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.     

The informativeness of pro forma and street earnings: an examination of information asymmetry around earnings announcements

Using adverse-selection cost as a proxy for information asymmetry, we find evidence that non-GAAP earnings numbers issued by management (pro forma earnings) and analysts (street earnings) improve price discovery. First, information asymmetry before an earnings announcement is positively associated with the probability of a non-GAAP earnings number at the forthcoming earnings announcement. Second, the post-announcement reduction in information asymmetry is greater when managers or analysts issue non-GAAP earnings at the earnings announcement and when the magnitude of the non-GAAP earnings adjustment is larger. Our results suggest that earnings adjustments by analysts and managers increase the amount and precision of earnings information and help to narrow information asymmetry between informed and uninformed traders following earnings announcements. Alternatively, the findings may be attributable to characteristics of non-GAAP firms and overall better reporting quality for those firms rather than non-GAAP earnings disclosure per se.     

Earnings Announcements and Systematic Risk

Firms scheduled to report earnings earn an annualized abnormal return of 9.9%. We propose a risk‐based explanation for this phenomenon, whereby investors use announcements to revise their expectations for nonannouncing firms, but can only do so imperfectly. Consequently, the covariance between firm‐specific and market cash flow news spikes around announcements, making announcers especially risky. Consistent with our hypothesis, announcer returns forecast aggregate earnings. The announcement premium is persistent across stocks, and early (late) announcers earn higher (lower) returns. Nonannouncers' response to announcements is consistent with our model, both over time and across firms. Finally, exposure to announcement risk is priced.     

Earnings Announcement Lags and Market Responses—Does the Tone of the News and the Market Sentiment Matter?

We investigate earnings announcement lags (period from the end of the reporting period until the announcement date) for the good and the bad quarterly earnings news across different market sentiment periods as well as market reactions thereto. Companies listed on Baltic stock exchanges exhibit clear signs of strategic timing of earnings announcements. Earnings announcement lags for the bad news tend to be longer than those for the good news. This difference is more pronounced during low market sentiment periods. If the release of the bad news is postponed, abnormal return responses remain lower, as expected.     

The Information in Management's Expected Earnings Report Date: A Day Late, a Penny Short

Since 1995, managers of thousands of firms have voluntarily disclosed the expected date of their firm's next quarterly earnings announcement to Thomson Financial Services Inc. These disclosures are approximately 500% more accurate than the simple time–series expected report dates used in prior accounting research. These disclosures are also informative. On average, managers who miss their own expected date eventually report earnings that fall about one penny per share below consensus forecasts for each day of delay. Investors respond by sending the price of late–announcing stocks down at the missed expected report date and continue to send them down as the reporting delay lengthens, consistent with our "day late, penny short" result. Despite this, we find that the market response at the time earnings are announced still depends on whether the announcement is early, on time, or late relative to the firm's own expected report date.     

Quarterly Earnings Announcements and Market Risk Adjustments

We examine (1) whether there is a shift in beta for individual securities around quarterly earnings announcements, and (2) whether these beta changes relate to certain characteristics of the firms. We find a statistically significant upward (downward) beta shift during the two-day earnings announcement period for 25 per cent (9 per cent) of a sample of 195 US firms. We also find that the beta shift at the time of the earnings announcement is significantly higher for small firms (i.e., more precise announcements).     

Earnings seasonality,management earnings forecasts and stock returns

We examine whether management earnings forecasts (MEFs) help reduce the stock return seasonality associated with earnings seasonality around earnings announcements (EAs) in Chinese A-share markets. We find that firms in historically low earnings seasons outperform firms in high earnings seasons by 2.1% around MEFs. Firms in low earnings seasons also have higher trading volume and return volatility than their counterparts around EAs and MEFs. MEFs significantly reduce the ability of historical seasonal earnings rankings to negatively predict announcement returns, volume and volatility around EAs. The reduction effects are stronger when MEFs are voluntary or made closer to EAs. The evidence suggests that MEFs facilitate the correction of investors’ tendency to extrapolate earnings seasonality and its resulted stock mispricing.     

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.     

