Earnings News Research Articles

The Incremental Value Relevance of Media Coverage of Earnings Announcements: Evidence from the Trading of Short Sellers

SYNOPSISWe investigate the relation between media coverage and the trading behavior of short sellers around earnings announcements. Prior research provides conflicting evidence on the role of the media, with some studies finding that the media can impede the price discovery process. Our evidence indicates that short sellers increase their activity in line with the tone of media coverage around earnings announcements, after controlling for earnings news and other factors that affect relative levels of short selling. Furthermore, we show that information in the media successfully forecasts earnings information in the days leading up to the earnings announcement, and that short sellers trade in a manner consistent with information reflected in media coverage preceding the earnings announcement. Our findings are consistent with information contained in the media having value relevance, and suggest that the media may help to facilitate the price discovery process around the release of earnings.

The Informational Role of Investor Relations: Evidence from the Debt Market

ABSTRACTWe explore the role of investor relations (IR) in debt markets. Using earnings announcements as a laboratory, we examine whether, when, and to what extent IR departments help credit investors assimilate information. We find that the presence of IR decreases (increases) the negative (positive) impact on CDS spreads stemming from bad (good) earnings news, suggesting that IR efforts improve information precision and reduce transparency risk. Cross-sectional analyses suggest that IR matters more when uncertainty is high and creditors are concerned about the credit risk implications of firm performance. We also find that IR firms receive higher credit ratings and fewer covenants when issuing bonds, and CDS markets react less negatively when IR firms' bond ratings are downgraded below investment grade. Because firms choose their IR activities, we show that our inferences are robust to multiple methods of addressing endogeneity. Overall, we find that IR departments are influential in debt markets.

Political Bias in the Media's Coverage of Firms' Earnings Announcements

ABSTRACT This study examines whether firms' political activism induces bias in the media coverage of earnings announcements and how such coverage impacts markets. We infer firm political ideology based on employee political contributions and identify firm and manager characteristics associated with distinct ideologies. We find that media outlets negatively slant their coverage of earnings announcements when the political leanings of the outlet are incongruent with the political ideology of the firm. Consistent with slanted coverage affecting market outcomes, we provide evidence that the price reaction to good (bad) earnings news is decreasing (increasing) in the percent of incongruent media outlets covering the earnings announcement. In addition, trading volume and returns volatility are decreasing for good earnings news with the percent of incongruent media outlets. Our results suggest that the prevalent bias across some media outlets in their coverage of political news also affects their coverage of corporate financial events. JEL Classifications: G14; L82; M41.

The Information Role of the Media in Earnings News

AbstractI reexamine whether media articles with substantive editorial content inform the market's reaction to firms' earnings news. Using variation in earnings announcement coverage because of restructuring at The Wall Street Journal (WSJ), my analyses suggest that WSJ earnings articles improve price discovery and increase trading volume at S&P 500 earnings announcements. Additionally, textual analysis suggests media articles that differ more from the firm's earnings release increase trading volume, and that the differences speed up (slow down) price discovery when they corroborate (contradict) the tone of the firm's news. Such high difference articles are slightly longer, are more readable and specific, include more references to the industry and economy, repeat less “stale” news published in previous WSJ articles, and quote more investor and expert sources. Overall, my paper contributes to research on the role of the media in earnings news by providing evidence that journalists' editorial content helps investors understand firms' earnings, instead of simply entertaining or increasing awareness.

Short‐Term Institutions, Analyst Recommendations, and Mispricing: The Role of Higher Order Beliefs

ABSTRACTWe document that stocks that have optimistic (pessimistic) consensus recommendations and are currently held by many short‐term institutions exhibit large stock‐return reversals: Their large past outperformance (underperformance) is followed by large negative (positive) future alphas. The predictable return reversals originate from overreaction to past recommendation releases and the correction of these overreactions around future releases. Results are stronger when earnings news is released and at firms with higher fundamental uncertainty. Further, firms with more short‐term institutions show stronger announcement returns and price drift after recommendation changes. Our results are consistent with models of higher order beliefs where short‐term institutions coordinate trading around public signals.

