The Increasing Usefulness of Annual Earnings Announcements: An Examination of Changes in Disagreement Using Analyst Forecasts

• In Event: Forecasting

Abstract

Researchers in accounting have found evidence of a striking increase in stock market price and volume reactions to earnings announcements since 2001 (Beaver et al. 2018; Barron et al. 2018). Surprisingly, this increase is greatest in large firms. To help explain this evidence, we return to Holthausen and Verrecchia’s (1990) model of price and volume reactions to earnings announcements and analyst forecast proxies developed in Barron et al. (1998). An important purpose of accounting from a public policy perspective is to level the informational playing field among investors. Price reactions, however, are unable to capture investor disagreement and volume reactions capture both the resolution of prior disagreement and newfound disagreement generated by earnings announcements. We provide new insights by examining changes in forecast measures of disagreement around annual earnings announcements over the last forty years. First, we show that forecast dispersion is reduced around earnings announcements and this reduction has increased over time. Next, we use Barron et al.’s informedness proxy to show that analysts as a group are more informed by earnings announcements in recent time periods. Finally, we use their consensus proxy to show that the ability of earnings announcements to make analysts more commonly informed has increased over time. This evidence suggests that earnings announcements are becoming increasingly effective at achieving an important public policy objective.

Authors

• Orie Barron, Pennsylvania State University

• Richard Schneible, Grand Valley State University

• Douglas E Stevens, Georgia State University