The Inferential Value of Quarterly Earnings Announcements Relative to Other Sources of Information

Abstract

This paper evaluates the prevalent view that accounting information competes with, but also disciplines, information from other sources by examining the inferential value to investors of accounting versus non-accounting information. Inferential value is defined as the ability of the capital markets to draw the correct inference from the information signals regarding future firm performance. Both average quarterly accounting rate of return on equity and excess stock returns are used as measures of firm performance. The findings indicate that a market-normalized accounting rate of return derived from stock prices and excess returns measured around earnings announcement dates are more highly correlated with changes in future firm performance than similar measures in the non-disclosure periods. The findings support the prevalent view that accounting information disciplines information from other sources.