Active Funds and Bundled News

ABSTRACT We use trade-level data to examine the role of actively managed funds (AMFs) in earnings news dissemination. We find that AMFs are drawn to, and participate disproportionately more in, earnings announcements (EAs) that include bundled managerial guidance. When the two pieces of news are directionally inconsistent, AMFs trade in the direction of future guidance rather than current earnings. AMFs exhibit an ability to discern, and adapt their trading to, the bias in bundled guidance. While AMF trades at EAs are generally more profitable than their non-EA trades, this result reverses when guidance bias is extreme. Overall, we find that increased AMF trading during EAs leads to faster price adjustment. Collectively, these findings suggest that AMFs are sophisticated processors of bundled earnings news, and their trading generally improves market price discovery. JEL Classifications: G12; G14; G23; M41.

Credit rating, post‐earnings‐announcement drift, and arbitrage from transient institutions

AbstractThis study first establishes a robust link between credit rating and post‐earnings‐announcement drift (PEAD). I find strong evidence that PEAD is more salient for firms with low credit ratings. This finding is consistent with the notion that investors are prone to underreact to earnings news from low credit rating firms that are characterized by high uncertainty of asset fundamentals. The association between credit rating and PEAD is not driven by traditional information uncertainty proxies such as earnings volatility, cash flow volatility, accruals quality, firm age, idiosyncratic volatility, and analyst forecast dispersion. I further investigate whether transient institutions exploit the differential of PEAD among different rated firms in their arbitrage trades. The results reveal that transient institutions tend to focus their arbitrage on low credit rating firms. However, the existence and concentration of PEAD in low credit rating firms suggest that transient institutions fail to arbitrage away PEAD among low‐rated firms and that the arbitrage strategy is riskier than expected by the transient institutions. This in turn implies that estimation risk associated with pricing the earnings news of low‐rated firms plays a substantive role in forming the strong PEAD of these firms.

Sleep Disruption and Investor Processing of Earnings News: Evidence from Daylight Saving Time Advances

Despite extensive evidence on the effects of psychological and behavioral factors on investors’ processing of accounting information, little is known about how physiological factors affect the investor response to accounting disclosures. Research in neuroscience suggests that sleep disruptions can have profound physiological effects that impair cognition. Motivated by this evidence, we use “spring forward” Daylight Saving Time (DST) phase advances, which have been shown to inhibit cognitive function by disrupting the human sleep cycle and circadian rhythm, to examine the effect of sleep disruption on investors’ reactions to earnings news. We find consistent evidence of a muted reaction to earnings news released during the week following a DST advance. We also find that this effect is stronger when investors are more likely to be trading on earnings news. We find no evidence of a decrease in EDGAR downloads or media attention during this period, suggesting that DST advances affect investors’ information integration, rather than information acquisition. Our inferences are strengthened through a placebo test performed during the previous (i.e., pre-2007) DST phasing regime, and through alternative design choices and robustness tests. Overall, our findings suggest that sleep disruptions affect investors’ ability to integrate value-relevant earnings news into their trading decisions. Our study provides insight into the costs of sleep inadequacy, which has been declared a public health epidemic and is prevalent among professional investors, and informs ongoing policy debates regarding the abolishment of DST phasing.

“Stiff Business Headwinds and Uncharted Economic Waters”: The Use of Euphemisms in Earnings Conference Calls

This paper studies whether euphemisms obfuscate the content of earnings conference calls and cause investors to underreact. I argue that managers’ use of euphemisms can alleviate the impact of bad news and delay the market reaction to adverse information. Using a dictionary of corporate euphemisms, I find that their use by managers—but not by analysts—is negatively associated with both immediate and future abnormal returns, and their frequency moderates the negative market reaction to bad earnings news. Finally, stock underreaction is more pronounced on busy earnings announcement dates, when investor attention is distracted. This paper was accepted by Brian Bushee, accounting.

