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The effect of earnings surprises on information asymmetry

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  • Brown, Stephen
  • Hillegeist, Stephen A.
  • Lo, Kin
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    Abstract

    We examine the effect of earnings surprises on changes in information asymmetry. We hypothesize and find that asymmetry is lower (higher) in the quarter following positive (negative) earnings surprises compared to firms that meet the consensus analyst earnings forecast. The relations between earnings surprises and information asymmetry are stronger when the surprises are more likely to capture investors' attention. Examining the source of these changes, we show that decreased information search activities is the most important factor for asymmetry declining after positive surprises; for negative surprises, decreased uninformed trading plays a dominant role increasing asymmetry.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 47 (2009)
    Issue (Month): 3 (June)
    Pages: 208-225

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    Handle: RePEc:eee:jaecon:v:47:y:2009:i:3:p:208-225

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    Web page: http://www.elsevier.com/locate/jae

    Related research

    Keywords: Information asymmetry Earnings surprises Investor recognition hypothesis;

    References

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    Cited by:
    1. Chakrabarty, Bidisha & Moulton, Pamela C., 2012. "Earnings announcements and attention constraints: The role of market design," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 612-634.
    2. Zhang, Qi & Cai, Charlie X. & Keasey, Kevin, 2013. "Market reaction to earnings news: A unified test of information risk and transaction costs," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 251-266.
    3. Paul-Valentin Ngobo & Jean-Fran├žois Casta & Olivier Ramond, 2012. "Is customer satisfaction a relevant metric for financial analysts?," Post-Print halshs-00680003, HAL.
    4. Karpoff, Jonathan M. & Lee, Gemma & Masulis, Ronald W., 2013. "Contracting under asymmetric information: Evidence from lockup agreements in seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 110(3), pages 607-626.

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