Does voluntary balance sheet disclosure mitigate post-earnings-announcement drift? |
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| Authors: | Charles Hsu Qinglu Jin Zhiming Ma Jing Zhou |
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| Institution: | 1. Hong Kong University of Science and Technology, Hong Kong, China;2. Institute of Accounting and Finance, Shanghai University of Finance and Economics, China;3. Guanghua School of Management, Peking University, China;4. SILC Business School, Shanghai University, China;1. School of Business, University of Connecticut, 2100 Hillside Rd., Unit 1041A, Storrs, CT 06269, United States;2. College of Business, Colorado State University, 501 W. Laurel St., Fort Collins, CO 80523, United States;1. Oregon State University, United States;2. Purdue University, United States;1. University of Bologna, Department of Management, Via Capo di Lucca 34, 40126 Bologna, Italy;2. University of Udine, Economics and Statistics Department, Via Palladio 8, 33100 Udine, Italy;1. D’Amore-McKim School of Business Northeastern University, United States;2. College of Business Administration University of Nebraska – Lincoln, United States;3. Farmer School of Business Miami University, United States;1. Department of Accounting, Box 8113, North Carolina State University, Raleigh, NC 27695-8113, United States;2. Department of Management, Ca’ Foscari University, Cannaregio 873, 30121 Venice, Italy;1. Tampere University, Faculty of Management and Business, 33014 Tampere, Finland;2. University of Vaasa, P.O. Box 700, 65101 Vaasa, Finland;3. The University of Auckland Business School, 12 Grafton Road, Auckland, Private Bag 92019, Auckland 1142, New Zealand |
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| Abstract: | Theory suggests that balance sheet information such as total assets, total equity, or total liabilities complements earnings information in helping investors assess a firm’s profitability and estimate earnings growth. The voluntary disclosure of balance sheet information at earnings announcement could help investors gather and process this information at a lower cost. We therefore predict that voluntary balance sheet disclosure at the time of an earnings announcement helps investors promptly understand the implication of current earnings news for future earnings and subsequently reduces post-earnings-announcement drift (PEAD). Consistent with these predictions, our results show that when firms provide voluntary balance sheet disclosures, the earnings response coefficient in the event window is significantly higher and the corresponding PEAD is significantly lower. We further find that the impact of voluntary balance sheet disclosure on PEAD is more pronounced when the magnitude of balance sheet value surprise is larger, when balance sheet value is more informative about future earnings, when earnings uncertainty is higher, or when information cost is higher, consistent with our conjectures that helping investors to better understand future earnings performance and lowering information costs are key mechanisms underlying the effect of voluntary balance sheet disclosure on PEAD. |
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| Keywords: | Balance sheet Post-earnings-announcement drift Voluntary disclosure Total assets Total equity Total liabilities |
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