Does CSR Engender Trust? Evidence From Investor Reactions to Corporate Disclosures

We investigate whether a firm's corporate social responsibility (CSR) activities engender investor trust. Motivated by the observation that investor trust facilitates greater informational price efficiency, we address our question by examining the relation between CSR and three dimensions of stock price discovery: (1) the speed with which stock prices reflect earnings news, (2) the level of investor uncertainty around earnings announcements, and (3) earnings response coefficients. We find robust evidence that CSR enhances investor trust in firms. Specifically, we find that firms with more CSR enjoy faster incorporation of earnings news into stock prices, lower investor uncertainty around earnings announcements, and higher earnings response coefficients. Using a regression discontinuity design, we identify the causal effect of CSR on the speed with which stock prices reflect earnings news. Our inferences are robust to controls for characteristics of reported earnings and firms' information environment, as well as alternative measures of CSR.

Former investors and long-horizon price drifts in response to earnings news

Former investors and long-horizon price drifts in response to earnings news

Disproportionate Insider Control and the Informativeness of Stock Returns about Future Earnings

We test whether agency conflicts generated by the divergence between insider voting rights and cash flow rights (i.e., disproportionate insider control) within dual-class firms reduce the informativeness of stock returns about future earnings. We find that the future earnings response coefficient (FERC), which measures the extent to which current period returns incorporate future earnings news, is decreasing in disproportionate insider control, but the negative relation between disproportionate insider control and the FERC is weaker when institutional ownership is high and when managers provide more disclosure (i.e., greater disaggregation in mandatory reports, voluntary management guidance, and voluntary Form 8-K filings). Collectively, our findings reveal that although agency conflicts inherent in dual-class firms weaken the information environment, bonding and monitoring achieved via more disclosure and a more sophisticated investor base can help to alleviate agency problems arising from disproportionate insider control.

Does mandatory short selling disclosure lead to investor herding behavior?

In this paper, we test two competing hypotheses for the clustering of short sale disclosure in the UK: herding- and information-based trading. We find evidence mainly consistent with investor herding behavior rather than with independent information-based trading. Short sale disclosure occurs with similar frequency across the pre-earnings announcement, post-earnings announcement, and no-information windows, suggesting that information shocks related to firm fundamentals are not a major factor of short sale disclosure clustering. More importantly, the clustering of short sale disclosure does not vary significantly between good and bad earnings news. Finally, we find that firm-level short interest exhibits a much smaller reversal for disclosure stocks than for matched non-disclosure stocks with similar prevailing short interest, a result consistent with the idea that the disclosure of short positions induces investor herding behavior and therefore makes short interest more persistent.

Corporate In-house Human Capital Investments in Accounting

In this study, we provide large-sample evidence on how corporate in-house human capital investments in accounting affect earnings management. We construct a dataset of more than 411,000 individual-years of corporate accountants between 2009 and 2015 and measure firms’ accounting human capital using the proportion of their accountants with Big N work experience or a CPA designation. We find that firms with higher accounting human capital have a lower probability of accounting irregularities, lower discretionary accruals, better internal control quality, and fewer unintentional accounting errors. The results hold when we control for potential endogeneity by using the staggered adoption of the CPA mobility law and the number of top accounting undergraduate programs near the firm as instrumental variables for accounting human capital. We further find that firms with higher accounting human capital exhibit stronger market reactions to earnings news and pay lower audit fees, confirming that external stakeholders perceive these firms as having better financial reporting quality.

Social Networks and Market Reactions to Earnings News

Using social network data from Facebook, we show that earnings announcements made by firms located in counties with higher investor social network centrality attract more attention from both retail and institutional investors. For such firms, the immediate price and volume reactions to earnings announcements are stronger, and post-announcement drift is weaker. Such firms have lower post-announcement persistence of return volatility but higher persistence in investor attention and trading volume. These effects are stronger for small firms, firms with poor analyst and media coverage, and for stocks with salient returns. Our evidence suggests a dual role of social networks---they facilitate the incorporation of public information into prices, but also trigger persistent excessive trading.

