Lawrence D. Brown, Jerry C. Y. Han, Do Stock Prices Fully Reflect the Implications of Current Earnings for Future Earnings for AR1 Firms?, Journal of Accounting Research, Vol. 38, No. 1 (Spring, 2000), pp. 149-164

This study investigates whether firms that expect increases in earnings resulting from sudden product price increases use accounting accruals to reduce earnings and, thus, political sensitivity. Specifically, oil firms' accruals are analyzed in a period of rapid gasoline price increases during the 1990 Persian Gulf crisis. Our results show that oil firms that expected to profit from the crisis used accruals to reduce their reported quarterly earnings during the Gulf crisis. In contrast to previous research, we find that the tendency to release good earnings news early, documented in prior research, is reversed for oil firms during the Gulf crisis. This finding suggests that the benefit of disclosing "good news" (i.e., earnings increases) early may have been outweighed by the political costs associated with timely releases of the information.

Voluntary Disclosure, Management forecasts, Earnings forecasts, Revenue forecasts

Unexpected earnings, Intraindustry information transfers, Disclosures, Market reaction

The effect that voluntarily disclosed managers' earnings forecasts have on the security prices of the announcing firms and other firms in the same industry is examined. The results are consistent with information content in managers' forecasts and with information transfer between forecast firms and other firms in the industry. These inferences are drawn from firms' abnormal returns computed from single- and two-index pricing models - where the latter includes market and industry indexes. Interestingly, while a positive information transfer is evident with market model residuals, once industry cross-sectional covariation in firms' returns is removed, no directional relation is apparent.