Quality of Information and Volatility Around Earnings Announcements

61 Pages Posted: 13 Mar 2002

See all articles by Suleiman R. Mohammed

Suleiman R. Mohammed

University of Strathclyde - Department of Accounting and Finance

Pradeep K. Yadav

University of Oklahoma Price College of Business

Date Written: February 28, 2002

Abstract

On the basis of theoretical work of Kim and Verrecchia (1991a, 1997), this paper investigates the association between volatility around earnings and dividend announcements and the amount of pre-announcement information and the precision of the announced news for a sample of 212 firms drawn from the London Stock Exchange for the period January 1990 to December 1998. The aforementioned theory suggest that the variance of price change around announcement periods is decreasing in the amount of pre-announcement information but increasing in the precision of the disclosed news.

The volatility of stock returns in the event window, natural logarithm of the average market value of a firm over the sample period, and the surrogate of precision derived from analytical work of KV (1991a) are assumed to be the operational measures for the variance of price change around announcement periods, the amount of pre-announcement information, and the precision of the announced news respectively. Tests are conducted using both GJR-GARCH (1,1) and the absolute return measure of volatility. After controlling for the magnitude of the average change of earnings per share, the net change in the degree of leverage, and the level of stock market volatility around firm specific news, the following conclusions emerge. First, it is documented that the volatility of stock returns around announcement periods is negatively related to the amount of pre-announcement information. Consistent with Grant (1980), this finding suggests that (small) firms with relatively less pre-announcement information experience high levels of uncertainty before announcement. This high pre-release uncertainty causes analysts and market participants to disagree about the implications of the forthcoming earnings and dividends announcements. When the announcement becomes imminent it tends to contain a lot of surprises that are translated into higher announcement period volatility. Second, it is found that the precision of the disclosed news plays a significant and important role in explaining shifts in volatility around event windows. In more specific terms, the volatility of stock returns around announcement periods is found to be directly proportional to the precision of the information released. Thus, the precision of an announcement is likely to influence investors' trading decisions around future earnings and dividends announcement dates. The primary conclusions of this paper are robust to the announcement of good or bad news, and remain qualitatively unchanged under a number of alternative assumptions about the way we estimate announcement period volatility. To the extent that the surrogates used for the quality of the predisclosure information and the precision of the news disclosed are appropriate operational measures of the unobservable theoretical constructs of precision implied by Kim and Verrecchia (1991a, 1997) analytical work, the evidence presented here is consistent with their theoretical predictions.

Keywords: Volatility, Earnings Announcements, Information Quality

JEL Classification: D8, G10, G14

Suggested Citation

Mohammed, Suleiman R. and Yadav, Pradeep K., Quality of Information and Volatility Around Earnings Announcements (February 28, 2002). EFA 2002 Berlin Meetings Presented Paper. Available at SSRN: https://ssrn.com/abstract=302934 or http://dx.doi.org/10.2139/ssrn.302934

Suleiman R. Mohammed (Contact Author)

University of Strathclyde - Department of Accounting and Finance ( email )

Curran Building
100 Cathedral Street
Glasgow G4 0LN
United Kingdom
0141-5483939 (Phone)
0870-1679556 (Fax)

Pradeep K. Yadav

University of Oklahoma Price College of Business ( email )

307 W.Brooks, Room 205A Division of Finance
Norman, OK 73019
United States
4053256640 (Phone)
4053255491 (Fax)

HOME PAGE: http://www.ou.edu/price/finance/faculty/pradeep_yadav.html

Register to save articles to
your library

Register

Paper statistics

Downloads
1,000
Abstract Views
4,804
rank
21,609
PlumX Metrics