How Much New Information is There in Earnings?

Abstract

We quantify the relative importance of earnings announcements in providing new information to the share market, using the r-squared in a regression of securities' calendar year returns on their four quarterly earnings announcement window returns. The r-squared, which averages approximately five to nine percent, measures the proportion of total information incorporated in share prices over a year that is associated with earnings announcements. We conclude that the average quarterly announcement is associated with approximately one to two percent of total annual information and one quarter of one percent of annual trading volume, thus providing only a modest amount of incremental information to the market. The results are consistent with the view that the primary economic role of reported accounting earnings is not to provide timely new information to the share market, and by inference lies elsewhere, for example in settling contracts (Watts and Zimmerman, 1986) and in disciplining prior expectational information (Gigler and Hemmer, 1998; Ball, 2001). We also report increased information during earnings announcement windows in recent years, particularly in larger firms, due in part to increased concurrent releases of management forecasts. There is a convex relation between relative informativeness during earnings event windows and firm size. There is no evidence of abnormal information arrival in the weeks surrounding earnings announcements. Substantial information is released in analyst forecast revisions prior to earnings announcements, but not after.

Keywords: earnings, timeliness, analyst forecasts, management forecasts, efficiency

JEL Classification: G12, G14, G29, G32, M41