Presents further information about the relative distributional properties of Z-statistics derived from squared residuals and squared forecast errors. Advantages of using squared residuals; Characteristics of the distribution of Z-statistics based on squared forecast errors; Author's comments on the reactions of William M. Cready.

[Firms sometimes file their 10-K or 10-Q with the Securities and Exchange Commission (SEC) several days before the corresponding earnings announcement appears in The Wall Street Journal (WSJ). In these cases, the 10-K or 10-Q filing constitutes the first public announcement of earnings. This study addresses the question of whether the price and volume reactions to these earnings announcements occur at the SEC filing date or at the subsequent WSJ announcement date. This research can be viewed as a limited test of whether the securities markets are efficient with respect to the data contained in 10-K and 10-Q filings. The generalizability of the test results is limited because of the nonrandom nature of the sample. Tests were performed on daily price and volume data for 342 firmquarters for which the SEC filing date preceded the WSJ earnings announcement by at least four trading days. The results suggest that there was no significant market reaction, on average, at the SEC filing date, even though the filing was the first public announcement of earnings for the quarter. However, there is evidence of the existence of a market reaction to the subsequent WSJ earnings announcement. The direction of the price reaction at the WSJ announcement date is consistent with the sign of unexpected earnings. Wright and Groff (1986) present evidence indicating that the existence of a market reaction to the public release of price-relevant information does not depend on exactly how that information is made public. In contrast, the results presented in this paper suggest that, in some limited cases, the method of disclosing accounting earnings is related to whether the information embodied in those earnings will be reflected in security prices in a timely fashion. The results also suggest that, at least in one specific set of circumstances, data disclosed as part of an SEC-mandated filing are not fully reflected in prices until a subsequent media disclosure is made.]

Firms sometimes file their 10-K or 10-Q with the Securities and Exchange Commission (SEC) several days before the corresponding earnings announcement appears in The Wall Street Journal (WSJ). In these cases, the 10-K or 10-0 filing constitutes the first public announcement of earnings. This study addresses the question of whether the price and volume reactions to these earnings announcements occur at the SEC filing date or at the subsequent WSJ announcement date. This research can be viewed as a limited test of whether the securities markets are efficient with respect to the data contained in 10-K and 10-0 filings. The generalizability of the test results is limited because of the non random nature of the sample. Tests were performed on daily price and volume data for 342 firm- quarters for which the SEC filing date preceded the WSJ earnings announcement by at least four trading days. The results suggest that there was no significant market reaction, on average, at the SEC filing date, even though the filing was the first public announcement of earnings for the quarter. However, there is evidence of the existence of a market reaction to the subsequent WSJ earnings announcement The direction of the price reaction at the WSJ announcement date is consistent with the sign of unexpected earnings. Wright and Groff (1986) present evidence indicating that the existence of a market reaction to the publicrelease of price-relevant information does not depend on exactly how that information is made public. In contrast, the results presented. in this paper suggest that, In some limited cases, the method of disclosing accounting earnings is related to whether the information embodied in, those earnings will be reflected in security prices ins timely fashion. The results also suggest that, at least In one specific set of circumstances, data disclosed as part of an SEC-mandated filing are not fully reflected in prices until a subsequent media disclosure is made.

Prior research has used inaccurate classification rules to distinguish between stock splits and stock dividends. The CRSP classification of two-for-one stock distributions agrees with the actual accounting treatment only 23% of the time. In addition, the accounting treatment impacts the announcement period reaction—two-for-one distributions accounted for as stock dividends are associated with five-day announcement period returns of 2.70%, significantly greater that the 0.93% announcement returns for distributions accounted for as stock splits. Announcement returns are positively related to earnings growth in the two years following the distribution for stock dividend firms but not for stock split firms. The accounting choice appears to be used to confirm management's private information about future earnings revealed at the time of the distribution announcement.

Stock dividends which increase outstanding shares by less than 25 percent require a transfer from retained earnings of the market value of the new shares, a much larger transfer than that required for stock dividends of 25 percent or more. Choosing a distribution factor near, but below, 25 percent may be an indication of management optimism that future income will replenish retained earnings, avoiding constraints on future cash distributions. In this study, firms declaring 20 percent and 25 percent stock dividends are compared. The 20 percent stock dividend firms exhibit significantly greater announcement-period abnormal returns and significantly greater post-declaration cash dividend growth. These effects are greatest for firms incorporated in states where the level of retained earnings more strictly constrains the payment of cash dividends.

[Stock dividends which increase outstanding shares by less than 25 percent require a transfer from retained earnings of the market value of the new shares, a much larger transfer than that required for stock dividends of 25 percent or more. Choosing a distribution factor near, but below, 25 percent may be an indication of management optimism that future income will replenish retained earnings, avoiding constraints on future cash distributions. In this study, firms declaring 20 percent and 25 percent stock dividends are compared. The 20 percent stock dividend firms exhibit significantly greater announcement-period abnormal returns and significantly greater post-declaration cash dividend growth. These effects are greatest for firms incorporated in states where the level of retained earnings more strictly constrains the payment of cash dividends.]

We observe significant post-split excess returns of 7.93 percent in the first year and 12.15 percent in the first three years for a sample of 1,275 two-for-one stock splits. These excess returns follow an announcement return of 3.38 percent, indicating that the market underreacts to split announcements. The evidence suggests that splits realign prices to a lower trading range, but managers self-select by conditioning the decision to split on expected future performance. Presplit runup and post-split excess returns are inversely related, indi? cating that our results are not caused by momentum.

[Research on analysts' earnings forecasts has produced two major results. First, security analysts provide more accurate forecasts than do time-series models (Brown et al. 1987) and, second, analysts' forecasts become more accurate and less dispersed as the forecast horizon decreases (Brown et al. 1985). This study examines the effect of an annual earnings announcement on the dispersion of analysts' one-year-ahead forecasts. It seems logical that forecasts should be less dispersed after the release of a value-relevant publicly observable signal. However, we find the opposite; i.e., that forecasts become more dispersed than would be expected in the absence of an earnings announcement. Security analysts' forecasts have often served as a proxy for the unobservable market expectation of earnings. Similarly, the dispersion of analysts' forecasts may proxy for the diversity of investor beliefs about future earnings. A number of studies have suggested that diversity of beliefs is important in security pricing as well as being a determinant of trading volume. Insight into the effects of earnings announcements on the heterogeneity of investors' beliefs will improve our understanding of how information gets impounded into prices and how information alters investors' portfolio decisions. The Bayesian belief revision model developed in this study suggests that the surprise content of the signal and the diversity of the perceived precision of the signal are important factors in determining whether the information event will cause a convergence or divergence of forecasts. Holthausen and Verrecchia (1990) reach similar conclusions when they examine the effect of information on consensus. In their model, a decrease in consensus (increase in diversity of beliefs) is possible if there is disagreement about the effect of the signal on the value of the firm. Bamber (1987) argues that the surprise content of the announcement and disagreement about the interpretation of the signal are related; i.e., "more surprising or informative announcements are likely to spawn a wide variety of interpretations...." Empirical results are consistent with the insights provided by our model. There is a greater divergence of forecasts when the earnings announcement contains a bigger surprise, where surprise is defined as the difference between reported earnings and analysts' predictions of those earnings. An alternative explanation for the empirical results is nonsynchronous updating of forecasts by analysts. By partitioning the sample on the length of time between the announcement date and the next IBES report, we are better able to identify which IBES report (the first or second after the announcement) contains updated forecasts. This partitioning provides a more accurate measure of changes in the dispersion of forecasts due to an earnings announcement.]