Cross‐Quarter Differences in Stock Price Responses to Earnings Announcements: Fourth‐Quarter and Seasonality Influences*

Abstract

Abstract. This article examines the impact of one form of sales seasonality on the response of equity retums to earnings announcements in different quarters. We regress unexpected announcement period returns on unexpected earnings and compare the results for seasonal firms-those with sales consistently concentrated in the same quarter each year-to those of other firms. For seasonal firms, we find robust evidence of a greater regression intercept and some evidence of a greater eamings response coefficient in peak sales quarters than in nonpeak quarters. These results are consistent with a greater resolution of the uncertainty about seasonal firms* prospects in their peak sales quarters than in other quarters. Our evidence also shows that fourth-quarter earnings announcements have smaller stock price response coefficients than do interim announcements. Some prior has found smaller fourth-quarter eamings response coefficients for small but not large firms. We find some evidence that fourth-quarter earnings response coefficients are smaller than interim-quarter response coefficients for large firms as well as for small firms. This suggests that explanations for smaller fourth-quarter earnings response coefficients need to be applicable to both large and small firms.R6sum6. Les auteurs examinent, pour differents trimestres, l'incidence d'une forme de caract&re saisonnier des ventes sur la reaction du rendement des actions aux declarations de b^ndfices. Ils effectuent une analyse de regression des rendements imprdvus des trimestres par rapport aux b6n6fices impr^vus et comparent les resultats obtenus dans le cas des entreprises dont les activites sont saisonni&res-c'est-^-dire dont les ventes sont systematiquement concentrees dans le mSme trimestre chaque annee-^aux resuitats obtenus dans le cas des autres entre-* Accepted by Michael Gibbins. The authors thank the anonymous reviewers and workshop partidpants at Michigan State University for substantive and constructive comments on earlier versions of this article. They are also indebted to Barbara Gugliotta Pierce for her research assistance and Indiana University for the summer research support that fadlitated the completion of this project. The authors gratefully acknowledge the contribution of IBES Inc. for providing eamings per share forecast data, available through the Institutional Brokers Estimate System. These data are provided as part of a broad academic program to encourage earnings expectations researcb.

The relation between earnings and cash flows

“…In addition, there is evidence that the accrual process differs between quarters for other than seasonal reasons. Collins, Hopwood and McKeown (1984), Kross and Schroeder (1990) and Salamon and Stober (1994) report evidence consistent with the fourth quarter reports reflecting the correction of errors in the previous three quarterly reports. Hayn and Watts (1997) find that more transitory earnings items and more losses are reported in the fourth quarter.…”

The market's response to earnings surprises after first-time going-concern modifications

“…Finally, Q 4 is an indicator variable equals to 1 if the earnings announcement is a fourth quarter earnings announcement, and 0 otherwise. We expect that the coefficient on this variable will be negative when interacted with UE because of the lower informativeness of fourthquarter earnings reports (e.g., Mendenhall & Nichols, 1988;Salamon & Stober, 1994). …”

Earnings forecasts and idiosyncratic volatilities

“…3 A vast literature that begins with Beaver (1968) reports increased return variances around earnings announcements. Other studies include Patell and Wolfson (1984) and Salamon and Stober (1994). 4 See, for example, Michaely and Womack (1999), Dechow, Hutton and Sloan (1999), and Scharfstein and Stein (1990).…”