Starving for information? Financial reporting frequency and earnings information spillovers around the world

• In Event: Financial Reporting and Disclosure Around the World

Abstract

We uncover an unintended consequence of reduced financial reporting frequency, namely excessive earnings information spillovers. Our central idea is that investors in firms that report earnings only semi-annually compensate for the lack of interim earnings disclosures for non-reporting quarters—i.e. the first three months of semi-annual periods—by relying more heavily on alternative sources of earnings news. We find that the returns of semi-annual announcers are more than twice as sensitive to the earnings announcement returns of US industry bellwethers for non-reporting quarters compared to reporting quarters. Strikingly, these exacerbated spillovers are followed by return reversals when investors finally observe own-firm earnings at the subsequent semi-annual earnings announcement. Taken together, our results indicate that reduced reporting frequency routinely starves investors of interim information and can lead investors to overreact to alternative sources of earnings news for non-reporting quarters. Overall, the evidence is consistent with the view that reduced reporting frequency impairs the ability of investors to properly value firms and impedes the efficiency of financial markets.

Authors

• Emmanuel T De George, London Business School

• Salman Arif, Indiana University Bloomington