Financial Reporting Frequency and Earnings Information Spillovers around the World

Abstract

We uncover a negative consequence of reduced financial reporting frequency, namely excessive earnings information spillovers. Our central idea is that investors in firms that report earnings only semi-annually compensate for the lack of interim earnings disclosures for non-reporting periods — i.e. first three months of semi-annual periods — by relying more heavily on alternative sources of earnings news. We find that returns of semi-annual announcers are almost twice as sensitive to the earnings announcement returns of US industry bellwethers for non-reporting periods compared to reporting periods. Strikingly, these exacerbated spillovers are followed by return reversals when investors finally observe own-firm earnings at the subsequent semi-annual earnings announcement. This indicates that investors periodically overreact to peer-firm earnings news in the absence of own firm earnings disclosures arising from low reporting frequency. Overall, the evidence suggests that reduced reporting frequency impairs the ability of investors to properly value firms and impedes the efficiency of financial markets.