Quarterly Earnings Announcements Research Articles

Stock Splits Puzzle: An Additional Answer From Pre‐Split Earnings Announcements

ABSTRACTIf stock splits are used by managers to convey private information to the public, we hypothesize that the information content of splits should be related to the information managers reveal during quarterly earnings announcements. Supporting this hypothesis, we find that post‐split stock returns and operating earnings growth are positively correlated with the 5‐day returns around the last earnings announcement prior to the splits. This relationship holds even after controlling for different characteristics, including size, book‐to‐market, and momentum. These findings add new evidence to the rich literature on the signaling hypothesis regarding the motivation behind this corporate event.

The effect of ASC 606 adoption on value relevance of revenues: Early evidence

This study examines the effect of adopting the principle-based revenue recognition standard, i.e., ASC 606, on the value relevance of reported revenues. We hand-collect data on the cumulative effects of ASC 606 adoption on retained earnings to identify materially impacted firms. We find that, compared to firms not materially impacted by ASC 606 adoption, the value relevance of reported revenues has improved for firms materially impacted based on long-window tests, while the informativeness of reported revenues has not improved for firms materially impacted based on short-window tests around quarterly earnings announcements. We also find that analysts' revenue forecast revisions have increased incrementally for firms materially impacted by ASC 606 adoption. Overall, our results suggest that ASC 606 adoption has generally increased the value relevance and informativeness of reported revenues.

IRS Enforcement and Voluntary Tax Disclosure

ABSTRACT Although voluntary tax disclosures can improve firms’ information environments and reduce financial statement users’ costs of processing complex tax information, they can also inform tax authorities about tax avoidance strategies. This study explores the content of voluntary tax disclosures during quarterly earnings announcements and conference calls to examine the effect of IRS enforcement on managers’ voluntary tax disclosure decisions. We estimate a negative relation between IRS enforcement and voluntary tax disclosures that is concentrated in the subset of firms with high levels of tax avoidance. These results are consistent with managers having concerns about the potential costs of voluntary disclosures to tax authorities. In supplemental analysis, we find results consistent with voluntary tax disclosures benefiting analysts, but at the cost of increasing IRS attention. Collectively, our results suggest an unintended negative effect of IRS enforcement on the information environment. Data Availability: Data are available from the sources cited in the text. JEL Classifications: H25; M41; M48.

Do psychological factors exert greater influence on investment decisions than physiological factors? Evidence from Borsa Istanbul

We investigate the impact of Ramadan, the Holy month of fasting, on the phenomenon of post-earnings announcement drift (PEAD) in Borsa Istanbul. Utilizing quarterly earnings announcements and employing both the analyst forecast method and time series forecast method as surprise measures, our study spans the earnings period from the first quarter of 2007 to the last quarter of 2018. Our objective is to bridge the gap between studies highlighting the negative impacts of physiological factors and the positive impacts of psychological factors on economic decision-making. Given the anticipated opposing effects of physiological and psychological factors on PEAD during Ramadan, our findings offer a unique opportunity to compare the influences of physiology and psychology on investment decisions. Contrary to the expected positive impact resulting from physiological factors causing attention deficit, our research reveals that earnings announcements made during Ramadan exhibit, on average, a 16–25% lower drift in the subsequent 60-day period, depending on the method used. We attribute this unexpected outcome to the dominance of psychological factors, such as heightened sentiment, self-awareness, and spirituality, over physiological factors. This finding holds significance for policymakers, as activities that may seem to have a harmful impact on the economy due to visible physiological or physical factors can unexpectedly yield positive effects due to less tangible psychological factors. Additionally, our results hold importance for investors, as a hedge strategy using earnings surprises results in a negative return if the announcements are made during Ramadan. Our findings remain robust across different measures of PEAD and various intensities of physiological factors.

Curbing Enthusiasm: Media Sentiment and the Disciplining Role of Quarterly Earnings Announcements

ABSTRACT A longstanding literature suggests that earnings provide the market with relevant information about firm performance, but one often overlooked benefit is their role in disciplining market expectations. This study examines the role of earnings announcements in constraining potential mispricing associated with firm-specific media sentiment. We show that media sentiment-driven quarterly returns (orthogonal to risk factors and fundamental news) largely reverse when public earnings are released. Our results suggest that quarterly earnings announcements play an important role in reducing media sentiment-related mispricing. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G14; L82; M41.

