How Important are Earnings Announcements as an Information Source?

Abstract:     
In a competitive information market, a single information source can only dominate other sources individually, not collectively. We explore whether earnings announcements constitute such a dominant source using Ball and Shivakumar’s (2008) R2 metric: the proportion of the variation in annual returns explained by the four quarterly earnings announcement returns. We find that the earnings announcement days’ R2 is 11 percent — higher than the corresponding R2 of days with dividend announcements, management forecasts, preannouncements, 10-K and 10-Q filings, and their amendments, and comparable to that of the four days with largest realized absolute return in a year. Additional analysis reveals that earnings announcements convey extreme bad news as often as management forecasts and preannouncements; for any other type of news earnings announcements are much more frequent. We conclude that earnings announcements are an important source of new information in the equity market.

Number of Pages in PDF File: 40

Keywords: earnings information arrival days, conditional information content, information monopoly, incremental information

JEL Classification: D4, D83, G14, L11, M4

Accepted Paper Series