Earnings management and corporate spinoffs

In this study we examine whether firms manage earnings before pursuing corporate spinoffs. Using a sample of 226 completed spinoffs between 1985 and 2005, we find strong evidence of pre-spinoff earnings management among parent firms involved in non-focus-increasing spinoffs. We also find higher levels of earnings management among parent firms that have a higher level of information asymmetry prior to spinoff announcements. Our regression results show a significant negative relation between income-increasing earnings management and the announcement period returns for non-focus-increasing spinoffs. In addition, a significant positive relation is found between income-increasing earnings management and the announcement period returns for focus-increasing spinoffs. The results suggest that income-increasing earnings management sends out negative signals about non-focus-increasing spinoffs but positive signals about focus-increasing spinoffs.     

Firm strategy and market reaction to earnings

We examine whether a firm's strategy affects the information content of the firm's earnings announcement. A cost leadership strategy is characterized by low sales margins coupled with large sales volumes, economies of scale and major investments in plant and physical assets, whereas a differentiation strategy involves high sales margins achieved through product quality and branding realized by investments in intangibles such as R&D and advertising. These characteristics of the strategies result in differential impact on investor reactions to new information that is revealed about firms. Our results show that firms pursuing a cost leadership strategy have earnings announcements that are more commonly interpreted and result in a greater change in the average belief about stock price. On the other hand, earnings announcements of firms pursuing a differentiation strategy result in more heterogeneous interpretation accompanied by a smaller change in the average belief about stock price. This paper advances our understanding of the cross-sectional variation in the market's reaction to earnings announcements. In addition, the paper demonstrates a predictable instance of divergence in the price reaction and trading volume reaction to an earnings announcement.     

Do IFRS Reconciliations Convey Information? The Effect of Debt Contracting

We examine whether earnings reconciliation from U.K. generally accepted accounting principles (GAAP) to International Financial Reporting Standards (IFRS) convey information. As a result of debt contracting, mandatory accounting changes are expected to affect the likelihood of violating existing covenants based on rolling GAAP, leading to a redistribution of wealth between shareholders and lenders. Consistent with this prediction, we find significant market reactions to IFRS reconciliation announcements. These market reactions are more pronounced among firms that face a greater likelihood and costs of covenant violation and early announcements. While the association between later announcements and weaker market reactions is consistent with contractual implications of technical changes to earnings, which investors quickly learn to predict, it is inconsistent with IFRS forcing all firms in the sample to reveal firm-specific information through accruals. Thus, by showing that mandatory IFRS also affects debt contracting, we expand on existing IFRS research that focuses on how accounting quality and cost of capital are impacted.     

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.     

The Timeliness of Restatement Disclosures and Financial Reporting Credibility

This study investigates whether prompt discovery and disclosure of earnings restatements is associated with greater post‐restatement financial reporting credibility. We measure the timeliness of restatement detection by the length of time between the end of the misstated period and the subsequent restatement announcement. We document that shorter detection periods are significantly associated with high‐quality corporate governance characteristics and executive and/or auditor turnover, but not with characteristics of restatements. We also find that firms with shorter detection periods exhibit a more moderate decline in the information content of earnings following restatement announcements relative to firms with longer detection periods, and that detection period length has an incremental effect on the information content of earnings relative to executive and/or auditor turnover alone. In addition, we find that restatement disclosures are more timely following the implementation of the SOX‐era reforms, and that only firms with shorter detection periods experience more moderate post‐restatement declines in the information content of earnings following the implementation of the SOX‐era reforms. The results from this study suggest that the timeliness of restatement detection and disclosure is associated with greater financial reporting credibility following restatements.     

Do stock splits signal future profitability?

This study examines whether stock split announcements contain information content about future profitability, measured in terms of future earnings change, future earnings, or future abnormal earnings. We find that the split announcement year has the highest earnings change and the earnings change declines substantially over the subsequent five years. Our empirical results show little evidence that stock splits are positively related to future profitability. In fact, stock splits are in general negatively related to future profitability in subsequent years after the announcement, except for dividend-paying firms with a split factor less than 0.5. This negative relation holds regardless of future profitability measure. Therefore, our empirical finding suggests that stock splits are not useful signals of a firm’s future earnings prospects. JEL Classification G30     

Event Day 0? After‐Hours Earnings Announcements

In recent years, the proportion of after-hours earnings announcements has increased to more than 40%. For after-hours announcements, earnings-related volume and price changes are not observed on the Compustat or I/B/E/S earnings announcement date, but one trading day later. This study demonstrates the importance of accounting for after-hours announcements for event studies around earnings announcements.     

