The Impact of Earnings Announcements on a Firm's Information Environment
50 Pages Posted: 28 Nov 2016 Last revised: 27 Apr 2018
Date Written: April 11, 2018
We examine how earnings announcements change a firm’s information environment, captured by the relative level of private and common information in analysts’ expectations, and offer several extensions. First, we demonstrate that a firm’s pre-existing information environment is a crucial determinant of how earnings announcements alter the proportion of common information – or consensus – in analysts’ expectations. Earnings announcements have a more negative (positive) effect on consensus when the pre-earnings announcement consensus is higher (lower). Second, voluntary disclosures such as bundled management forecasts increase consensus, whereas non-GAAP disclosures decrease consensus. Finally, we examine whether these effects differ across revenue and expense expectations and find that earnings announcements decrease consensus for expenses significantly more than for revenues. We also document that both management forecasts and non-GAAP disclosures increase consensus for revenue expectations, but have differing effects on expense expectations. Our study extends the prior literature by demonstrating that the change in the consensus of beliefs around earnings announcements is conditional on both the pre-existing level of consensus as well as voluntary disclosures made concurrent with the earnings announcement.
Keywords: Consensus, Private Information, Common Information, Information Environment, Earnings Announcement
JEL Classification: M41, G21
Suggested Citation: Suggested Citation