When Can Quarterly Reports Resolve Uncertainty About Earnings? Evidence From ASC 606
50 Pages Posted: 27 Jul 2020
Date Written: June 30, 2020
We examine whether quarterly reports resolve uncertainty about how accruals map to cash flows and, correspondingly, how to price earnings. Although existing studies suggest quarterly reports released concurrently with earnings depress trading due to information overload, we predict that quarterly reports help investors price earnings news when they face uncertainty about how earnings map to future cash flows. We rely on the implementation of ASC 606 as a quasi-exogenous increase in uncertainty about how to price earnings. Specifically, we find that when uncertainty is high in the first quarter of ASC 606 implementation, 10-Qs released concurrently with earnings increase trading in response to earnings news. We find the relation is stronger when firms face greater uncertainty, and our results are supported by other accounting standard changes and broad, firm-quarter proxies for uncertainty. Our results suggest that quarterly reports are informative to investors when uncertainty about accounting information is especially high.
Keywords: Voluntary disclosure, mandatory disclosure, information uncertainty, accounting change, ASC 606, earnings announcements
JEL Classification: G14, M41
Suggested Citation: Suggested Citation