Market Implications of Predisclosure Information: Size and Exchange Effects

Abstract

Differential market reactions to earnings announcements can, inter alia, be ascribed to the extent to which such announcements entail surprise (i.e., unexpected information); the greater the predisclosure information, the less the surprise element in earnings announcements. Since there is no direct measure of predisclosure information, the literature has utilized two different proxies: (i) firm size-the effect (Atiase [1980; 1985]) and (ii) listing-the exchange effect (Grant [1980]). Atiase [1980] argues that private predisclosure information production and dissemination are an increasing function of firm size (capitalization). If so, the amount of unexpected information conveyed to the market by actual earnings reports should be inversely related to firm size, other things equal. Empirical evidence in Atiase [1985] supports this hypothesis. Grant [1980] found that, for OTC firms, the average price revaluation associated with annual earnings announcements is significantly higher in the report week relative to both nonannouncement