This paper presents evidence that stock return prediction errors are less positively skewed in the time period surrounding accounting earnings report announcements than in a subsequent non- announcement period. Assuming that information available about firms in non-announcement periods depends on discretionary disclosure practices of firms and discretionary search for information by investors, the results suggest that earnings reports cause more extreme ‘bad news’ to be reflected in stock prices relative to discretionary sources of information.

Analyst following, Institutional investors, Information costs

This paper compares the information investors have about a firm's future earnings, as reflected in its stock price, to that of the firm's management, as reflected in its management earnings forecast. Stock returns in the preforecast and forecast announcement period are positively associated with management earnings forecast errors, indicating that stock prices contain information beyond that reflected in management forecasts. This phenomenon can occur if management does not issue its true forecast or if investors have information about earnings that management does not have. The first hypothesis, that management forecasts do not fully reflect management's information, implies that forecasts will be biased in a directional or nondirectional manner. This study conducts tests for directional bias and develops and conducts a test for nondirectional bias, using a sample of management forecasts occurring in years 1979-1983. The hypothesis that management forecasts are biased is only rejected for forecasts made in 1982. Given the magnitude of economic changes occurring in 1982, post-forecast information may well have been negative, causing the average forecast error in 1982 to differ from zero. In the other years studied, the hypothesis that management forecasts are biased is not rejected. The data, thus, suggest that stock prices reflect information beyond that in management earnings forecasts because investors access some information that managers do not.

This study provides a test of the relationship between changes in a firm's disclosure environment and its security price behavior. The initiation of interim reporting is examined. Theory suggests that the marginal information content of an annual report is greater when it has not been preceded by interim reports and that greater return variability will be observed at the annual report announcement date. The variance of returns upon release of the annual report is compared in the ‘annual-report-only’ and ‘annual-plus-quarterly-reports’ environments. As predicted by the theory, variability is significantly greater in the ‘annual-report-only’ environment.

This paper provides evidence that firms signal their private information about future earnings by their choice of split factor. Split factors are increasing in earnings forecast errors, after controlling for differences in pre‐split price and firm size. Furthermore, price changes at stock dividend and split announcements are significantly correlated with split factors, holding other factors constant, and with earnings forecast errors. These correlations suggest that management's choice of split factor signals private information about future earnings and that investors revise their beliefs about firm value accordingly. The analysis also suggests, however, that announcement returns are significantly correlated with split factors after controlling for earnings forecast errors. This suggests that earnings forecast errors measure management's private information about future earnings with error, that split factors signal other valuation‐relevant attributes, or that a signaling explanation is incomplete.

This paper examines how public disclosure affects private inforamtion acquisition activity in a market economy. We analyze a setting where traders with short-term investment horizons are allowed to trade on their private information prior to a public disclosure. We demonstrate in this setting that public disclosure stimulates investment in private information acquisition. This result is shown to have implications for the magnitude of the pre-announcement and announcement price reactions to the disclosure.

Maureen McNichols, G. Peter Wilson, Evidence of Earnings Management from the Provision for Bad Debts, Journal of Accounting Research, Vol. 26, Studies on Management's Ability and Incentives to Affect the Timing and Magnitude of Accounting Accruals (1988), pp. 1-31

This paper provides evidence that firms signal their private information about future earnings by their choice of split factor. Split factors are increasing in earnings forecast errors, after controlling for differences in pre-split price and firm size. Furthermore, price changes at stock dividend and split announcements are significantly correlated with split factors, holding other factors constant, and with earnings forecast errors. These correlations suggest that management's choice of split factor signals private information about future earnings and that investors revise their beliefs about firm value accordingly. The analysis also suggests, however, that announcement returns are significantly correlated with split factors after controlling for earnings forecast errors. This suggests that earnings forecast errors measure management's private information about future earnings with error, that split factors signal other valuation-relevant attributes, or that a signaling explanation is incomplete.