Quarterly Earnings Announcements Research Articles

No Signal is Bad Signal: Analyst Silence after On-Site Visit

We study a unique Chinese dataset of equity analysts’ on-site visits to publicly listed companies. We find that analyst silence (no release of report from visit date to the next quarterly earnings announcement) contains information that negatively impacts both stock returns and earnings surprises. The information vacuum created by analyst silence affects market participants differentially, as institutional investors react to such hidden negative information more promptly than retail investors. Finally, we show that agency issues may cause analyst silence and strongly affect the negative impact associated with analyst silence.

How Important are Earnings Announcements as an Information Source?*

In a competitive information market, a single information source can only dominate other sources individually, not collectively. We explore whether earnings announcements constitute such a dominant source using Ball and Shivakumar's (2008) [How much new information is there in earnings?, Journal of Accounting Research, 2008, 46(5), pp. 975–1016] R 2 metric: the proportion of the variation in annual returns explained by the four quarterly earnings announcement returns. We find that the earnings announcement days' R 2 is 11% – higher than the corresponding R 2 of days with dividend announcements, management forecasts, preannouncements, and 10-K and 10-Q filings and their amendments, and comparable to that of the four days with the largest realised absolute returns in a year. Additional analysis reveals that earnings announcements convey extreme bad news as often as management forecasts and preannouncements; for any other type of news, earnings announcements are much more frequent. We conclude that earnings ...

The structure of information release and the factor structure of returns

We model how firms releasing information on different dates causes the CAPM to fail, requiring an additional factor based on the information structure to price assets. We exemplify this mechanism’s empirical relevance using quarterly earnings announcements, which cluster across months along size and book-to-market. Seventy percent of the alpha reduction from including SMB and HML occurs in the four main earnings announcement months. The information structure factor accounts for all of SMB and HML’s seasonal alpha reduction and one third of their overall alpha reduction. Controlling for size and book-to-market, exposures to SMB and HML vary with firms’ earnings announcement month.

Long-Term Event Study on Earnings Surprises and Practical Portfolio Construction

This study investigates the effect of quarterly earnings announcements for a large sample of US-listed companies in recent years (2008-2016). The research design involves regressions of total returns and residual returns on surprises, size, growth, accounting accruals, volume and announcement timing. Meanwhile, this study incorporates the effect of size and growth on the impact of earnings surprises into consideration. My results show the earnings and accounting accruals can be exploited to build an implementable portfolio, which has the annual return of 50.03% after hedging the beta, size, and growth.

The Market Reaction and Trading Behavior by Investor Types around Quarterly Earnings Announcements

The Market Reaction and Trading Behavior by Investor Types around Quarterly Earnings Announcements

Option Prices and Disclosure

In this paper, I develop a measure of the difference in the amount of information that investors expect a forthcoming disclosure to contain should it reveal good news versus bad news (the disclosure's asymmetry). I derive this measure from a model of option prices leading up to an asymmetric disclosure. The model shows that the disclosure's asymmetry can be captured using a weighted change in option-implied return skewness leading up to its release. This measure's ability to capture investors' prior beliefs regarding asymmetry is advantageous when studying ex-ante decisions including contracting and information acquisition choices. I implement the measure on a sample of large firms' quarterly earnings announcements, finding evidence that investors anticipate cross-sectional, but not time-series variation in earnings' asymmetry.

Can Short-Selling Alleviate the Underpricing?

This paper investigates whether short-selling facilitates arbitrage activity and mitigates the positive post-earnings announcement drift (PEAD), the well-known underpricing anomaly. Using the quarterly earnings announcement of the Korean Stock Exchange KOSPI200 composite stocks, we find that positive earnings stock in a difficult-to-short industry experiences larger and more persistent underpricing after earnings announcement than those in an easy-to-short industry; and that the observed larger underpricing in a difficult-to-short industry is associated with the short-sale constraint, not with their illiquidity or information inefficiency. Moreover, this inverse relation between the positive PEAD and its industry’s short-ability is stronger during the inactive equity linked warrant (ELW) trade period, thereby suggesting that short-selling alleviates the mispricing by facilitating arbitrage activities (not by the other channels); and ELW actually play roles as an alternative of short trade.

Opportunism as a firm and managerial trait: Predicting insider trading profits and misconduct

We show that opportunistic insiders can be identified through the profitability of their trades prior to quarterly earnings announcements (QEAs) and that opportunistic trading is associated with various kinds of firm or managerial misconduct. A value-weighted trading strategy based on (not necessarily pre-QEA) trades of opportunistic insiders earns monthly four-factor alphas of over 1%, which is much higher than in past insider trading literature and substantial and significant even on the short side. Firms with opportunistic insiders have higher levels of earnings management, restatements, US Securities and Exchange Commission enforcement actions, shareholder litigation, and executive compensation. These findings suggest that opportunism is a domain-general trait.

