Annual Earnings Announcements Research Articles

Regulated and unregulated insider trading around earnings announcements

This paper analyses insider trading behaviour around annual and interim earnings announcements during changing legislative environments in Sweden from 1980 to 2003. Using a unique data set, we are able to explore the nature of insider trading patterns from unregulated to strongly regulated insider trading markets. We find limited evidence of opportunistic insider trading. Insiders seem to be reluctant to sell stocks before positive earnings announcements. They also tend to time their trades in conjunction with an immediate post-announcement period, i.e. “safety trading”, which becomes more evident within stronger legislation environments. Some support for contrarian trading behaviour is also found.

Strategic timing of annual earnings announcements: evidence from an order-driven market

Using Spanish data, this paper examines, for the first time, the differences in the intraday response of an order-driven market to earnings announcements made during trading and non-trading hours. We show that the speed of reaction depends on timing of the announcement: for overnight (daytime) announcements, the improvement in liquidity is (not) immediate. This finding could explain why Spanish firms prefer to release the bad (good) earnings announcement in trading (non-trading) hours. This strategic timing differs from the traditional disclosure policy in American markets, suggesting that different microstructures may react differently to news releases and, consequently, drive the strategic timing of corporate disclosures.

The information content of earnings announcements in Denmark

PurposeThe purpose of this paper is to examine the reaction to earnings announcements in a small stock market.Design/methodology/approachThe paper uses the traditional event study method to examine the information content of annual earnings announcements in the small Danish stock market from 1999‐2004.FindingsThe paper finds abnormal volatility in the days surrounding the announcements, indicating that they contain relevant information for the stock market. The abnormal volatility persists several days after the announcement, suggesting that the information environment of this small stock market works to decrease the speed of adjustment. In addition to this sign of inefficiency, the paper finds significant positive abnormal returns accompanying the announcements. These results are robust across various methodologies. Surprisingly, the paper finds a positive correlation between the information content and predisclosure information. This contradicts previous studies, and it is interpreted as evidence of a low level of pre‐announcement information. Confirming the results of similar studies, the paper finds that unexpected earnings are best proxied using a model based on consensus analyst forecasts.Originality/valueThis paper contributes to the existing literature by analyzing the information content of earnings announcements in a small stock market with accounting standards that are congruent with the International Accounting Standards.

The timing of industry and firm earnings information in security prices: A re-evaluation

This paper re-evaluates evidence in Ayers and Freeman [Ayers, F., Freeman, R., 1997. Market assessment of industry and firm earnings information. Journal of Accounting and Economics 24, 205–218] suggesting that investors anticipate industry-wide components of earnings earlier than firm-specific components, and that post-earnings-announcement drift following annual earnings announcements is due primarily to firm-specific components of earnings. Our tests indicate that post-announcement drift is entirely attributable to coefficient bias due to measurement errors in the use of realized earnings changes as proxies for unexpected earnings. Also, coefficient differences in the market's anticipation of subsequent-year industry and firm-specific earnings become insignificant when we introduce suitable controls for non-linearity in the return/earnings relation.

Managerial Decisions on Annual Earnings Announcement Timing: Empirical Evidence from Regulation Fair Disclosure

Managerial Decisions on Annual Earnings Announcement Timing: Empirical Evidence from Regulation Fair Disclosure

Investor protection and the information content of annual earnings announcements: International evidence

We draw on the investor protection literature to identify structural factors in the financial reporting environment that are likely to explain cross-country differences in the information content of annual earnings announcements. Using data from over 50,000 annual earnings announcements in 26 countries, we find that annual earnings announcements are more informative in countries with higher quality earnings or better enforced insider trading laws, and that annual earnings announcements are less informative in countries with more frequent interim financial reporting. We also find that, on average, earnings announcements are more informative in countries with strong investor protection institutions.

The Effect of Annual Earnings Announcements on the Chinese Stock Markets

This paper examines the annual earnings announcement effect of the stock markets in China. The investigation is based on events analysis and carried out by modeling the daily changes of stock returns using the M-EGARCH approach, by testing the news effects of annual earnings announcement on the conditional mean of abnormal return and the variance of the returns. It is found that a higher than expected earnings announcement leads to a rise in the conditional mean of stock returns on days before the news announcement and a fall afterwards. The conditional volatility of the changes are significantly reduced by bigger absolute values of reported earnings before the news announcement and increased afterwards, supporting the rejection of semi-strong-form efficiency.

