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The Effect of Earnings Surprises on Information AsymmetryStephen BrownUniversity of Maryland - Department of Accounting & Information Assurance Stephen A. HillegeistArizona State University (ASU) - W. P. Carey School of Business, School of Accountancy Kin LoUniversity of British Columbia - Sauder School of Business 2009 Journal of Accounting & Economics, Vol. 47, pp. 208-225, 2009 Abstract: 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, D82 Accepted Paper SeriesDate posted: January 4, 2009 ; Last revised: July 8, 2009Suggested CitationContact Information
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