The Evolution of Financial Market Efficiency: Evidence from Earnings Announcements

Abstract

Stock prices on earnings announcement days have become more efficient. Prices better reflect earnings surprises, and post-announcement price drifts gradually disappear over time. Since the turn of the century, prices on announcement days have also become more informative about future prices with announcement day returns explaining more than 20% of total quarter-ahead returns. This increase in price informativeness occurs mostly at the time of a sudden rise in earnings guidance practices and following a policy change impacting earnings disclosure. These results hold for large and small stocks and have broad implications for firm managers relying on markets to produce price information.

Keywords: disclosure, earnings announcements, market efficiency, price discovery, price informativeness

JEL Classification: G10, G12, G14