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Stock Price Reaction to Evidence of Earnings Management: Implications for Supplementary Financial Disclosure

Author

Listed:
  • William R. Baber

    (The George Washington University School of Business)

  • Shuping Chen

    (University of Washington Business School)

  • Sok-Hyon Kang

    (The George Washington University School of Business)

Abstract

We condition security price reactions to quarterly earnings announcements on whether firms disclose supplementary balance sheet and/or cashflow information that can be used to estimate the consequences of earnings management. Disclosure of supplementary information is voluntary, and thus, we consider the possibility that firms that disclose balance sheet and/or cashflow information differ systematically from firms that do not disclose. Results indicate that investors discount evidence of earnings management at the disclosure date when supplementary information is disclosed. Such results indicate more informed earnings interpretations of quarterly earnings when firms provide balance sheet and/or cashflow information concurrently.

Suggested Citation

  • William R. Baber & Shuping Chen & Sok-Hyon Kang, 2006. "Stock Price Reaction to Evidence of Earnings Management: Implications for Supplementary Financial Disclosure," Review of Accounting Studies, Springer, vol. 11(1), pages 5-19, March.
    • Handle: RePEc:spr:reaccs:v:11:y:2006:i:1:d:10.1007_s11142-006-6393-0
    DOI: 10.1007/s11142-006-6393-0
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