[The efficient market hypothesis (EMH) has spawned a large and impressive body of "event studies." Conditional on the maintained hypothesis of market efficiency, these studies test the "information content" of events such as accounting earnings releases (Fama 1991). However, the notion of "information content" of accounting earnings has not been formally defined, except implicitly-via the way it is calibrated in event studies-as percent price change (risk and size adjusted) associated with earnings releases. In the assumption of belief homogeneity underlying the original formulation of EMH, where no competitive non-null trading is expected in equilibrium, price changes will reflect fully the public announcement (see, e.g., Grossman and Stiglitz 1980). Hence, price changes will, conditional on the endowment and preferences configuration and on prior homogeneously held beliefs, constitute a one-to-one mapping with the belief change induced by the earnings release, and could be adopted as an operational definition of information content (IC). However, admitting the possibility of belief-change heterogeneity into the analysis brings into question the theoretical validity and plausibility of this operational definition. Competitive trading that becomes possible as a result of disagreement would perturb the one-to-one mapping between price change and belief change induced by the earnings release. In any case we no longer have a well-defined single construct reflecting heterogeneous belief changes. Under belief homogeneity the market acts as if it were a single decision-maker whose belief change theoretically reflects and calibrates the value or "content" of information.1 Once we allow for multiple decision-makers, or equivalently, for belief-heterogeneity, however, this simple definition of IC is no longer applicable. How is one to aggregate the belief changes of different traders, and what weights should be attached to such changes in the process of aggregation? Moreover, even if an appropriate operational definition of IC were to be discovered under such circumstances, what would be the empirical manifestations? The derived "information content" measure includes volume reaction, price reaction, and the predisclosure expected belief dispersion. The results imply that neither price reaction nor volume reaction alone will provide a complete characterization of information content; both must be jointly observed along with some aspects of the existing information environment to gauge information content fully.]

This paper uses a state variable characterization of firm earnings to develop an economic model of interim information and its effects on the information role of announced earnings. The model provides a simple yet rigorous approach for assessing, both theoretically and empirically, the potential effects of interim information about non firm‐specific state variables on the information role of announced earnings. It is shown that, under appropriate conditions, uncertainty about firm earnings can be decomposed into uncertainty about firm‐specific and non firm‐specific state variables. This decomposition provides economic structure to the meaning of interim information. It is demonstrated, both in the theoretical and empirical analyses, that the interim revelation of industry‐wide state variables diminishes the information role of announced earnings. Résumé. L'auteur utilise une variable caractérisant la situation de l'entreprise au chapitre des bénéfices (variables d'état), en vue d'élaborer un modèle économique de l'information périodique et de ses conséquences sur le rôle informatif des bénéfices déclarés. Le modèle, simple mais rigoureux, permet d'évaluer, en théorie aussi bien qu'en pratique, les conséquences que peut avoir l'information périodique relative aux variables d'état qui ne sont pas spécifiques à l'entreprise (mais spécifiques au secteur) sur le rôle informatif des bénéfices déclarés. Il est démontré que, dans des circonstances appropriées, l'incertitude relative aux bénéfices de l'entreprise peut être décomposée en incertitude relative aux variables d'état spécifiques à l'entreprise et non spécifiques à l'entreprise. Cette décomposition donne une structure économique au sens de l'information périodique. Les études tant théoriques qu'empiriques démontrent que la communication périodique des variables d'état de tout un secteur diminue le rôle informatif des bénéfices déclarés.