Firm Size and the Information Content of Annual Earnings Announcements: Australian Evidence

Abstract: We investigate the effect of firm size on the market's short‐window response to annual earnings announcements for a large sample of Australian listed companies. Our research design involves regressions of unexpected earnings against unexpected returns. Non‐linearity in the returns‐earnings relationship is incorporated and other factors known to affect the response to earnings announcements are controlled for. Contrary to prior US research, our results show that firm size has either no effect on the response to earnings announcements (3 day window) or the response is significantly stronger for larger firms (twenty‐one day window). The information content of earnings announcements is present across firm size categories but the nature of the response differs with firm size and context.

The Information Content of Earnings Announcements in Denmark

This paper uses the traditional event study method to examine the information content of annual Danish earnings announcements. Using data from 1999-2001 we find abnormal volatility in the days surrounding the earnings announcements, indicating that the announcements do in fact contain information that is relevant for the stock market. The results do not indicate that the Danish stock market is efficient. The abnormal volatility persists for up to 4 days after the announcement, while significant positive abnormal returns accompany the announcements. This conclusion is shown to be robust to the use of different trading frequency restrictions and existence of concurrent disclosures. Surprisingly, we find a positive relationship between abnormal returns and firm size. This contradicts the findings of previous studies, and indicates that small stock markets behave differently on this aspect. Confirming the results of similar studies in the US, we find that unexpected earnings are best proxied using a model based on consensus analyst forecasts. Finally, while the choice of return allocation procedure has little impact on the results, the treatment of data with respect to concurrent disclosures and trading frequency restrictions has an impact. This provides implications for the comparability of previous studies and methodology of future research.

Market Reaction to Annual Earnings Announcements: The Case of Euronext Paris

The aim of this paper is to examine market behaviour around the times of annual earnings announcements made in the Paris Bourse. Accordingly, we propose to study both the informational role of accounting numbers and the intraday speed of adjustment of stock prices to new information. Our sample is composed of 117 overnight announcements published among Reuters monitors during the period 2001-2003. For every date, the event is classified into one of three categories: good news, bad news or no news. This split was made by comparing the actual number to financial analysts' expectations. Our intraday analysis reveals several results. First, according to the thesis of Kim and Verrecchia (1994), the spread remains large short time after the release of unanticipated earnings announcements. During this period, spread widening is accompanied by an abnormal market activity. Second, abnormal returns earned by sophisticated investors dissipate within fifteen minutes. Next, Prices converge to equilibrium more quickly for good news than for bad news. Finally, we present evidence of price reversal thirty minutes following bad news announcements, as predicted by Ziebart (1998).

Dampak Earnings Reporting Lags Terhadap Koefisien Respon Laba

The objectives of the study are: (1) to analyze the mean difference of market reaction to semi-annual versus annual earnings announcement; (2) to analyze the mean difference of semi-annual versus annual ERC; and (3) to empirically investigate the impact of reporting lags on ERC. This study uses a time-series of 47-listed company on the JSX during 1992-2001. The sample was proportionally selected from 8 industries. This study uses the 10 years time-series on the equation 1 and 10 years pooled-time series on the equation 2. The t test on semi-annual versus annual abnormal return and ERC of equation 1 was used to test the hypotheses 1 and 2. Furthermore, multiple-regression analysis of equation 2 was used to test the hypotheses 3. The result of this study are as follows:(1) the investors respond indifferently of semi-annual and annual earnings announcement, but cumulatively the semi-annual abnormal return is larger relatively to the annual CAR; (2) semi-annual ERC is greater relatively to the annual ERC; (3) there is negative direction of length of reporting lags on the ERC; and (4) based on sensitivity analysis, the determinants of ERC are earnings persistence, earnings predictability, growth opportunity, leverage and industrial effect. The systematic risk and firm size was inconsistent to the previous studies. The reason is probably caused by the structural change bias during 1997-1998 period. The study extent the ERC issues and contribute to BAPEPAM, mainly to the decrees No. 17/PM/2002 that revised the decrees No. 80/PM/1996. This new decrees shorten the reporting lags of semi-annual and annual financial statement to BAPEPAM. Based on the finding that JSX’s investors respond statistically insignificant the signal of early (lately) issuance of financial statements, it (however) supports the BAPEPAM to gradually shorten the new reporting lags regulation. It is suggested to anticipate the global capital market that requires the real-time and more relevance informations.

