Market Reaction to Quantitative and Qualitative Order Backlog Disclosures

Abstract

Findings in the prior literature on the implications of Order Backlog (OB) for stock returns are both sparse and inconclusive. For example, Rajgopal et al. (2003) show that firms with larger ratios of OB to total assets earn lower subsequent returns than firms with smaller ratios; while Lev and Thiagarajan (1993) find that increases in OB beyond sales increases are positively associated with returns. We provide evidence that quantitative information on increases in OB, coupled with positive qualitative indications by management about the direction of OB, are associated with higher returns; and that there is incremental information content to OB related disclosures over and above earnings surprises. We find this to be the case for annual and quarterly OB disclosures, regardless of whether they are provided in the preliminary earnings releases or in the SEC Form 10-Q (K) filings.