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EARNINGS ANNOUNCEMENTS, QUALITY AND QUANTITY OF INFORMATION, AND STOCK PRICE CHANGES
Author(s) -
Chen Carl R.,
Wuh Lin James,
Sauer David A.
Publication year - 1997
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1997.tb00261.x
Subject(s) - earnings surprise , earnings , post earnings announcement drift , stock (firearms) , stock price , earnings response coefficient , economics , volatility (finance) , earnings per share , monetary economics , earnings quality , price discovery , business , econometrics , financial economics , finance , accrual , mechanical engineering , paleontology , series (stratigraphy) , engineering , biology , futures contract
We analyze the informational effect of earnings announcements on stock price changes. Although prior studies postulate that the direction and magnitude of earnings surprises contribute to abnormal stock price changes, we attribute earnings surprises and subsequent stock price changes to the quality and quantity of available information. If a stock is followed by many financial analysts, the amount of information available to investors contributes to higher quality information, which in turn is reflected by a small earnings surprise. Furthermore, we demonstrate that as the quality and quantity of information increase, stock prices adjust more quickly, which sheds additional light on the post‐earnings‐announcement drift issue. Finally, cross‐sectional analysis reveals that the flow of information, as measured by the rate of trading volume changes, and the stock of information, as measured by the number of financial analysts, contributes significantly to the variations in excess returns and return volatility. Traditional variables, such as earnings surprises, earnings reporting lag, and firm size, do not perform well.