On-market share buybacks, exercisable share options and earnings management

Chan et al. (2006b ) suggest that managers might announce a share buyback to manipulate investors’ perceptions and capitalize on the positive price reaction usually associated with the announcement. The incentive to do so is greater when managers have exercisable options. Prior studies document that managers engage in upwards earnings management for opportunistic reasons related to option holdings (Bergstresser and Philippon, 2006). We examine the association between earnings management and exercisable option holdings for buyback firms to investigate if earnings management in the pre‐buyback period is greater for firms with equity incentives to increase share price. Our results, using 138 buybacks over the period 1996–2003, support our prediction. We find that buyback firms with both exercisable options that are in‐the‐money prior to the buyback announcement as well as options that are exercised in the buyback period have higher discretionary current accruals than buyback firms with no exercisable options, unexercised options or with out‐of‐the‐money options. Overall, our results are consistent with buyback firms with exercisable options using earnings management and buyback announcements to maximize option payoffs, and buyback firms without exercisable options signalling undervaluation.     

Is there Information in an Earnings Announcement Delay?

Using a sample of announcements drawn from the 1980s and early 1990s, we reassess the relation between earnings news and earnings announcement timing. Using analyst forecast errors to proxy for news, we find that early announcements are associated with good news relative to late announcements. The relation between news and timing, however, does not appear to be strictly monotonic. Furthermore, we find that unexpected earnings explain 4% or less of the variation in timing. Finally, we assess whether abnormal returns behave in a manner that is consistent with a good news early, bad news late relation.     

The Effect of Earnings–Announcement Timing on Earnings Management

This paper examines whether firms which delay earnings announcements engage in earnings management. The cross–sectional version of the modified Jones 1995 model is used to estimate 'normal' accruals. Prior research has documented that, on average, delayed earnings announcements are associated with negative earnings surprises. Our evidence suggests that the market anticipates unfavorable earnings news when it observes reporting delays. As a consequence, late reporters appear to make the most of a bad situation by employing income–decreasing accruals in big–bath–type earnings management and in contractual renegotiations. We find that the magnitude of income–reducing abnormal accruals is related to the reporting lag.     

The Value Relevance of Revenue for Internet Firms: Does Reporting Grossed‐up or Barter Revenue Make a Difference?

This study provides evidence on (a) the market's response to revenue and revenue announcements, (b) the extent of the use of grossed-up and barter revenue by Internet firms, and (c) whether the value relevance of revenue differs when Internet firms report grossed-up or barter revenue. Results indicate that revenue announcements are highly associated with three-day market returns and provide information incremental to that contained in earnings announcements. The use of grossed-up and barter revenue is common for certain sectors of Internet firms, but not pervasive across sectors. Evidence suggests that the value relevance of revenue for firms reporting grossed-up and barter revenue declined subsequent to the "crash" in April 2000. Additional analyses explore the effect of active individual investors on the pricing of revenue for firms reporting grossed-up and barter revenue. Findings suggest higher pricing of revenue for firms reporting grossed-up or barter revenue with relatively greater individual investor following.     

Individual Large Shareholders,Earnings Management,and Capital‐Market Consequences

Using a large hand‐collected sample of all blockholders (ownership ≥ 5%) of S&P 1500 firms for the years 2002–2009, we first document significant individual blockholder effects on earnings management (accrual‐based earnings management, real earnings management, and restatements). This association is driven primarily by these large shareholders influencing rather than selecting firms’ financial reporting practices. Second, the market's reaction to earnings announcements suggests that investors recognize the heterogeneity in blockholders’ influence on earnings management. The results highlight the highly individualized effects of blockholders and a mechanism through which shareholders impact reported earnings.