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).     

Strategic insider trading around earnings announcements in Australia

This paper tests, within the Australian setting, whether directors strategically time trades in their own firms, around earnings announcements, in the context of impediments to trading in the immediately preceding period. I show that both signed and unsigned trade activity are insignificantly different from zero in the preceding period, and significantly negative and positive after the event. Further, directors in Australia significantly sell following positive earnings news, and buy after negative news, providing evidence of ‘indirect’ trading. Directors’ trades in the longer-term pre-announcement period are also negatively related to the news content sentiment, contrary to expectation. Finally, I find evidence of positive autocorrelation between directors’ trades over the longer-term past, and those executed after earnings announcements, which, in the absence of the ‘short-swing’ rule in Australia, casts doubt over short-term strategic insider trading, more generally.     

Are trading bans effective? Exchange regulation and corporate insider transactions around earnings announcements

There is considerable controversy on the role of corporate insider trading in the financial markets. However, there appears to be a consensus view that some form of regulation concerning their activities should be imposed. One such constraint involves a trading ban in periods when corporate insiders are expected to be advantaged vis-à-vis the information flow. This paper directly tests whether constraints of this kind are effective in curtailing insider activity through a study of the trading characteristics of UK company directors. The London Stock Exchange Model Code (1977) imposes a two-month close period prior to company earnings announcements. We find that although the close period affects the timing of director trades, it is unable to affect their performance or distribution. Directors consistently earn abnormal returns irrespective of the period in which they trade. They tend to buy after abnormally bad earnings news and sell after abnormally good earnings news. Moreover, there are systematic differences in the trading patterns of directors surrounding interim and final earnings announcements. It appears that many corporate insiders have private information and exploit this in their trading activities. As a result, one can conclude that trading bans do not impose significant opportunity costs on the trading of corporate insiders.     

Strategic timing of annual earnings announcements: evidence from an order-driven market

Using Spanish data, this paper examines, for the first time, the differences in the intraday response of an order-driven market to earnings announcements made during trading and non-trading hours. We show that the speed of reaction depends on timing of the announcement: for overnight (daytime) announcements, the improvement in liquidity is (not) immediate. This finding could explain why Spanish firms prefer to release the bad (good) earnings announcement in trading (non-trading) hours. This strategic timing differs from the traditional disclosure policy in American markets, suggesting that different microstructures may react differently to news releases and, consequently, drive the strategic timing of corporate disclosures.

The puzzling behavior of short sellers around earnings announcements

We examine the performance of ‘predictive’ and ‘reactive’ short sellers who take relatively large short positions immediately before and after quarterly earnings announcements, respectively. While both types short into advancing markets, it is surprising for reactive shorts since their trades are in stocks that just announced unexpected good news and thus, according to the post-earnings announcement drift anomaly, will subsequently have abnormally high cumulative returns. Nevertheless, we find that for both types of short sellers: (1) subsequent cumulative returns are significantly negatively related to the amount of abnormal short selling, suggesting they are informed, and (2) relative to non-earnings dates, the subsequent returns around earnings announcements are significantly more negative, indicating they appear to be adept at exploiting earnings announcements. Surprisingly, we find that the subsequent returns of reactive short sellers are significantly greater than those of predictive short sellers except for S&P 500 stocks, perhaps due to their greater analyst following. Importantly, we are left with two puzzles. First, reactive shorts would have significantly improved their performance had they based their trades on the size of standardized unexpected earnings (‘SUE’). Second, predictive shorts of Micro stocks would have significantly improved their performance had they simply waited until earnings were announced and then based their trades on SUE.     

The effect of option transaction costs on informed trading in the options market around earnings announcements

We investigate the effect of option market transaction costs (a form of market imperfection) on the ability of option implied volatility-based measures to predict future stock returns and volatility around quarterly earnings announcements. We find that the predictability is significantly stronger for firms with lower option relative bid-ask spreads. The effect is more pronounced around positive rather than negative earnings news. We find no significant effect of option transaction costs around randomly chosen dates when there is no clustering of major information events. Trading strategies based on option market predictors and transaction costs earn monthly abnormal returns of 1.39% to 1.91%.     

Stock price reactions to earnings announcements: evidence from Chinese markets

We examine the stock price reactions to changes in earnings per share (EPS) in the Chinese stock markets. We find that domestic A-share investors do not correctly anticipate the changes in earnings and fail to adjust new earnngs information quickly, but international B-share investors can predict earnings changes better than A-share investors. As a result, abnormal returns (ARs) can be obtained by trading on the earnings information, but for A shares only. An explanation is that most A-share holders are individuals with short-term investment horizon while most B-share holders are large institutions that trade on more detailed and accurate financial information not immediately available to A-share holders.     

