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.     

Prior Wall Street Journal Announcements of Possible Bankruptcy Filings and Price Reactions to Subsequent Bankruptcy Filings

This study examines the relation between prior Wall Street Journal (WSJ) announcements of possible bankruptcy filings and price reactions to subsequent bankruptcy filings for 336 firms that filed for bankruptcy between 1980 and 1993. Extant research indicates that price reactions to announcements of economic events are inversely related to the amount of surprise in the announcements. Prior WSJ anouncements of possible bankruptcy filings increase the markets a priori assessment of firms' probability of bankruptcy, thereby potentially reducing the surprise in subsequent bankruptcy filings. We hypothesize smaller price reactions to bankruptcy filings for firms where the WSJ previously published an article indicating that the firm may file for bankruptcy. Our results are consistent with this hypothesis. Specifically, we find smaller price reactions to bankruptcy filings for firms with prior WSJ announcements of possible bankruptcy filings. Our results hold after controlling for firm size, probability of bankruptcy, exchange listing, leverage, and predisclosure information.     

Information Content and Timing of Earnings Announcements

Abstract:   The China Securities Regulatory Commission requires all listed firms to make earnings announcements by the end of April each year. This requirement creates a unique opportunity for us to evaluate the timing of earnings announcements in a four‐month cluster. Firms, which are willing to make early announcements, tend to surprise the market, as indicated by the higher volume and price reactions. Later announcements are more predictable, as indicated by the lower volume and price reactions. These results indicate that an information asymmetry exists between early and late earnings announcements in Mainland China.     

Relation Between Predisclosure Information Asymmetry and Trading Volume Reaction Around Quarterly Earnings Announcements

This study investigates the effects of differences in predisclosure information asymmetry on trading volume reaction during quarterly earnings announcements. The analyses show that trading volume reaction to quarterly earnings announcements is positively related to the level of predisclosure information asymmetry and to the magnitude of the price reaction to the announcements. These results are consistent with Kim and Verrecchia's (1991a) theoretical trading volume proposition, and with Atiase and Bamber's (1994) tests of the proposition based on annual earnings announcements. This study also provides evidence on the relation of predisclosure information asymmetry and trading volume before and after quarterly earnings announcements.     

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.     

Factors Associated with Differences in the Magnitude of Abnormal Returns Around NYSE Versus Nasdaq Firms' Earnings Announcements

This study provides an explanation for the 'exchange effect' puzzle documented in prior accounting research. Grant (1980) finds that the magnitude of earnings announcement week abnormal returns is higher, on average, for firms traded over-the-counter than for NYSE firms. Atiase (1987) shows that this incremental 'exchange effect' persists even after controlling for firm size. We investigate potential explanations for this incremental exchange effect. We first show that even after controlling for differences in firm size, Nasdaq firms have less rich information environments and enjoy greater growth opportunities than NYSE firms. We then investigate whether differential predisclosure information environments and/or growth opportunities can explain the incremental exchange effect. The results indicate that although the absolute magnitude of the earnings announcement-related abnormal returns is inversely related to proxies for the amount of predisclosure information, the incremental exchange effect cannot be explained by differences in the predisclosure information environment. In contrast, after controlling for differences in growth opportunities across NYSE versus Nasdaq firms, and investors' heightened sensitivity to Nasdaq firms' growth opportunities in particular, there is no significant incremental exchange effect (whether or not we control for predisclosure information). These results suggest that the incremental exchange effect puzzle documented in prior research is more likely to reflect growth-related phenomena than differences in the predisclosure information environment.     

The information content of earnings announcements: new insights from intertemporal and cross-sectional behavior

This study examines the information content of quarterly earnings announcements, measured as the magnitude of stock price revision at earnings announcements relative to price revision at other times. We investigate whether quarterly earnings announcements are informative using a nonparametric approach and 1971–2011 sample period. The findings affirm prior evidence on earlier sample periods that significantly more information is conveyed to investors in the three days around earnings announcements than in randomly chosen three-day periods. Next, we examine the behavior of information content over our sample period and document four key findings. First, there is a dramatic increase in information content at earnings dates from 2001 onward. Second, the market reaction to loss firms is substantially less than that for profitable firms. Third, there is a significantly greater reaction to larger firms. Fourth, reaction at earnings dates is significantly increasing in analyst coverage, and once analyst coverage is controlled, the association with size becomes less significant.     

