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How Much New Information Is There in Earnings?

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  • RAY BALL
  • LAKSHMANAN SHIVAKUMAR

Abstract

ABSTRACT We quantify the relative importance of earnings announcements in providing new information to the share market, using the "R"-super-2 in a regression of securities' calendar-year returns on their four quarterly earnings-announcement "window" returns. The "R"-super-2, which averages approximately 5% to 9%, measures the proportion of total information incorporated in share prices annually that is associated with earnings announcements. We conclude that the average quarterly announcement is associated with approximately 1% to 2% of total annual information, thus providing a modest but not overwhelming amount of incremental information to the market. The results are consistent with the view that the primary economic role of reported earnings is not to provide timely new information to the share market. By inference, that role lies elsewhere, for example, in settling debt and compensation contracts and in disciplining prior information, including more timely managerial disclosures of information originating in the firm's accounting system. The relative informativeness of earnings announcements is a concave function of size. Increased information during earnings-announcement windows in recent years is due only in part to increased concurrent releases of management forecasts. There is no evidence of abnormal information arrival in the weeks surrounding earnings announcements. Substantial information is released in management forecasts and in analyst forecast revisions prior (but not subsequent) to earnings announcements. Copyright (c), University of Chicago on behalf of the Institute of Professional Accounting, 2008.

Suggested Citation

  • Ray Ball & Lakshmanan Shivakumar, 2008. "How Much New Information Is There in Earnings?," Journal of Accounting Research, Wiley Blackwell, vol. 46(5), pages 975-1016, December.
  • Handle: RePEc:bla:joares:v:46:y:2008:i:5:p:975-1016
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    2. De George, Emmanuel T. & Li, Xi & Shivakumar, Lakshmanan, 2016. "A review of the IFRS adoption literature," LSE Research Online Documents on Economics 67599, London School of Economics and Political Science, LSE Library.
    3. Nicholas Seybert & Holly I. Yang, 2012. "The Party's Over: The Role of Earnings Guidance in Resolving Sentiment-Driven Overvaluation," Management Science, INFORMS, vol. 58(2), pages 308-319, February.
    4. Denis Cormier & Pascale Lapointe-Antunes & Bruce J. McConomy, 2014. "Forecasts in IPO Prospectuses: The Effect of Corporate Governance on Earnings Management," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(1-2), pages 100-127, January.
    5. repec:eee:crpeac:v:32:y:2015:i:c:p:67-77 is not listed on IDEAS
    6. Richard Barker & Anne McGeachin, 2015. "An Analysis of Concepts and Evidence on the Question of Whether IFRS Should be Conservative," Abacus, Accounting Foundation, University of Sydney, vol. 51(2), pages 169-207, June.
    7. Ball, Ray & Jayaraman, Sudarshan & Shivakumar, Lakshmanan, 2012. "Audited financial reporting and voluntary disclosure as complements: A test of the Confirmation Hypothesis," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 136-166.
    8. Jeffrey J. Coulton & Tami Dinh & Andrew B. Jackson & Tom Smith, 2016. "The impact of sentiment on price discovery," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(3), pages 669-694, September.
    9. Jap Efendi & Jin Dong Park & Chandra Subramaniam, 2016. "Does the XBRL Reporting Format Provide Incremental Information Value? A Study Using XBRL Disclosures During the Voluntary Filing Program," Abacus, Accounting Foundation, University of Sydney, vol. 52(2), pages 259-285, June.
    10. Vincent Chen & Samuel Tiras, 2015. "‘Other information’ as an explanatory factor for the opposite market reactions to earnings surprises," Review of Quantitative Finance and Accounting, Springer, vol. 45(4), pages 757-784, November.
    11. Chen, Jing & Jung, Michael J., 2016. "Activist hedge funds and firm disclosure," Review of Financial Economics, Elsevier, vol. 29(C), pages 52-63.
    12. Karol Marek Klimczak & Grzegorz Szafrański, 2010. "Valuation Effects Of Accounting Information Availability," Post-Print hal-00481073, HAL.
    13. repec:eee:advacc:v:39:y:2017:i:c:p:47-59 is not listed on IDEAS
    14. Pantic, B., 2016. "Comparability of financial reports: A literature review of most recent studies," Working Papers 6451, Graduate School of Management, St. Petersburg State University.
    15. Leonardo Fernandez, 2012. "Price Discovery, Investor Distraction and Analyst Recommendations Under Continuous Disclosure Requirements in Australia," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 3, June.
    16. Rimona Palas & Amos Baranes, 2017. "The Prediction of Earnings Movement Using Mandated XBRL data ? Industry Analysis," Proceedings of Economics and Finance Conferences 4507381, International Institute of Social and Economic Sciences.
    17. Tang, Michael & Zarowin, Paul & Zhang, Li, 2015. "How do analysts interpret management range forecasts?," Accounting, Organizations and Society, Elsevier, vol. 42(C), pages 48-66.
    18. Emmanuel T. De George & Xi Li & Lakshmanan Shivakumar, 2016. "A review of the IFRS adoption literature," Review of Accounting Studies, Springer, vol. 21(3), pages 898-1004, September.
    19. Berger, Philip G., 2011. "Challenges and opportunities in disclosure research—A discussion of ‘the financial reporting environment: Review of the recent literature’," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 204-218.
    20. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    21. Hitzemann, Steffen & Uhrig-Homburg, Marliese & Ehrhart, Karl-Martin, 2015. "Emission permits and the announcement of realized emissions: Price impact, trading volume, and volatilities," Energy Economics, Elsevier, vol. 51(C), pages 560-569.
    22. repec:eee:advacc:v:33:y:2016:i:c:p:20-34 is not listed on IDEAS
    23. Francesco PAOLONE, 2014. "Cost Structure Complexity And Stock Prices Volatility: An Analysis Of Possible Relationship Among Italian Listed Companies In The Period Of Crisis," Romanian Journal of Economics, Institute of National Economy, vol. 38(1(47)), pages 107-133, June.
    24. Mingzhi Liu & Michel Magnan, 2016. "Conditional conservatism and the yield spread of corporate bond issues," Review of Quantitative Finance and Accounting, Springer, vol. 46(4), pages 847-879, May.
    25. Rick Cuijpers & Erik Peek, 2010. "Reporting Frequency, Information Precision and Private Information Acquisition," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(1-2), pages 27-59.

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