Market segmentation and information values of earnings announcements: Some empirical evidence from an event study on the Chinese stock market

This paper investigates the trading activities of two distinct classes of shareholders, namely, the Chinese domestic investors and the foreign investors in the segmented Chinese A- and B-share markets, respectively. We conduct an event study on the annual earnings announcements based on two different accounting standards: International accounting standards (IAS) and PRC generally accepted accounting principles (PRC GAAP). The earnings announcements based on IAS and PRC GAAP are value relevant. The investors in the B-share market react to both the IAS and PRC GAAP earnings announcements, while the investors in the A-share market pay more attention to the PRC GAAP earnings reports. In the B-share market, positive abnormal returns are associated with positive earnings surprise and negative abnormal returns go with negative earnings surprise. We find preevent abnormal trading volumes without significant price changes for the A shares, which may be due to existing information in the A-share market prior to earnings announcements. The postevent abnormal trading volumes last for a longer period in the A-share market than in the B-share market.

Audit Qualification and Timing of Earnings Announcements: Evidence from China

This study extends the scope of timing research to China's emerging capital market by examining the effects of audit opinions and earnings surprises on the timeliness of annual earnings announcements, after controlling for firm size, the presence of losses, financial distress, auditor switches, and changes in the Chinese regulatory environment. Based on a sample of listed Chinese firms for 1995–1999, we observe that both audit opinions and earnings surprises have significant effects, as reported in Bamber et al. (1993). We also find a significant effect attributable to the magnitude of negative earnings surprises as shown by Begley and Fischer (1998). In addition, we document a significant interaction effect between audit opinions and earnings surprises. Positive earnings surprises with modified audit opinions are announced significantly later than unqualified negative earnings surprises.

When Is Bad News Really Bad News?

We examine whether the price response to bad and good earnings shocks changes as the relative level of the market changes. The study is based on a complete sample of annual earnings announcements during the period 1988 to 1998. The relative level of the market is based on the difference between the current market P/E and the average market P/E over the prior 12 months. We find that the stock price response to negative earnings surprises increases as the relative level of the market rises. Furthermore, the difference between bad news and good news earnings response coefficients rises with the market.

Implied Standard Deviations and Post‐earnings Announcement Volatility

This paper investigates volatility increases following annual earnings announcements. Standard deviations implied by options prices are used to show that announcements of bad news result in a lower volatility increase than those of good news, and delay the increase by a day. Reports that are difficult to interpret also delay the volatility increase. This delay is incremental to that caused by reporting bad news, although the effect of bad news on slowing down the reaction time is dominant. It is argued that the delays reflect market uncertainty about the implications of the news.

Mutual Fund Manager Forecasting Behavior

I examine publicly released annual earnings forecasts issued in conjunction with stock recommendations by mutual fund managers of actively managed open‐end mutual funds. I find that mutual fund manager annual earnings forecasts systematically overestimate the earnings number later disclosed at the annual earnings announcement. In further analyses, I attempt to distinguish between two explanations for this forecast bias: an untruthful reporting bias (market manipulation) and a truthful cognitive bias (optimism). These explanations generate different predictions about the timing of changes in fundholdings of forecasted securities between the forecast release and annual earnings announcement dates. I interpret my findings as more consistent with an optimism explanation for mutual fund manager annual forecast bias and less consistent with a market manipulation explanation for this bias. I am, however, unable to eliminate an unobservable selection bias either in the decision of the mutual fund manager to report a forecast publicly or in the media’s decision to publish that forecast as an explanation for my finding that mutual fund manager forecasts are biased.

A Profile of the Return-Suprise Relation

The relation of share prices to the information in annual earnings announcements is investigated by measuring return-surprise correlations across partitions of the distribution of earnings or earnings surprise. Correlations in each partition are compared to partitioned correlations from the normal distribution and reveal new insights into the return-surprise relation. In particular, a few extreme events in small firms and value stocks can have a disproportionate influence on estimates of the return-surprise relation. The largest losses and negative surprises are often accompanied by large positive returns during both announcement and pre-announcement periods, resulting in negative and non-normal return-surprise correlations. Large gains and positive surprises also tend to be accompanied by large positive returns, resulting in high and non-normal correlations. Small negative surprises are not highly correlated with return during announcement periods, but are reflected in pre-announcement returns. Although losses are less informative than gains over pre-announcement periods, losses (particularly small losses) are more informative than gains during earnings announcement periods.