The information content of earnings announcements: new insights from intertemporal and cross-sectional behavior

This study examines the information content of quarterly earnings announcements, measured as the magnitude of stock price revision at earnings announcements relative to price revision at other times. We investigate whether quarterly earnings announcements are informative using a nonparametric approach and 1971–2011 sample period. The findings affirm prior evidence on earlier sample periods that significantly more information is conveyed to investors in the three days around earnings announcements than in randomly chosen three-day periods. Next, we examine the behavior of information content over our sample period and document four key findings. First, there is a dramatic increase in information content at earnings dates from 2001 onward. Second, the market reaction to loss firms is substantially less than that for profitable firms. Third, there is a significantly greater reaction to larger firms. Fourth, reaction at earnings dates is significantly increasing in analyst coverage, and once analyst coverage is controlled, the association with size becomes less significant.

The Tale of Silent Dogs: Do Stock Prices Fully Reflect the Implication of News Withholding?

Theory posits that investors can rationally infer the implications of strategic nondisclosure for firm value, pressuring managers to disclose information voluntarily. This study documents that the lack of an earnings guidance predicts an abnormal return of -41 basis points around the subsequent quarterly earnings announcement, suggesting that investors do not fully incorporate the implications of nonguidance. Further analyses demonstrate that limitations in price efficiency, driven by investors' limited attention and short‐selling constraints, explain the mispricing of nonguidance and are associated with less guidance issuance. Our results collectively highlight limited price efficiency as another friction when studying managers' strategic disclosure decisions.

How Does More Frequent Reporting Reduce Information Asymmetry?

In countries around the world, policymakers debate whether companies should report semiannually or quarterly. This study contributes to that debate by examining the mechanism behind the drop in information asymmetry that accompanies a switch to quarterly reporting. Using U.S. data, I show that Amihud (2002) illiquidity, a common information asymmetry proxy, grows by 10.7% over the intervening period between two quarterly earnings announcements. This growth occurs gradually throughout the entire period. A semiannual reporter that switches to quarterly reporting will cut this growth time in half by cutting each semiannual reporting period into two quarterly reporting periods. As a result, it will reduce information asymmetry in what would have been the second half of the semiannual reporting period. I confirm this in international settings, where I find that switching from semiannual to quarterly reporting reduces Amihud (2002) illiquidity by up to 5% in the second half of each semiannual period.

Accounting quality, information risk and the term structure of implied volatility around earnings announcements

We examine the association between accounting quality, which is used as a proxy for firm information risk, and the behavior of the term structure of implied option volatility around earnings announcements. By employing a large sample of US firms having options traded on their equity during 1996–2010, we find that lower (higher) accounting quality is significantly associated with stronger (weaker) changes in the steepness of the term structure of implied volatility curve around quarterly earnings announcements. This finding (which is robust to controls for business-stemming uncertainty regarding future firm performance) is consistent with a stronger differential of short vs. long-term uncertainty for higher information risk firms, indicating greater uncertainty on the future economic performance of poorer vs. stronger accounting quality firms. We also establish the trading implications of these findings by demonstrating a (profitable in-sample) self-financed option trading strategy that is based on the quality of the accounting information released on earnings announcement days.

An Evaluation of Earnings Announcementss Timing and Consistency with Subsequent Financial Statements

We utilize Compustat quarterly data and earnings announcement dates to study how the time from the end of firms’ quarters to the announcement of the firm’s earnings has varied, on average, during 2005-2015. In addition, we study how the advent of XBRL may have affected the timeliness of firms’ earnings announcements during the post-XBRL era (2012-2015) as compared to the per-XBRL era (2005-2008). In addition, we manually collect data from 2015 first, second, and third quarter 8-K earnings announcements and subsequent 10-Q quarterly financial statements filed on the SEC website. We then compare the data reported in the 8-K earnings announcements to the data reported in the subsequent 10-Q financial statements to assess the consistence between earnings announcements data and the corresponding financial statement data.

The Fail to Meet an Earnings Thresholds and Delay in Quarterly Earnings Announcements

The Fail to Meet an Earnings Thresholds and Delay in Quarterly Earnings Announcements

How important are earnings announcements in China?

