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Earnings characteristics and analysts’ differential interpretation of earnings announcements: An empirical analysis
Author(s) -
Ahmed Anwer S.,
Song Minsup,
Stevens Douglas E.
Publication year - 2009
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.2008.00292.x
Subject(s) - earnings , earnings quality , stock (firearms) , capital market , earnings response coefficient , economics , differential (mechanical device) , empirical evidence , post earnings announcement drift , intuition , interpretation (philosophy) , financial economics , price–earnings ratio , business , earnings per share , accounting , finance , psychology , computer science , mechanical engineering , philosophy , accrual , epistemology , engineering , aerospace engineering , programming language , cognitive science
This study provides empirical evidence on factors that drive differential interpretation of earnings announcements. We document that Kandel and Pearson's forecast measures of differential interpretation are decreasing in proxies for earnings quality and pre‐announcement information quality. This evidence yields new and useful insights regarding which earnings announcements are less likely to generate newfound disagreement among analysts and investors. Recent research suggests that investor disagreement can increase investment risk, increase the cost of capital, and cause stock prices to deviate from fundamental value. Therefore, our results support prior intuition that increasing the quality of earnings and pre‐announcement information can improve the efficiency of capital markets.