How important are earnings announcements as an information source?

• Main Authors: Basu, Sudipta, Duong, Truong, Markov, Stanimir, Tan, Eng Joo
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2013
• Subjects: earnings information arrival days; conditional information content; information monopoly; incremental information; Corporate Finance; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/2962; https://ink.library.smu.edu.sg/context/lkcsb_research/article/3961/viewcontent/SSRN_id1616466.pdf
• Institution: Singapore Management University

In a competitive information market, no single information source is likely to dominate all other sources collectively, but a single source can dominate all or most other sources individually. We explore whether earnings announcements constitute such a dominant source using Ball and Shivakumar’s R2 metric: the proportion of the variation in annual returns explained by earnings announcement returns. We find that earnings announcement R2 is 11% -- higher than the corresponding R2 of returns on days with dividend announcements, management forecasts, preannouncements, 10-K and 10-Q filings and amendments. Only the four largest realized absolute daily returns in a year match the ability of earnings announcement returns to explain annual returns. We conclude that earnings announcements are the single most important source of new information in the equity market.