Timeliness of corporate financial reporting in emerging capital markets: empirical evidence from the Zimbabwe Stock Exchange

This article reports on the results of an empirical investigation of the timeliness of annual reporting by 47 non-financial companies listed on the Zimbabwe Stock Exchange. It also reports on the factors that affect timely reporting by these companies. The results of a descriptive analysis indicate that 98% of the companies in the sample reported promptly to the public (i.e., submitted their audited annual reports to the Zimbabwe Stock Exchange by the regulatory deadline). A two-stage least squares regression identified company size, profitability and company age as statistically significant explanators of the differences in the timeliness of annual reports issued by the sample companies. No evidence was found to support the monitoring costs theory argument, which suggests that highly-geared companies are timely reporters. Furthermore, the empirical data indicate that audit reporting lead time is significantly associated with the timeliness with which sample companies release their preliminary annual earnings announcement, but not with the timeliness of their audited annual reports. Plausible explanations for these findings along with the limitations of the underlying research are provided.

Beaver (1968) Revisited: Has the Information Content of Annual Earnings Announcements Declined in the Past Three Decades?

In 1968, Beaver published his seminal paper on the information content of earnings announcements, establishing that both trading volume and return volatility increase at the time of earnings announcements. Thirty-some years after Beaver's study, concerns have been raised about a perceived degradation in the informativeness of earnings because of the increasing availability of timely non-accounting information and the increasing rate of technological innovation and change not reflected in the accounting system in a timely manner. In this paper we examine changes over the past thirty years in the information content of earnings using the two metrics from Beaver (1968): abnormal trading volume and volatility. In contrast to the conventional wisdom, we find no evidence of a decline in the informativeness of accounting information over the past thirty years, as measured by both abnormal trading volume and return volatility around quarterly earnings announcements. If anything, our results suggest an increase over time in the informativeness of quarterly earnings announcements. Variables reflecting changes in firm-specific factors account for a portion of the observed increase.

Do we really ‘know’ what we think we know? A case study of seminal research and its subsequent overgeneralization

We show that the community of accounting researchers has not fully appreciated the sensitivity of research conclusions to (necessarily) subjective research design choices, and that this failure has led to the subsequent overgeneralization of early evidence. Our analysis is based on a case study that examines the effects of two basic research design choices, and subsequent researchers' appreciation of the impact of those choices. To enhance our study's accessibility to a broad cross-section of the accounting research community, our case study focuses on an article that is covered in most accounting doctoral programs — the recipient of the second American Accounting Association “Seminal Contribution to Accounting Literature Award” — Beaver's 1968 article on the information content of annual earnings announcements [ Beaver, W. (1968). The information content of annual earnings announcements. Empirical research in accounting; selected studies, 1968. Supplement to Journal of Accounting Research, 6, 67–92.] Our analysis reveals that the research design choices in Beaver's study significantly affected the results. Beaver clearly explained these choices, and was careful in drawing inferences. Nevertheless, subsequent researchers interpreted Beaver's evidence too broadly. Our new empirical evidence suggests that the information content inference is much more fragile than is generally suspected. We also present citation analyses showing that, consistent with the Kuhnian view that adherents of a paradigm tend to ignore (later) anomalous evidence, subsequent researchers largely overlooked post-Beaver evidence that was inconsistent with the paradigm's interpretation of Beaver's results. The paper concludes with a brief consideration of how cognitive biases of individuals, combined with biases inherent in the review process and the academy in general, foster an environment where the placement of the first research bricks affect the whole wall. While the case study focuses on an archival empirical financial accounting study, consideration of the effects of subjective research design choices and the documented deficiencies in the interpretation of research are relevant to empirical accounting researchers in general and to critical theorists, as well. While accounting scholars ‘think we understand’ the impact of research design choices, the evidence presented here suggests that we have collectively failed to apply this understanding in practice. Such failure delays the acquisition of knowledge. This study provides a salient demonstration indicating that we must constantly remain on guard to recognize the subjective nature of research design choices, to consider the likely effects of those choices, and to be cautious in drawing generalizations.