Stock Dividends,Stock Splits,and Signaling

This paper provides evidence that firms signal their private information about future earnings by their choice of split factor. Split factors are increasing in earnings forecast errors, after controlling for differences in pre-split price and firm size. Furthermore, price changes at stock dividend and split announcements are significantly correlated with split factors, holding other factors constant, and with earnings forecast errors. These correlations suggest that management's choice of split factor signals private information about future earnings and that investors revise their beliefs about firm value accordingly. The analysis also suggests, however, that announcement returns are significantly correlated with split factors after controlling for earnings forecast errors. This suggests that earnings forecast errors measure management's private information about future earnings with error, that split factors signal other valuation-relevant attributes, or that a signaling explanation is incomplete.     

Spreads, depths, and the impact of earnings information: an intraday analysis

For a sample of NYSE firms, we show that wide spreads are accompaniedby low depths, and that spreads widen and depths fall in responseto bigger volume. Spreads widen and depths fall in anticipationof earnings announcements; these effects are more pronouncedfor announcements with larger subsequent price changes. Spreadsare also wider following earnings announcements, but this effectdissipates quickly after controlling for volume. Collectively,our results suggest liquidity providers are sensitive to changesin information asymmetry risk and use both spreads and depthsto actively manage this risk.     

Regular Dividend Announcements and Future Unexpected Earnings: An Empirical Analysis

Previous studies have interpreted stock price reaction to dividend announcements as being consistent with the hypothesis that any changes are forecasts of future corporate profits. Recent studies seem to provide evidence to this effect. This study provides additional empirical evidence pertaining to the issue of whether quarterly cash dividend announcements convey useful information about a firm's future profitability, beyond that contained in contemporaneous quarterly earnings announcements. The association between unexpected changes in quarterly dividends and unexpected accounting earnings in subsequent quarters is examined, after controlling for information contained in past and current earnings series. The results, based on a large sample of regular quarterly cash dividend changes, indicate that firms that increased (decreased) their dividends realized, on average, greater (smaller) unexpected accounting earnings in subsequent periods than firms that did not change their dividends.     

Institutional stakeholdings and better-informed traders at earnings announcements

Utama and Cready [Utama, S., Cready, W.M., 1997. Institutional ownership, differential predisclosure precision and trading volume at announcement dates. Journal of Accounting and Economics 24, 129–150] use total institutional ownership to proxy for the proportion of better-informed traders, an important determinant of trading around earnings announcements. We argue that institutions holding small stakes cannot justify the fixed cost of developing private predisclosure information. Also, institutions with large stakes generally do not trade around earnings announcements since they are dedicated investors or face regulations that make informed trading difficult. However, institutions holding medium stakes have incentives to develop private predisclosure information and trade on it; we show that their ownership is a finer proxy for the proportion of better-informed traders at earnings announcements.     

Driven to Distraction: Extraneous Events and Underreaction to Earnings News

Recent studies propose that limited investor attention causes market underreactions. This paper directly tests this explanation by measuring the information load faced by investors. The  investor distraction hypothesis  holds that extraneous news inhibits market reactions to relevant news. We find that the immediate price and volume reaction to a firm's earnings surprise is much weaker, and post-announcement drift much stronger, when a greater number of same-day earnings announcements are made by other firms. We evaluate the economic importance of distraction effects through a trading strategy, which yields substantial alphas. Industry-unrelated news and large earnings surprises have a stronger distracting effect.     

MARKET REACTION TO DIVIDEND-DECREASE ANNOUNCEMENTS: PUBLIC UTILITIES VS. UNREGULATED INDUSTRIAL FIRMS

In this study I compare the common share price reaction to dividend-decrease announcements by public utilities with the share price reaction to dividend-decrease announcements by unregulated firms. Regressing cumulative prediction errors from an event study methodology on firm characteristics, the empirical evidence shows that dividend decreases by public utilities prompt stronger negative market reactions than similar announcements by unregulated firms, even when yield, yield change, firm size, and Tobin's Q differences are considered.     

