T1: How Much New Information Is There in Earnings? Flashcards
What is earnings announcement?
An earnings announcement is an official public statement of a company’s profitability for a specific time period, typically a quarter or a year.
What is the research question?
Research Question:
How much information do quarterly earnings announcements provide,
compared to the overall change in the information environment?
Motivating Question:
How important are earnings as new information to share markets?
What is Reg FD?
– Regulation Fair Disclosure of 2000
– “mandates that all publicly traded companies must disclose material
information to all investors at the same time”
What is SOX?
– Sarbanes-Oxley Act of 2002
– “enhanced standards for all U.S. public company boards, management and public accounting firms”
– e.g., corporate governance, disclosure, auditor independence
Why do we care?
Disclosure is costly, therefore its costs should be compared to its benefits.
Are earnings announcements useful?
Should they be mandatory?
Those questions are fundamental to accounting.
Return?
Buy-and-hold returns:
– Calendar-year buy and-hold returns from daily returns
– Earnings announcement returns over days -1 to +1
What is the research method?
• “ ….we calculate the adjusted R2
from a regression of calendar-year returns on returns in each of the four three-day announcement ˋevent windows’ during the year.”
• “To infer the information content of earnings announcements, we
compare the adjusted R2
value from regression (1) against a benchmark that is designed to reflect normal price volatility.”
What is the main finding?
A quarterly earnings announcement is associated with approximately 1% to 2% of total annual information.
What are potential explanations why
capital markets do not or just slightly react to earnings announcements?
• less frequent; various other and more timely information sources exist
• lack of discretion; earnings
announcements are mandatory regardless of the information provided
- rather backward looking
- Managers have incentives to minimize earnings surprises
If capital markets do not or just slightly react to earnings announcements, why is accounting still important?
• use of accounting numbers in periodic contract settlements (e.g., debt, compensation)
• confirmation of prior, expectational
statements; disciplining disclosure
in settling debt and compensation contracts and in disciplining prior information,
• verifiably
What are potential problems in measuring the information content within different event windows?
• Event window returns measure all information that is released during the earnings announcement window, not only earnings (e.g., management/press commentary, forecasts, etc.)
• Also: A longer time frame would no longer look at earnings
„surprises“ and „new“ information
