The Effect of Reporting Streaks on Ex Ante Uncertainty

Abstract

This paper predicts and finds that investor uncertainty surrounding a key information release event—the earnings announcement—is decreasing in a firm’s reporting streak. We use three proxies related to investor ex ante uncertainty and corresponding pricing of such uncertainty: option-implied volatilities, variance risk premiums, and expected returns; all are measured with maturities surrounding the impending quarterly earnings announcement. Consistent with prior research, we measure reporting streak as the number of consecutive quarters the firm meets or beats the consensus analyst EPS forecast. Empirical results confirm that all three uncertainty related constructs are decreasing in the length of the reporting streak. Our results suggest prior findings of valuation premiums for firms having longer reporting streaks manifest (at least in part) through a denominator effect: that is, through reduced risk for such firms.

Keywords: Uncertainty; Implied Volatilities; Variance Risk Premium; Expected Returns; Reporting Streak; Meet or Beat Analyst Forecasts

JEL Classification: G13, G14, M41