Cross-Predictability of Earnings and Stock Returns: A Latent Factor Approach

I propose a new method, three-pass regression filter developed by Kelly and Pruitt (2015), to predict non-announcing firms’ earnings news using the cross-section of all available early announcers’ earnings news, the number of which can be as large as thousands. The method assumes a set of common latent factors driving the earnings news of non-announcing firms and early announcers and thus efficiently reduces the dimension of announced earnings. Empirical tests show that the extracted measure strongly predicts the earnings surprise and the earnings announcement return with both statistical and economic significance. A long-short trading strategy based on the extracted information realizes a 10% value-weighted alpha annually, indicating a delayed reaction of investors. The return predictability is stronger for small firms or firms with less investor attention. Controlling a series of documented information channels has little impact on the predictive power of this extracted measure.

Credit Rating, Post-Earnings-Announcement-Drift, and Arbitrage

This study first establishes a robust link between credit rating and post-earnings-announcement drift (PEAD). I find strong evidence that PEAD is more salient for firms with low credit ratings. This finding is consistent with the notion that investors are prone to underreact to earnings news from low-credit-rating firms that are characterized by high uncertainty of asset fundamentals. The association between credit rating and PEAD is not driven by traditional information uncertainty proxies such as earnings volatility, cash flow volatility, accrual quality, firm age, idiosyncratic volatility, and analyst forecast dispersion. I further investigate whether transient institutions exploit the differential of PEAD among different rated firms in their arbitrage trades. The results reveal that transient institutions tend to focus their arbitrage on low-credit-rating firms. However, the existence and concentration of PEAD in low-credit-rating firms suggest that transient institutions fail to arbitrage away PEAD among low-rated firms and that the arbitrage strategy is riskier than expected by the transient institutions. This in turn implies that estimation risk associated with pricing the earnings news of low-rated firms plays a substantive role in forming the strong PEAD of these firms.

Analyst talent, information, and insider trading

We examine 1984–2018 data and show that the talent or ability of sell-side financial analysts affects a covered firm's information environment—more so than the simple number of analysts covering a firm. We find that while analysts in general produce market and industry-level information, high-ability analysts contribute more firm-specific information. Firms covered by high-ability analysts experience significantly less insider trading prior to positive earnings news. Results only reside in opportunistic (not routine) trades. When an analyst initiates (terminates) coverage we find decreased (increased) subsequent insider trading. Both changes are primarily driven by analyst talent. Analyst ability also negatively relates to insider trading profitability.

The Effect of Institutional Ownership on the Timing of Earnings Announcements: Evidence from the Russell Index Inclusion

Using the annual Russell 1000/2000 index reconstitution as an exogenous shock to institutional ownership (IO), I examine the effect of IO on firms’ decisions regarding the time of day to announce earnings. I argue that firms with high IO strategically choose to announce earnings after hours to facilitate post-announcement price discovery and reduce volatility because the after-hours period is largely dominated by sophisticated institutional investors. I find that firms with greater IO are more likely to announce earnings during after-market sessions (i.e., after hours after the market closes), but not during premarket sessions (i.e., after hours before the market opens). My analysis further shows that transient IO has a stronger influence on the likelihood of after-market announcements relative to quasi-indexer or dedicated institutional holdings and that firms with high IO are even more likely to announce during after-market sessions when firms have bad earnings news or when earnings include large transitory items. Lastly, I find that announcing earnings during after-market sessions indeed facilitates post-announcement price discovery and reduces volatility for firms with high IO. Collectively, my findings suggest that IO is a significant factor in firms’ disclosure timing decisions and that the timing of disclosures affects price discovery and volatility.

OCVID-19 Lockdown and Market Reaction to Earnings News

We examine the influence of mobility on the stock market reaction around earnings announcements during the COVID-19 pandemic. The pandemic has led to abrupt implementation of stay-at-home mandatory restrictions and social distancing requirements all around the world, resulting in the collapse of face-to-face interactions on a large scale. Using Google’s Community Mobility Reports to obtain daily, county-level mobility of U.S. residents, we find that firms located in counties with higher mobility experience stronger immediate price responses during earnings announcements and weaker post-announcement drift, suggesting that COVID-19 restrictions dampen price discovery in financial markets. We also show that investor attention is a potential mechanism by which mobility affects the market reaction. Together, our study finds empirical support for the importance of face-to-face interactions in facilitating stock market information.