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.