The Effect of Earnings Surprises on Information Asymmetry

46 Pages Posted: 8 Aug 2006 Last revised: 18 Dec 2008

See all articles by Stephen Brown

Stephen Brown

University of Maryland - Department of Accounting & Information Assurance

Stephen A. Hillegeist

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy

Kin Lo

University of British Columbia (UBC) - Sauder School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: November 18, 2008

Abstract

We examine the effect of earnings surprises on changes in information asymmetry. We hypothesize and find that asymmetry is lower (higher) in the quarter following positive (negative) earnings surprises compared to firms that meet the consensus analyst earnings forecast. The relations between earnings surprises and information asymmetry are stronger when the surprises are more likely to capture investors' attention. Examining the source of these changes, we show that decreased information search activities is the most important factor for asymmetry declining after positive surprises; for negative surprises, decreased uninformed trading plays a dominant role increasing asymmetry.

Keywords: Information asymmetry, meeting or beating expectations, earnings expectations, expectation management, investor recognition hypothesis

JEL Classification: G12, G14, M41, M43

Suggested Citation

Brown, Stephen and Hillegeist, Stephen A. and Lo, Kin, The Effect of Earnings Surprises on Information Asymmetry (November 18, 2008). Available at SSRN: https://ssrn.com/abstract=922128 or http://dx.doi.org/10.2139/ssrn.922128

Stephen Brown

University of Maryland - Department of Accounting & Information Assurance ( email )

Robert H. Smith School of Business
College Park, MD 20742-9157
United States

Stephen A. Hillegeist

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy ( email )

Tempe, AZ 85287-3706
United States
480-965-6614 (Phone)

Kin Lo (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8430 (Phone)
604-822-9470 (Fax)

HOME PAGE: http://www.sauder.ubc.ca/Faculty/People/Faculty_Members/Lo_Kin

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