How Important are Earnings Announcements as an Information Source?

• Main Authors: BASU, Sudipta, DUONG, Truong Xuan, MARKOV, Stanimir, TAN, Eng Joo
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2011
• Subjects: earnings information arrival days; conditional information content; information monopoly; Corporate Finance; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/3283; https://ink.library.smu.edu.sg/context/lkcsb_research/article/4282/viewcontent/TanJE2013ImportantEarningAnnounce.pdf
• Institution: Singapore Management University

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.