The Effect of Earnings Surprises on Information Asymmetry
University of Maryland - Department of Accounting & Information Assurance
Stephen A. Hillegeist
Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy
University of British Columbia - Sauder School of Business
Journal of Accounting & Economics, Vol. 47, pp. 208-225, 2009
We examine the effect of earnings surprises on changes in information asymmetry. We hypothesize and find that asymmetry is lower (higher) in the quarter following positive (negative) earnings surprises compared to firms that meet the consensus analyst earnings forecast. The relations between earnings surprises and information asymmetry are stronger when the surprises are more likely to capture investors' attention. Examining the source of these changes, we show that decreased information search activities is the most important factor for asymmetry declining after positive surprises; for negative surprises, decreased uninformed trading plays a dominant role increasing asymmetry.
Keywords: Information asymmetry, earnings surprises, investor recognition hypothesis
JEL Classification: G12, G14, M41, M43, D82Accepted Paper Series
Date posted: January 4, 2009 ; Last revised: July 8, 2009
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