PurposeThis paper tests the information efficiency of the Chinese stock market to judge if it contravenes the Fama (1965) efficient market hypothesis. Following China’s stock market reforms the market has grown in international importance, however many find information difficult to obtain and interpret.Design/methodology/approachThe relative importance of earnings announcements is quantified using cross-sectional regressions of calendar-year annual returns R_i on returns in the four quarterly earnings announcement windows return R_j. The metric developed by Ball and Shivakumar (2008) and Basu et al. (2013) is used to determine the level of new information contained in earnings announcements.FindingsAnalysis reveals earnings announcements contain little new information of value, thus demonstrating the Chinese markets are not informationally efficient. Therefore, investors cannot automatically assume assets are always correctly priced, as they are in other established markets.Originality/valueMajor structural changes were made to Chinese equity markets in 2004, with the introduction of the Qualified Foreign Institutional Investors scheme. At the same time, firms were required to make earnings announcements on a quarterly basis. This paper is the first to test the impact of these changes on the information value of earnings announcements since the changes.

Earnings Response Coefficient: Applying Individual and Portfolio Methods

This paper reports new findings from applying portfolio method, which shows a much bigger earnings impact on share prices (ERC) compared to the erstwhile reports of ERC using individual events, averaged over the sample. We estimate cumulative abnormal returns, CAR, across a test window for each quarterly earnings announcement event across one accounting year. The CARs are then regressed against earnings changes of individual firms and portfolios. The findings show a significant positive CAR when earnings increases; and a negative CAR if earnings declines. The ERC is very small in the test period of 2001-14, which is consistent with published results for years before 2000. The ERC size magnifies substantially due to the grouping effect used through portfolio formation. What is significant is that the use of portfolio method, by removing the idiosyncratic errors, show a price response very close to the size of earnings (i.e., ERC of 0.93) with a very high R-square of 75 percent. The last evidence supports strongly the value relevance accounting theory that has not seen much support from averaging the price responses of individual event responses.

Earnings response coefficient: Applying individual and portfolio methods

This paper reports new findings from applying portfolio method, which shows a much bigger earnings impact on share prices (ERC) compared to the erstwhile reports of ERC using individual events, averaged over the sample. We estimate cumulative abnormal returns, CAR, across a test window for each quarterly earnings announcement event across one accounting year. The CARs are then regressed against earnings changes of individual firms and portfolios. The findings show a significant positive CAR when earnings increases; and a negative CAR if earnings declines. The ERC is very small in the test period of 2001-14, which is consistent with published results for years before 2000. The ERC size magnifies substantially due to the grouping effect used through portfolio formation. What is significant is that the use of portfolio method, by removing the idiosyncratic errors, show a price response very close to the size of earnings. The last evidence supports strongly the value relevance accounting theory that has not seen much support from averaging the price responses of individual event responses.

The Study on Determinants of Quarterly Earnings Announcements Lag

The Study on Determinants of Quarterly Earnings Announcements Lag

Does the market price the nature and extent of earnings management for firms that beat their earnings benchmark?

This study investigates whether the abnormal returns at the quarterly earnings announcement date varies according to the market’s expectations of the nature (informative vs opportunistic) and extent of discretionary accruals for firms that meet or beat expectations (MBE). In doing so, this study introduces an innovative model that measures the market’s expectation of the informativeness of earnings at the earnings announcement date and assesses the impact on the abnormal return for the interaction between the nature and expected extent of earnings management. A large sample of Standard & Poor’s (S&P) 500 firms that meet or exceed their earnings expectation over the period of 1998 to 2007 is analyzed. The results reveal that the expected extent of earnings management has a positive (negative) relation with the abnormal return when earnings management is informative (opportunistic).

Opportunity Knocks But Once: Delayed Disclosure of Financial Items in Earnings Announcements and Neglect of Earnings News

We define a delayed disclosure ratio (DD) as the fraction of 10-Q financial statement items that are withheld at the earlier quarterly earnings announcement. We find that higher DD firms have a greater delay in investor and analyst response to earnings surprises: (i) the fraction of total market reaction to quarterly earnings news realized around the earnings announcement (after the 10-Q filing) is smaller (greater), and (ii) analysts are more likely to defer issuing forecasts from immediately after the earnings announcement to after the 10-Q filing. Consistent with our limited attention model predictions, the response catch-up associated with DD is incomplete even after the delayed items are fully disclosed at the 10-Q filing date, and persists until the next earnings announcement date. The return reaction to earnings news over the entire quarter does not vary with DD, so differences in earnings informativeness do not explain the DD effect. Our findings suggest that, for limited attention effects to be mitigated, the timing of disclosures must be coincident with the focal periods—at earnings announcement dates—when investors and analysts are paying the most attention.