Increased market response to earnings announcements in the 21st century: An Empirical Investigation

We examine the role of concurrent information in the striking increase in investor response to earnings announcements from 2001 to 2016, as measured by return variability and volume following Beaver (1968). We find management guidance, analyst forecasts, and disaggregated financial statement line items are more frequently bundled with earnings announcements, and each of these items explains part of the increase in market response. Furthermore, collectively, these concurrent information releases explain a substantial fraction of the increase in market response to earnings announcements since 2001. This is in contrast to the decline in market response to management guidance issued separately from earnings and the much smaller increase in market response to analyst forecasts issued separately from earnings over this time. The findings indicate that information arrival at earnings announcement dates has increased significantly over the past two decades, and that key components of this are increased disclosures by management of guidance and financial statement line items and forecasts by analysts.     

Earnings characteristics and analysts’ differential interpretation of earnings announcements: An empirical analysis

This study provides empirical evidence on factors that drive differential interpretation of earnings announcements. We document that Kandel and Pearson's forecast measures of differential interpretation are decreasing in proxies for earnings quality and pre‐announcement information quality. This evidence yields new and useful insights regarding which earnings announcements are less likely to generate newfound disagreement among analysts and investors. Recent research suggests that investor disagreement can increase investment risk, increase the cost of capital, and cause stock prices to deviate from fundamental value. Therefore, our results support prior intuition that increasing the quality of earnings and pre‐announcement information can improve the efficiency of capital markets.     

Facebook posting activity and the selective amplification of earnings disclosures

This study examines the determinants of Facebook activity levels with a particular focus on Facebook activity around earnings announcements. Facebook activity is generally higher for firms with higher levels of analyst following, individual ownership, and trading volume, indicating that it is responsive to investor demand effects. Facebook activity also increases around earnings announcements, with the increase being largely attributable to posts containing earnings news. In general, therefore, firms use Facebook posts to amplify earnings news. Such activity is selective, however; it is lower for firms with high levels of information asymmetry, for firms reporting earnings that exactly meet the consensus analyst forecast amount, and when the earnings news is negative but the accompanying price movement is positive. Hence, firms appear to use Facebook to manage the level of attention paid to earnings news.     

Revisiting the corroboration effects of earnings and dividend announcements

Using a unique market setting in Hong Kong, where (i) all firms release earnings and dividend information in the same announcement; (ii) corporate transparency is low; (iii) dividend income is non‐taxable and (iv) corporate ownership is highly concentrated, we re‐examine the corroboration effects of earnings and dividends. We use the control firm approach to avoid the return estimation bias resulting from observation clustering. We also add in variables and use econometric procedure to control for the potential impacts of earnings management, special dividends and heteroskedasticity. Our findings show that there exists a corroboration effect between the jointly announced signals.     

Market uncertainty and the importance of media coverage at earnings announcements

We investigate whether increased investor demand for financial information arising from higher market uncertainty leads to greater media coverage of earnings announcements. We also investigate whether greater coverage during times of higher uncertainty further destabilizes financial markets because of greater attention-based trading or, alternatively, improves trading and pricing by lowering investor acquisition and interpretation costs. When uncertainty is higher, we find evidence of greater media coverage of earnings announcements and that the greater coverage leads to improvements in investor informedness, information asymmetry, and intraperiod price timeliness, and greater trade by both retail and institutional investors. In contrast to the media serving an expanded role in improving capital markets during more uncertain times, we fail to find that changes in firm-initiated disclosures lead to similar improvements and find that less frequent analyst forecast revisions exacerbate problems in capital markets during earnings announcements.     

Accounting quality,information risk and the term structure of implied volatility around earnings announcements

We examine the association between accounting quality, which is used as a proxy for firm information risk, and the behavior of the term structure of implied option volatility around earnings announcements. By employing a large sample of US firms having options traded on their equity during 1996–2010, we find that lower (higher) accounting quality is significantly associated with stronger (weaker) changes in the steepness of the term structure of implied volatility curve around quarterly earnings announcements. This finding (which is robust to controls for business-stemming uncertainty regarding future firm performance) is consistent with a stronger differential of short vs. long-term uncertainty for higher information risk firms, indicating greater uncertainty on the future economic performance of poorer vs. stronger accounting quality firms. We also establish the trading implications of these findings by demonstrating a (profitable in-sample) self-financed option trading strategy that is based on the quality of the accounting information released on earnings announcement days.     

