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Is the market surprised by the surprise?

Author

Listed:
  • Khine Kyaw

    (NTNU)

  • Mojisola Olugbode

    (Plymouth University)

  • Barbara Petracci

    (University of Bologna)

Abstract

This study examines how the market reacts to earnings surprises with different characteristics such as future earnings prospects and historical surprises embedded in the earnings announced. We also explore the effect of corporate governance on market reaction to earnings information disseminated through earnings announcements. The sample comprises of 1620 US firms for the period 2002–2016. Using a regression-based approach, the results reveal that the market reacts to earnings surprises, particularly, to their sign, magnitude, persistence, and the future earnings prospects. Moreover, these different characteristics of earnings surprises are more important for negative surprises than for positive surprises. Furthermore, we find evidence for the information transparency theory that earnings announcements are a relatively more important source of information for low-corporate-governance firms than for high-corporate-governance firms. Finally, historical earnings information is more relevant for low-corporate-governance firms, whereas prospective earnings information is more important for high-corporate-governance firms. This study contributes to the extant literature by revealing that the market does not only react to the magnitude/sign of the surprises but also to other additional characteristics of earnings surprises. The study also reveals that firm governance influences how the market reacts to earnings information announced. Consequently, managers should be mindful that strengthening corporate governance could improve investors’ confidence in earnings announced.

Suggested Citation

  • Khine Kyaw & Mojisola Olugbode & Barbara Petracci, 2020. "Is the market surprised by the surprise?," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 17(1), pages 20-29, March.
    • Handle: RePEc:pal:ijodag:v:17:y:2020:i:1:d:10.1057_s41310-020-00071-4
    DOI: 10.1057/s41310-020-00071-4
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    Cited by:

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    More about this item

    Keywords

    Earnings announcement; Earnings surprise; Market reaction; Persistence; Corporate governance;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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