Is the Value Relevance of Earnings Conditional on the Timing of Earnings Information?

Posted: 10 Aug 2006

See all articles by Marcus L. Caylor

Marcus L. Caylor

Kennesaw State University

Thomas J. Lopez

University of Alabama - Culverhouse School of Accountancy

Lynn L. Rees

Utah State University - Huntsman School of Business

Abstract

We examine the association between quarterly stock returns and total earnings news conditional on the timing in which earnings information is revealed to the market. Evidence in prior research suggests that managers try to avoid reporting a negative earnings surprise and that market participants place greater weight on the information contained in earnings announcements than on earnings forecast revisions during a quarter (Soffer et al. 2000; Bartov et al. 2002). This notion is consistent with recency theory in the context of individual judgment and decision-making behavior (Hogarth and Einhorn, 1992). We extend prior research by investigating the descriptive validity of recency theory to a comprehensive set of potential earnings paths. Our evidence suggests, contrary to conclusions in the prior literature, that investors do not always assign more weight to earnings surprises than to analyst forecast revisions. Rather, our results suggest that the market response to earnings news is more consistent with prospect theory, an alternative cognitive psychology theory developed by Kahneman and Tversky (1979).

Keywords: earnings surprises, analysts' forecast revisions, value relevance, recency theory, prospect theory

JEL Classification: G12, G29, M41

Suggested Citation

Caylor, Marcus L. and Lopez, Thomas J. and Rees, Lynn L., Is the Value Relevance of Earnings Conditional on the Timing of Earnings Information?. Journal of Accounting and Public Policy, Vol. 26, No. 1, 2007. Available at SSRN: https://ssrn.com/abstract=920481

Marcus L. Caylor

Kennesaw State University ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States

Thomas J. Lopez

University of Alabama - Culverhouse School of Accountancy ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States
205-348-2907 (Phone)

Lynn L. Rees (Contact Author)

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
435-797-2272 (Phone)

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