Disclosure of fees paid to auditors and the market valuation of earnings surprises

We investigate if the SEC’s recently mandated disclosure of fees for audit and nonaudit services paid by firms to their incumbent auditors affected the market’s perception of auditor independence and earnings quality. Following the initial fee disclosures in 2001, we find that the market valuation of quarterly earnings surprises (earnings response coefficient) was significantly lower for firms with high levels of nonaudit fees than for firms with low levels of such fees. In contrast, in the year prior to the new fee disclosures, there was no reduction in earnings response coefficients for firms that subsequently reported high nonaudit fees. Our evidence suggests that mandated fee disclosures provided new information that was viewed by the market as relevant to appraising auditor independence and earnings quality.

Company investment announcements and the market value of the firm

This paper examines the stock market reaction to 402 company investment announcements made by UK companies during the 1991–1996 period. The market-adjusted abnormal returns are generally positive but small. Investment announcements are classified according to functional categories, and we find the level of abnormal returns to vary according to the type of capital investment being announced. In particular, we find the market to react more favourably to investments that ‘create’ future investment opportunities, than to investments which can be categorized as ‘exercising’ investment opportunities. The market reaction also varies with firm size, with large companies tending to experience smaller responses to announcements than do smaller firms. Chung et al. (1998 Chung, KH, Wright, P and Charoenwong, C. (1998). Investment opportunities and market reaction to capital expenditure decisions. Journal of Banking and Finance, 22: 41–60.  ) reported that the quality of a company's investment opportunities is the primary determinant of market reactions to capital expenditure decisions. The findings presented here lend some support to a role for investment opportunities in market valuations. Project size is also found to have a significant positive impact on the level of abnormal returns.     

The CDS market reaction to restatement announcements

I investigate the credit market's reaction to restatement announcements through changes in credit default swap (CDS) spreads. I document an overall positive association between CDS returns and restatement announcements. Specifically, I find that more positive CDS returns are associated with restatements (1) involving fraud and (2) affecting more accounts. Moreover, these reactions are sensitive to the underlying entities’ credit ratings and the market‐wide investor sentiment. Next, I compare CDS and stock market reactions and find that more negative stock returns are associated with restatements (1) involving fraud and (2) decreasing reported income.     

The effect of earnings surprises on information asymmetry

We examine the effect of earnings surprises on changes in information asymmetry. We hypothesize and find that asymmetry is lower (higher) in the quarter following positive (negative) earnings surprises compared to firms that meet the consensus analyst earnings forecast. The relations between earnings surprises and information asymmetry are stronger when the surprises are more likely to capture investors’ attention. Examining the source of these changes, we show that decreased information search activities is the most important factor for asymmetry declining after positive surprises; for negative surprises, decreased uninformed trading plays a dominant role increasing asymmetry.     

The effects of legal regime on the patterns of stock returns surrounding ADR earnings announcements

This study examines the effects of legal regime on the patterns of stock returns surrounding the earnings announcements of American Depositary Receipt (ADR) programs. My results indicate that the properties of accounting earnings associated with the local legal regime of an ADR program spill over to U.S. GAAP reconciled earnings. In particular, I find that the market reacts significantly to the earnings announcements of the ADR programs from common law countries whose accounting earnings are known to be more conservative and timely, but not to those of the ADR programs from code law countries where the earnings are known to be less conservative and timely.     

The effect of restatements on trading volume reactions to earnings announcements

This paper examines whether restatements affect trading volume reactions to subsequent earnings announcements. It closely follows the theoretical model developed by Kim and Verrecchia (J Account Econ 24:395–419, 1997) that decomposes the trading volume reactions around earnings announcements into the effects of pre-disclosure and event-period private information, and examines whether restatements change the trading volume reactions to earnings announcements in the post-restatement period. We find that restatements increase the degree of differential event-period information, leading to more divergent interpretation of earnings announcements subsequent to restatements. We also find that investors have less differential pre-disclosure private information in the post-restatement period, consistent with the view that investors’ beliefs converge when facing higher uncertainty in the information environment. Finally, focusing on irregularity restatement firms, we document that the effect of restatements on trading volume is more pronounced for firms announcing restatements after the passage of the Sarbanes–Oxley Act and after dismissing auditors and experiencing executive turnover. Overall, these results indicate that restatements affect investors’ behavior in forming judgments regarding earnings announcements.