggest that the earnings announcement window is distinguished from the preceding and subsequent windows not by being a period with more public information but as a period with different public information.     

Audit committee accounting expertise,expectations management,and nonnegative earnings surprises

We investigate whether accounting expertise on audit committees curtails expectations management to avoid negative earnings surprises. Controlling for the endogenous choice of an accounting expert, we find that firms with an accounting expert serving on the audit committee exhibit: (1) less expectations management to avoid negative earnings surprises; (2) less nonnegative earnings surprises through expectations management; and (3) more nonnegative earnings surprises that are less susceptible to manipulations of both realized earnings and earnings expectations. We find, however, that the inclusion of an accounting expert on the audit committee curtails expectations management only in the interim quarters. While Brown and Pinello (2007) find a greater magnitude of downward revisions in analysts’ forecasts in the fourth quarter, they also document a lower incidence of nonnegative earnings surprises. Together, this suggests that with an accounting expert, audit committees likely view the fourth quarter downward revisions as driven more by guidance than by manipulation, thus focusing on curbing only expectations management in interim quarters.     

Asymmetric Trading Costs Prior to Earnings Announcements: Implications for Price Discovery and Returns

We show that the cost of trading on negative news, relative to positive news, increases before earnings announcements. Our evidence suggests that this asymmetry is due to financial intermediaries reducing their exposure to announcement risks by providing liquidity asymmetrically. This asymmetry creates a predictable upward bias in prices that increases preannouncement, and subsequently reverses, confounding short‐window announcement returns as measures of earnings news and risk premia. These findings provide an alternative explanation for asymmetric return reactions to firms' earnings news, and help explain puzzling prior evidence that announcement risk premia precede the actual announcements. Our study informs methods for research centering on earnings announcements and offers a possible explanation for patterns in returns around anticipated periods of heightened inventory risks, including alternative firm‐level, industry‐level, and macroeconomic information events.     

How do stock-for-stock acquirers manage earnings? The accruals feature of real earnings management

This paper investigates whether stock-for-stock acquirers undertake real activities to manage earnings before merger announcements. Our results show that stock-for-stock acquirers present unusually high levels of credit sales and overproduction in the quarter immediately before the merger announcement. We also find that the accruals feature of real earnings management can explain the stock-for-stock acquirers’ high discretionary current accruals. In addition, stock-for-stock acquirer firms that accelerate their credit sales experience subsequent market underperformance. Overall, we provide a novel insight into the accruals feature of real earnings management.     

Ex Ante Incentives for Earnings Management and the Informativeness of Earnings

This study examines the relation between ex ante incentives of insurance managers to engage in earnings management to meet regulatory standards and the informativeness of earnings. This study extends prior research by simultaneously examining the effects of earnings management and uncertainty about earnings as suggested by Collins and DeAngelo (1990) and Imhoff and Lobo (1992). Results from a sample of 375 quarterly earnings announcements of 41 property and liability insurers during the period 1989 to 1992 support the hypothesis that when managers' incentives for earnings management are high, earnings announcements are less informative to investors (even after controlling for uncertainty associated with exposure to large-scale catastrophes). Robustness tests suggest that our results are not attributable to firm size, time period effects, firm effects, accounting estimation error, or financial distress risk. These results are consistent with investors using publicly available information to predict P-L insurance managers' ex ante incentives to manage earnings to meet regulatory standards, and that they use this information in forming their beliefs about earnings quality.     

Reexamination of earnings management before and after SOX: Evidence from SEC staff accounting bulletins 99-100

A substantial literature suggests that earnings management improved for U.S. firms in the post-2002 time period as a result of the Sarbanes-Oxley Act (henceforth, SOX) (Coates and Srinivasan, 2014) which was passed in the latter part of 2002. However, few papers have explored the impact of the Security and Exchange Commission’s Staff Accounting Bulletins (SABs) 99-100 in the year 2000 following their passage in late 1999. As a result, some of the reductions in earnings management that prior research attributes to SOX may have been due to these two SABs. We find that in 2000 there was a significant decline in the zero earnings discontinuity in quarterly earnings considered by prior research to be evidence of earnings management to avoid small losses. Surprisingly, we find only mixed evidence that SOX provided an incremental impact to that of the SABs, which occurs mainly in the quarterly distribution of EPS rather than in scaled quarterly earnings. We also find evidence that the passage of the SABs significantly reduced the practice where firms take write-offs in the fourth quarter that turn a profit for the year into a loss. Overall, our findings suggest that the decline in quarterly earnings management started well before SOX due to the SEC’s initiatives.     

Information Content of Interim Earnings Components—Evidence from Finland

This study examines the information content of the interim earnings of listed Finnish firms. The degree of association between returns and interim earnings is studied. The assumption is that, compared to transitory changes, permanent changes in earnings have a greater association with returns. Unexpected returns are regressed over unexpected permanent earnings and unexpected transitory earnings. Three return measurement periods are used to examine any potential asynchrony between prices and earnings. To reduce the errors-in-variables problem expected in single-security-level studies, observations are grouped into portfolios. When the data are divided into portfolios, the results give evidence of the association as hypothesized.     

Market Reaction to Multiple Contemporaneous Earnings Signals: Earnings Announcements and Future Earnings Guidance

We examine market reactions to contemporaneous announcements of current earnings and future earnings guidance for evidence on how investors trade off relevance and reliability. Current earnings are more reliable than future earnings guidance, but future earnings guidance may be more relevant for predicting future performance. We find that current earnings are more strongly associated with announcement-period returns than concurrently disclosed future earnings guidance, consistent with investors’ relative preference for reliability. We find similar return reactions to stand-alone earnings and to earnings released with guidance. In contrast, return reactions are lower for guidance announced simultaneously with current earnings than for stand-alone guidance.     

The Information Content of Segment Disclosures: Australian Evidence

This paper investigates whether the voluntary decomposition of consolidated earnings disclosures into industry segments has information content in the sense that such disclosures better enable investors to predict earnings. The broad rationale underlying the experimental design is that if segment disclosure does enable investors to better predict earnings then residual abnormal returns (after controlling for unexpected earnings) surrounding the earnings announcements of firms providing segment disclosures should on average be significantly lower than a matched' group of firms that do not provide this type of disclosure. Using a short event window design, our results support this view.     

Informed trading around earnings and mutual fund alphas

We examine whether informed trading around earnings announcements drives mutual fund performance. The measure is motivated by prior studies arguing that a mutual fund is skilled if it buys stocks with subsequent high earnings announcement returns. We find that this measure predicts future mutual fund returns. On average, after adjusting for Carhart’s four risk factors, the top decile of mutual funds outperforms the bottom decile by 44 basis points per quarter. By decomposing fund alphas into two components in their relations to earnings, we find that this measure is only associated with earnings-related fund alphas. This measure can also be used to predict stock returns at future earnings announcements.