Does Voluntary Balance Sheet Disclosure Mitigate Post-Earnings-Announcement Drift?

Abstract

Theory suggests that balance sheet information helps investors assess a firm’s profitability and estimate earnings growth. We therefore predict that voluntary balance sheet disclosure at the time of an earnings announcement helps investors promptly understand the implication of current earnings news for future earnings and subsequently reduces post-earnings-announcement drift (PEAD). Consistent with these predictions, our results show that when firms provide voluntary balance sheet disclosures, the earnings response coefficient in the event window is significantly higher and the corresponding PEAD is significantly lower. We further find that the impact of voluntary balance sheet disclosure on PEAD is more pronounced when book value is more informative or when earnings uncertainty is higher, consistent with our conjecture that helping investors to better understand future earnings performance is a key mechanism underlying the effect of balance sheet disclosure on PEAD.