Market Reaction to Quantitative and Qualitative Order Backlog Disclosures

Abstract

Information on Order Backlogs (OB) have long been sought after by analysts and practitioners as indicators of future sales, and in turn, of future earnings and stock returns. OB disclosures, though mandatory for annual reports, are voluntary for quarterly reports, and sometimes presented in preliminary earnings releases as a textual narration. We show that OB disclosures provide sales forecasting benefits to the users of financial statements and generate significant investor responses. Contributing to the existing literature, we study both annual and quarterly OB disclosures, and further distinguish between quantitative and qualitative OB disclosures in the quarterly filings. We investigate why managers make certain choices regarding the frequency and the format of OB disclosures. We show that both quantitative information on increases in OB and positive qualitative indications by management about the direction of OB, are associated with higher (incremental) immediate and drift returns.

Keywords: earnings surprise, future sales growth, order backlog, qualitative disclosures, stock returns

JEL Classification: G14, M41