Regulatory Enforcement, Management Earnings Forecasts, and Benchmarks of Earnings Announcement News in a Continuous Disclosure Environment

Abstract

We examine the contemporaneous and delayed market reaction to earnings announcements in a market setting characterised by strong disclosure regulation and enforcement. We evaluate the information content of four benchmarks of earnings announcement news: earnings in the previous year, analysts’ forecast consensus, tail analysts’ forecast errors, and earnings news derived from the contemporaneous market reaction to earnings announcements. By setting the study in the continuous disclosure environment of Australia, we extend the literature by investigating the impact of enforcement actions triggered by the market operators and firms’ decision to update the market with standalone earnings forecasts. We document that these four benchmarks significantly improve the profitability of post-earnings announcement drift strategies and the significance of these four benchmarks varies across firms subject to regulatory action and standalone earnings forecasting firms. Our study provides important regulatory and practical implications supporting intervention by market operators.

Keywords: continuous disclosure, price query, management earnings forecasts, earnings announcements, event study