A Study on Impact of Earnings Announcements on Share Prices in Indian Stock Market

We made an attempt to examine the stock prices response to quarterly earnings announcements in Indian stock market. To test the market efficiency, the event study methodology is applied and the abnormal returns are measured using the market model method. We have included NSE nifty 500 companies as sample. We observed that the majority of days during the prior to and post-announcement periods, the Abnormal returns are positive and significant. That implies that investors may experience unusual gains as a result of earnings news. So, we came to the conclusion that the Indian stock market is inefficient at the semi-strong level.

Stock Prices Reactions to Earnings Announcement Released During Trading versus Non-Trading Hours

The study has examined the stock prices reactions to quarterly earnings announcements released during trading versus non-trading hours. An event study method is applied to test whether the Indian stock market is semi-efficient. The NSE Nifty 500 companies are included in our sample. The sales, profit, and EPS figures from the current year are compared to similar quarters from the prior year to determine earnings changes. According to the study, the market's reaction to the announcements both during and non- trading hours was similar. We found that Firms generally released positive earnings changes during trading hours and negative earnings changes outside of regular trading hours. An empirical examination of CARs for multi-day event windows indicates there is market inefficiency and that there is a delayed price reactions.

Insider trading, future earnings, and post-earnings announcement drift

This paper examines the association between insider trading prior to quarterly earnings announcements and the magnitude of the post-earnings announcement drift (PEAD). We conjecture and find that insider trades reflect insiders’ private information about the persistence of earnings news. Thus, insider trades can help investors better understand and incorporate the time-series properties of quarterly earnings into stock prices in a timely and unbiased manner, thereby mitigating PEAD. As predicted, PEAD is significantly lower when earnings announcements are preceded by insider trading. The reduction in PEAD is driven by contradictory insider trades (i.e., net buys before large negative earnings news or net sells before large positive earnings news) and is more pronounced in the presence of more sophisticated market participants. Consistent with investors extracting and trading on insiders’ private information, pre-announcement insider trading is associated with smaller market reactions to future earnings news in each of the four subsequent quarters. Overall, our findings indicate insider trading contributes to stock price efficiency by conveying insiders’ private information about future earnings and especially the persistence of earnings news.

Responses of investors to earnings announcement: does the type of ownership holdings in banks matter?

PurposeThis study examines the influence of the ownership structure of banks on investors' behavior by dissecting the investors' response to news regarding performance indicators in private and government-owned banks.Design/methodology/approachThe event study methodology is used for the analysis. The data for 35 banks (out of 38), listed on the National Stock Exchange (NSE) for a duration of 230 months (January 2001 to February 2020) is collected. A set of cross-sectional regression analyses is done to identify variables influencing the returns under differential circumstances.FindingsPrivate banks seem to display a sharper response to negative changes in earnings, while government-owned banks show a more robust reaction to a positive change. The contrast is seen in the variables, having a bearing on the abnormal returns After controlling for a set of factors, the regression analysis shows the ownership structure may not matter on abnormal returns (on event day), the factors such as a change in quarterly earnings, firm-size and three-year average-sales growth influence the positive and negative changes in abnormal returns of government banks, and predictability for private banks is found to be poor regarding selected indicators.Originality/valueThe study evaluates the role of ownership structure on the heterogeneity in investors' responses to the financial performance of banks, thereby assisting in designing strategies to ensure the optimal outcome around the quarterly earnings announcements.

The Difference Between Conditional and Unconditional Insider Silence Effect: Evidence from China

Abstract When the litigation risk is higher, future stock returns are significantly lower following unconditional insider silence (no trade behavior during the last year) than following insider sales [5]. Specifically, Hong and Li [7] define the silence that routine-based insiders strategically choose as conditional insider silence and find that conditional insider silence following routine sell (buy) results in positive (negative) future return. In this paper, we examine whether there are different between the conditional and unconditional insider silence effects in the Chinese stock market. We find that the unconditional insider silence effect is greater than the conditional insider silence effect. Moreover, the firm would have positive abnormal compensation after quarterly earnings announcement under unconditional insider silence. We do not have enough evidence to support that the conditional (unconditional) insider silence effect is larger for companies with good corporate governance than for companies with poor corporate governance. Empirical results show that there are no significant difference between CEO and non-CEO’s conditional and unconditional insider silence effects. JEL classification numbers: G11, G14, G34. Keywords: Insider silence, Earnings announcement, Corporate governance, CEO.

