Earnings Comparability and Informed Trading

Abstract

We investigate whether earnings comparability is associated with the probability of informed trading (PIN) as a proxy for information asymmetry in the equity market. We measure earnings comparability in three different ways to account for idiosyncratic variation in firm-specific components of earnings using GAAP earnings, special item-adjusted GAAP earnings, and Street earnings. We find that earnings comparability is inversely associated with PIN. The inverse relation between earnings comparability and information asymmetry is pronounced for large and high-analyst coverage firms. Overall, this paper adds to the literature by demonstrating economic benefits of cross-firm properties of accounting information.

Keywords: earnings comparability, information-based trading, information asymmetry

JEL Classification: G14, M41