The Impact of Earnings Announcements on a Firm's Information Environment

Abstract

Numerous accounting research studies suggest earnings announcements reduce information asymmetry among investors. In contrast, some studies find that a construct for consensus – the proportion of a firm’s information set that is shared by market participants – decreases around earnings announcements. We revisit these inconsistent findings. First, we demonstrate that a firm’s pre-existing information environment is an important determinant of how earnings announcements affect consensus. As the pre-earnings announcement level of consensus increases, earnings announcements have a more negative effect on consensus. Second, voluntary disclosures can moderate or increase this negative impact on consensus. Bundled management forecasts increase consensus, whereas non-GAAP disclosures decrease consensus. Finally, we examine whether these effects differ across revenues and expenses and find that earnings announcements decrease consensus for expenses much more than that for revenues. We also document that both voluntary disclosures increase consensus for revenue expectations, but have differing effects on expense expectations. Our study reconciles disparate results from prior research and extends our understanding of how earnings announcements affect firms’ information environments.