Pengumuman Laba Kuartalan dan Respon Investor saat Pandemi Covid-19 di Indonesia: Sebuah Studi Peristiwa

This research aims to examine and prove empirically the effect of the announcement of quarterly earnings information during the Covid-19 pandemic on investor responses by using event studies. The dependent variable in this study is the investor's response as measured by cumulative abnormal return (CAR). The observation window used in this study was 7 days, namely three days before the announcement and three days after the announcement. The independent variable is the announcement of quarterly earnings as measured by unexpected earnings (EU). This study also examines the effect of changes in quarterly income, type of industry, and growth in Covid-19 cases as control variables on investor response. The sample in this study was 2,212 which were determined using the purposive sampling method. The results of the study prove that the announcement of quarterly earnings has a statistically significant effect on investor responses in several windows, changes in revenue have no effect on investor responses for all windows used, only in the windows t0;t2 CAR for financial and non-financial companies is different and significant. statistically, and the growth of covid cases was influential and statistically significant for several windows.

Responses in divergence of opinion to earnings announcements: evidence from American depository receipts

PurposeThe purpose of this paper is to investigate the relationship between investors' divergence of opinions and the asset prices of foreign stocks and also examine the effect of home market country-level factors on the influence of divergency of opinions on stock price.Design/methodology/approachThe authors employ panel data estimation with fixed effects to examine the host market response in divergent opinions to the earnings announcements. The paper uses the American Depositary Receipts (ADRs) of 42 countries from 1985 to 2011.FindingsThe authors find a negative relationship between differences of opinions and excess quarterly earnings announcement returns, and investors do process information asymmetrically based on good and bad earnings shocks. In addition, the authors find the negative relationship between divergent opinions and excess earnings announcement returns in ADRs is more pronounced in countries with short-sales restrictions, while other home-market country-level factors – the enforcement of insider trading law, legal origin, investor protection and rating on accounting standard – do not influence the relationship between investors' divergency of opinion and stock returns.Originality/valueThis paper is among the first to bring asymmetric effects on convergence in Miller framework and enhance the understanding of price convergence documented in Miller (1977). In addition, this study incorporates home-market country-level factors in explaining the relationship between investors' divergency of opinions and stock returns.

Net Buying Pressure and Informed Trading in the Options Market: Evidence from Earnings Announcements

By employing the modified net buying pressure as a measure of informed option trading, this study tested whether option trading around quarterly earnings announcements is either directionally motivated and/or volatility motivated. We found evidence that is consistent with the idea that option investors have private information prior to positive earnings announcements and use at-the-money options to exploit their informational advantage. In the post-event period, however, informed option investors trade by using deep-out-of-the-money and out-of-the-money options. We documented limited evidence on the volatility-motivated option trading, and our results suggest that this type of option trading could be motivated by hedging purposes only.

Market reaction to quantitative and qualitative order backlog disclosures

Analysts and practitioners have long sought information on order backlog (OB) as indicators of future sales, and in turn, of future earnings and stock returns. OB disclosures, though mandatory for annual reports, are voluntarily included in some quarterly reports and are sometimes presented only in textual narration. Given that the required annual OB data may be partially preempted by voluntary quarterly disclosures, we test whether quarterly OB disclosures are used by market participants, especially the qualitative OB disclosures, which were not tested before. We show that OB growth is helpful in forecasting future sales and thus assign a positive tone to qualitative OB disclosures that indicate OB growth. Both quarterly quantitative OB increases and positive qualitative tone are associated with immediate and drift returns, after controlling for other disclosures during the quarterly earnings announcements and variables that affect voluntary disclosure. Our results indicate that regulators may need to consider requiring OB disclosures in quarterly intervals when OB is sufficiently material.

