Earnings Comparability and Informed Trading

Posted: 28 Sep 2016 Last revised: 2 Oct 2016

See all articles by Sangwan Kim

Sangwan Kim

University of Massachusetts Boston

Steve C. Lim

Texas Christian University - M.J. Neeley School of Business

Date Written: July 18, 2016

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

Suggested Citation

Kim, Sangwan and Lim, Steve, Earnings Comparability and Informed Trading (July 18, 2016). Finance Research Letters, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1956140

Sangwan Kim (Contact Author)

University of Massachusetts Boston ( email )

100 Morrissey Blvd.
Boston, MA 02125
United States

Steve Lim

Texas Christian University - M.J. Neeley School of Business ( email )

2900 Lubbock Street
Fort Worth, TX 76129
United States
817-257-7536 (Phone)

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