THE RELATION AMONG DIVIDEND POLICY,FIRM SIZE,AND THE INFORMATION CONTENT OF EARNINGS ANNOUNCEMENTS

In this paper we investigate the role of dividends in explaining the size effect. The previous literature concludes that before the firm's earnings announcement, small firm stock prices impound less information than large firm stock prices. This size effect is evidenced by the greater market reaction to small firm earnings announcements than to large firm earnings announcements. We find that if the dividend announcement precedes the earnings announcement, no size effect exists. The implication is that the information conveyed by dividend announcements includes the information conveyed to investors in large firms by other information sources. However, if the firm does not pay dividends or if the firm's earnings announcement precedes its dividend announcement, the size effect exists. The implication is that dividends do not completely explain the size effect. That is, there are information sources other than dividends that are exclusively available to investors in large firms, and the information provided by these sources is reflected in the stock price of large firms before 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.     

Does Shareholder Composition Matter? Evidence from the Market Reaction to Corporate Earnings Announcements

We examine whether institutional ownership composition is related to parameters of the market reaction to negative earnings announcements. When firms report earnings below analysts' expectations, the stock price response is more negative for firms with higher levels of ownership by momentum or aggressive growth investors. There is no evidence, however, that these institutions cause an “overreaction” to earnings news. Ownership structure is also related to trading volume and to stock price volatility on days around earnings announcements. Our findings are consistent with the idea that the composition of institutional shareholders effects stock price behavior around the release of corporate information.     

The incremental information content of non-US GAAP earnings disclosures: Evidence from UK firms

This paper examines price and trading volume responses in the US equity market to the preliminary earnings announcements (PEAs) in the UK of UK firms listed on US exchanges (e.g., NYSE and AMEX). The inquiry focuses on whether the return forecast error (absolute and squared values) and volume residual (standardized and unstandardized) for each day were significantly different from the average on the day of the earnings announcements (PEA). The most significantly unexpected return occurred the day prior to the Financial Times (FT) announcement. The results suggest prompt volume and price responses to the UK PEAs in the US security market. Excess trading volume occurred the day prior to and the day of the FT release price response occurred on the day subsequent to the PEAs. This may suggests that investors possess differential prior beliefs or likelihood functions in evaluating public disclosure. Consistent with Frost and Pownall [Frost, C., & Pownall, G. (1996), Interdependencies in the global markets for capital and information: The case of Smithkline Beecham plc. Accounting Horizons, 1, 38-57], US investors seem not to be confused by US/UK generally accepted accounting principles (GAAP) differences, and in fact use information about UK GAAP earnings in their valuations and trading decisions. This implies that traders correctly use UK accounting output to the determination of values in setting security prices and arriving at trading decisions. Broadly, these findings support the assumption that disclosures by UK-listed firms in their domestic market influence share liquidity and trading in the US market.     

Options trading volume and stock price response to earnings announcements

We examine the effect of options trading volume on the stock price response to earnings announcements over the period 1996–2007. Contrary to previous studies, we find no significant difference in the immediate stock price response to earnings information announcements in samples split between firms with listed options and firms without listed options. However, within the sample of firms with listed options stratified by options volume, we find that higher options trading volume reduces the immediate stock price response to earnings announcements. This conforms with evidence that stock prices of high options trading volume firms have anticipated and pre-empted some earnings information in the pre-announcement period. We also find that higher abnormal options trading volume around earnings announcements hastens the stock price adjustment to earnings news and reduces post-earnings announcement drift.     

Insider trading,future earnings,and post-earnings announcement drift

This paper examines the association between insider trading prior to quarterly earnings announcements and the magnitude of the post-earnings announcement drift (PEAD). We conjecture and find that insider trades reflect insiders’ private information about the persistence of earnings news. Thus, insider trades can help investors better understand and incorporate the time-series properties of quarterly earnings into stock prices in a timely and unbiased manner, thereby mitigating PEAD. As predicted, PEAD is significantly lower when earnings announcements are preceded by insider trading. The reduction in PEAD is driven by contradictory insider trades (i.e., net buys before large negative earnings news or net sells before large positive earnings news) and is more pronounced in the presence of more sophisticated market participants. Consistent with investors extracting and trading on insiders’ private information, pre-announcement insider trading is associated with smaller market reactions to future earnings news in each of the four subsequent quarters. Overall, our findings indicate insider trading contributes to stock price efficiency by conveying insiders’ private information about future earnings and especially the persistence of earnings news.     

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.