Does Voluntary Balance Sheet Disclosure Mitigate Post-Earnings-Announcement Drift?

56 Pages Posted: 28 Oct 2016 Last revised: 22 Feb 2021

See all articles by Charles Hsu

Charles Hsu

Hong Kong University of Science & Technology

Qinglu Jin

Shanghai University of Finance and Economics

Zhiming Ma

Peking University

Jing Zhou

SILC Business School, Shanghai University

Date Written: December 1, 2020

Abstract

Theory suggests that balance sheet information such as total assets, total equity, or total liabilities complements earnings information in helping investors assess a firm’s profitability and estimate earnings growth. The voluntary disclosure of balance sheet information at earnings announcement could help investors gather and process this information at a lower cost. We therefore predict that voluntary balance sheet disclosure at the time of an earnings announcement helps investors promptly understand the implication of current earnings news for future earnings and subsequently reduces post-earnings-announcement drift (PEAD). Consistent with these predictions, our results show that when firms provide voluntary balance sheet disclosures, the earnings response coefficient in the event window is significantly higher and the corresponding PEAD is significantly lower. We further find that the impact of voluntary balance sheet disclosure on PEAD is more pronounced when the magnitude of balance sheet value surprise is larger, when balance sheet value is more informative about future earnings, when earnings uncertainty is higher, or when information cost is higher, consistent with our conjectures that helping investors to better understand future earnings performance and lowering information costs are key mechanisms underlying the effect of voluntary balance sheet disclosure on PEAD.

Keywords: Balance Sheet; Post-earnings-announcement Drift; Voluntary Disclosure; Total Assets; Total Equity; Total Liabilities

JEL Classification: G14, M41

Suggested Citation

Hsu, Charles and Jin, Qinglu and Ma, Zhiming and Zhou, Jing, Does Voluntary Balance Sheet Disclosure Mitigate Post-Earnings-Announcement Drift? (December 1, 2020). Journal of Accounting and Public Policy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2858749 or http://dx.doi.org/10.2139/ssrn.2858749

Charles Hsu

Hong Kong University of Science & Technology ( email )

Hong Kong
Hong Kong
852-2358-7568 (Phone)
852-2358-1693 (Fax)

Qinglu Jin

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China
86-21-65908982 (Phone)

Zhiming Ma

Peking University ( email )

Department of Accounting
Guanghua School of Management
Beijing, 100871
China

Jing Zhou (Contact Author)

SILC Business School, Shanghai University ( email )

China

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