Bundled Earnings Guidance and Analysts' Forecast Revisions*

ABSTRACTBundling managerial earnings guidance with quarterly earnings announcements (EAs) has become an increasingly common practice. This study investigates the impact of bundled guidance on analysts' forecast revisions. Our findings indicate that analysts respond more to bundled guidance than non‐bundled guidance. This effect increases with analysts' time pressure and cognitive constraints around the EA. Analysts' revisions also incorporate more of the bundled management guidance when accompanied by additional information, such as conference calls. We further find that analysts revise their forecasts more quickly following bundled guidance than non‐bundled guidance. Together, these findings are consistent with the notion that analysts place more weight on bundled guidance than on non‐bundled guidance in their forecast revisions as bundled guidance facilities analysts' timely forecast revisions following EAs. Finally, we find that analysts' forecast revisions following bundled guidance generate significant market reactions. Our findings enhance our understanding of analysts' information processing and shed light on why bundling can be an effective guidance strategy.

Naïve Earnings Growth Extrapolation

Exploiting the unique financial reporting format in China, we document that stocks with the strongest past year-to-date earnings growth experience a significant price run-up of 1.2% during the five trading days before their quarterly earnings announcements and a significant return reversal of -1.35% in the five trading days afterward. This inverted V-shaped pattern on cumulative return spreads is more pronounced among smaller firms with lower institutional ownership and fewer analyst coverage, and it is less pronounced among foreign B-share. Consistent with investor excess demand driving the price run-up, we find retail investor sentiment and buy-sell order imbalance rise ahead of earnings announcements for firms with high past earnings growth. Our findings support models of fundamental extrapolation and suggest investors naively extrapolate the salient but not-so-informative year-to-date earnings growth when forming expectations about the upcoming earnings.

The effect of Earnings Co-movement on Quarterly Earnings Response Coefficient

The effect of Earnings Co-movement on Quarterly Earnings Response Coefficient

Analyst reputation and management earnings forecasts

Prior studies show that analysts with high reputation are influential in the market. This paper examines whether managers consider analyst reputation in shaping their voluntary disclosure strategy. Using Institutional Investor magazine’s All-American (AA) rankings as a proxy for analyst reputation, we find that the coverage of AA analysts is positively associated with the likelihood of quarterly management earnings forecasts (MEFs). We also find that AA analysts’ forecast optimism is more positively associated with the likelihood of MEFs than non-AA analysts’ forecast optimism when the firm is covered by AA analysts. Analyses based on AA analyst coverage changes and AA status changes confirm the relation between analyst reputation and MEFs. We further find that analyst reputation influences other MEF properties, such as forecast news, bias, and revisions, and that our results are robust to alternative measures of analyst reputation. Further analyses show that market reactions at quarterly earnings announcements are more positive (negative) when firms meet/beat (miss) AA analysts’ forecasts than when firms meet/beat (miss) non-AA analysts’ forecasts. Collectively, our findings suggest that managers strategically provide voluntary forecasts by taking into account the reputation of individual analysts following their firms.

Month-End Reporting, Cash-Flow News, and Asset Pricing

We show that the stock market regularly and systematically receives information about company fundamentals through month-end reporting, even before the quarterly earnings announcement. Such cash-flow news concentrates at the beginning of a month and affects company announcements, analyst revisions, and stock returns. Using this time variation in cash-flow news, we show evidence supporting cash-flow news being more persistent than discount-rate news. Individual stock returns exhibit a post-monthly-announcement drift. Time series market momentum exists only when conditioning on past first-half month return, and is stronger when the past market-wide earnings surprise is bigger.

Post-earnings announcement drift: Evidence from Turkey

We study the post-earnings announcement drift (PEAD) anomaly and its determinants in Borsa Istanbul using quarterly earnings announcements and three different surprise measures. We find evidence supportive of the existence of PEAD in the Turkish stock market. Sorting stocks each quarter into three quantiles according to an earnings surprise measure based on past earnings, we find both statistically and economically significant difference of 2.9% in average cumulative abnormal return between high earnings surprise firms and low earnings surprise firms in the 60 days following the announcement. The hedge returns obtained using analyst forecast based surprise measure as well earnings announcement return based surprise measure are also significant at 2.9% and 2.2% respectively. The positive relation between post-announcement abnormal returns and the surprise in earnings remain significant after controlling for an extensive list of explanatory variables. Among these explanatory variables, we find that firm size has a negative impact on the magnitude of this positive association between surprise and subsequent equity returns. Finally, using two separate approaches we show that multifactor models fail to explain the return differentials following earnings announcements.