In a competitive information market, a single information source can only dominate other sources individually, not collectively. We explore whether earnings announcements constitute such a dominant source using Ball and Shivakumar's (2008) [How much new information is there in earnings?, Journal of Accounting Research, 2008, 46(5), pp. 975–1016] R 2 metric: the proportion of the variation in annual returns explained by the four quarterly earnings announcement returns. We find that the earnings announcement days' R 2 is 11% – higher than the corresponding R 2 of days with dividend announcements, management forecasts, preannouncements, and 10-K and 10-Q filings and their amendments, and comparable to that of the four days with the largest realised absolute returns in a year. Additional analysis reveals that earnings announcements convey extreme bad news as often as management forecasts and preannouncements; for any other type of news, earnings announcements are much more frequent. We conclude that earnings announcements are an important source of new information in the equity market.
earnings information arrival days, conditional information content, information monopoly
Corporate Finance | Portfolio and Security Analysis
European Accounting Review
Taylor and Francis
BASU, Sudipta; Duong, Truong; Markov, Stanimir; and TAN, Eng Joo.
How Important are Earnings Announcements as an Information Source?. (2011). European Accounting Review. 22, (2), 221-256. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/3283