How Much New Information Is There in Earnings?

Abstract

We quantify the relative importance of earnings announcements in providing new information to the share market, using the R 2 in a regression of securities' calendar-year returns on their four quarterly earnings-announcement "window" returns. The R 2 , which averages approximately 5% to 9%, measures the proportion of total information incorporated in share prices annually that is associated with earnings announcements. We conclude that the average quarterly announcement is associated with approximately 1% to 2% of total annual information, thus providing a modest but not overwhelming amount of incremental information to the market. The results are consistent with the view that the primary economic role of reported earnings is not to provide timely new information to the share market. By inference, that role lies elsewhere, for example, in settling debt and compensation contracts and in disciplining prior information,including more timely managerial disclosures of information originating in the firm's accounting system. The relative informativeness of earnings announcements is a concave function of size. Increased information during earnings-announcement windows in recent years is due only in part to increased concurrent releases of management forecasts. * Graduate School of Business, University of Chicago; †London Business School. We are grateful for the comments of There is no evidence of abnormal information arrival in the weeks surrounding earnings announcements. Substantial information is released in management forecasts and in analyst forecast revisions prior (but not subsequent) to earnings announcements.

Who Uses Financial Reports and for What Purpose? Evidence from Capital Providers

“…Analysts appear to recognise these limitations of accounting data (Campbell and Slack, 2008;Glaum and Friedrich, 2006) and emphasize the importance of the annual report as a reference document, both as the basis for forecasts of future earnings, and for resolving uncertainty about the present and recent past (Marton, 1998). Ball and Shivakumar (2008) argue that earnings provide little new information to stock markets, and have more of a 'disciplining' or verification role of confirming prior information. Beyer et al (2010) find that US mandatory accounting information explains a low proportion of equity returns, but represents a 'benchmark' against which more timely and relevant disclosures can be assessed.…”

A Review of the IFRS-Adoption Literature

“…In fact, based on the finding that little new information is released upon earnings announcements to market participants, Ball and Shivakumar (2008) conclude that a major role of accounting numbers must be their use in contracts, such as debt settlement and compensation contracts (Watts and Zimmerman 1986) and in disciplining prior information released by managers (Gigler and Hemmer 1998;Ball 2001;Ball, Jayaraman, and Shivakumar 2012). However, the extent to which accounting numbers matter for inclusion in debt covenants ultimately depends on the ability of accounting numbers to accurately predict changes in a borrower's credit risks, particularly before the material deterioration of its creditworthiness.…”

The Prediction of Earnings Movement Using Mandated XBRL Data – Industry Analysis

“…The ability to predict earnings based on past performance has been recognized as a measure of earnings quality (Penman and Zhang 2002) and while Ball and Shivakumar (2008) conclude that earnings announcements provide only a modest amount of new information to the share market, Bloomfield, Libby and Nelson (2003) show that investors over rely on old earnings performance when predicting future earnings performance.…”