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The Relation Between Investor Uncertainty and Market Reactions to Earnings Announcements: Evidence from the Property‐Casualty Insurance Industry in the USA

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  • Theodore E. Christensen
  • Jennifer J. Gaver
  • Pamela S. Stuerke

Abstract

This paper investigates the relationship between investor uncertainty, gauged by properties of analysts’ forecasts, and the stock market response to earnings. We find that uncertainty is best characterized by a comprehensive measure recently proposed by Barron, Kim, Lim and Stevens (1998), BKLS. The BKLS measure is related to uncertainty‐inducing events, as well as factors that affect the difficulty faced by analysts in forecasting earnings. We conclude that, first, pre‐disclosure uncertainty is a significant determinant of the price reaction to the earnings release, and second, BKLS is a more comprehensive measure of uncertainty than simple dispersion.

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  • Theodore E. Christensen & Jennifer J. Gaver & Pamela S. Stuerke, 2005. "The Relation Between Investor Uncertainty and Market Reactions to Earnings Announcements: Evidence from the Property‐Casualty Insurance Industry in the USA," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(1‐2), pages 1-29, January.
    • Handle: RePEc:bla:jbfnac:v:32:y:2005:i:1-2:p:1-29
    DOI: 10.1111/j.0306-686X.2005.00586.x
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    References listed on IDEAS

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    1. Theodore E. Christensen & Robert E. Hoyt & Jeffrey S. Paterson, 1999. "Ex Ante Incentives for Earnings Management and the Informativeness of Earnings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(7‐8), pages 807-832, September.
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    5. Theodore E. Christensen & Robert E. Hoyt & Jeffrey S. Paterson, 1999. ""Ex Ante" Incentives for Earnings Management and the Informativeness of Earnings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(7&8), pages 807-832.
    6. Ball, R & Brown, P, 1968. "Empirical Evaluation Of Accounting Income Numbers," Journal of Accounting Research, Wiley Blackwell, vol. 6(2), pages 159-178.
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    8. Beaver, William H. & McNichols, Maureen F. & Nelson, Karen K., 2003. "Management of the loss reserve accrual and the distribution of earnings in the property-casualty insurance industry," Journal of Accounting and Economics, Elsevier, vol. 35(3), pages 347-376, August.
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    14. Lucy F. Ackert & George Athanassakos, 1997. "Prior Uncertainty, Analyst Bias, And Subsequent Abnormal Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(2), pages 263-273, June.
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    3. Weetman, Pauline, 2006. "Discovering the ‘international’ in accounting and finance," The British Accounting Review, Elsevier, vol. 38(4), pages 351-370.
    4. Sanan Mukhtarov & Martijn Schoute & Jacco L. Wielhouwer, 2022. "The information content of the Solvency II ratio relative to earnings," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(1), pages 237-266, March.

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