This study examines empirically the role played by direct disclosure in the valuation of initial public offerings (IPOs). We investigate why some firms making an initial public offering in Canada include an earnings forecast in the offering prospectus and others do not, and, in particular, the role of such direct disclosures in IPO valuation. We explore several hypotheses motivated by the voluntary disclosure and signaling literatures. Our results are consistent with the hypotheses that (1) forecasters have “good news” to reveal about future earnings prospects relative to nonforecasters, (2) the earnings forecast signals are valuation relevant, and (3) the market is able to correct for expected forecast error or bias in the earnings forecast. Résumé. Les auteurs font une analyse empirique du rôle que joue la présentation directe d'information dans l'évaluation des premiers appels publics à lépargne. Ils se penchent sur les raisons pour lesquelles certaines sociétés qui font appel public à l'épargne au Canada intègrent à leur prospectus d'émission des prévisions de bénéfices, alors que d'autres ne le font pas, et ils s'intéressent en particulier au rôle de la présentation directe de ce genre d'information dans l'évaluation d'un premier appel public à l'épargne. Ils examinent plusieurs hypothèses inspirées d'ouvrages traitant de présentation volontaire d'information et d'indicateurs. Les résultats obtenus sont conformes aux hypothèses selon lesquelles 1) ceux qui font état de prévisions ont de l'information positive à communiquer au sujet des perspectives de bénéfices, contrairement à ceux qui ne font état d'aucune prévision, 2) les indicateurs que représentent les prévisions de bénéfices sont pertinents à l'évaluation et 3) le marché a la capacité de corriger l'information qu'il reçoit pour tenir compte des erreurs ou des distorsions anticipées dans les prévisions de bénéfices.

Recent empirical work by Krinsky and Rotenberg (KR) (1989a, b) suggests that the relationship between entrepreneurial ownership retention and initial valuation of unseasoned common shares may not hold in the Canadian environment. In this study, we replicate and extend KR's tests on our more recent Canadian sample of 180 IPOs that listed on the TSE between 1984 and 1987. We find empirical evidence that initial valuation is increasing in the ownership retention signal (α), even when retention is included with various other possible managerial or firm‐specific signals about future cash flows. Further, we find this result to be robust with respect to a number of different model specifications as well as across different definitions of who the entrepreneur is, different classes of common stock, and different types of offering units. Résumé. Les récents travaux empiriques de Krinsky et Rotenberg (1989a, b) donnent à penser que la relation entre la rétention par l'entrepreneur d'une participation dans l'entreprise et l'évaluation initiale d'actions ordinaires émises par une entreprise non solidement établie pourrait ne pas tenir dans le contexte canadien. Dans l'étude qui suit, les auteurs reprennent, en les élargissant, les tests de Krinsky et Rotenberg auprès d'un échantillon canadien plus récent de 180 premiers appels publics à l'épargne sur la bourse de Toronto, entre 1984 et 1987. Ils démontrent empiriquement que l'évaluation initiale des actions émises augmente au signal de rétention d'une participation (α), même lorsque la rétention fait partie de divers signaux possibles relatifs à la direction ou spécifiques à l'entreprise au sujet des flux monétaires éventuels. Les auteurs concluent en outre que la solidité de cette conclusion résiste à la modification des caractéristiques du modèle ainsi qu'à la modification des définitions de l'identité des entrepreneurs, des différentes catêgories d'actions ordinaires et des différents types d'unités émises.

The efficient market hypothesis (EMH) has spawned a large and impressive body of "event studies." Conditional on the maintained hypothesis of market efficiency, these studies test the "information content" of events such as accounting earnings releases (Fama 1991). However, the notion of "information content" of accounting earnings has not been formally defined, except implicitly--via the way it is calibrated in event studies--as percent price change (risk and size adjusted) associated with earnings releases. In the assumption of belief homogeneity underlying the original formulation of EMH, where no competitive non-null trading is expected in equilibrium, price changes will reflect fully the public announcement (see, e.g., Grossman and Stiglitz 1980). Hence, price changes will, conditional on the endowment and preferences configuration and on prior homogeneously held beliefs, constitute a one-to-one mapping with the belief change induced by the earnings release, and could be adopted as an operational definition of information content (IC). However, admitting the possibility of belief-change heterogeneity into the analysis brings into question the theoretical validity and plausibility of this operational definition. Competitive trading that becomes possible as a result of disagreement would perturb the one-to-one mapping between price change and belief change induced by the earnings release. In any case we no longer have a well-defined single construct reflecting heterogeneous belief changes. Under belief homogeneity the market acts as if it were a single decision-maker whose belief change theoretically reflects and calibrates the value or "content" of information. Once we allow for multiple decision-makers, or equivalently, for belief-heterogeneity, however, this simple definition of IC is no longer applicable. How is one to aggregate the belief changes of different traders, and what weights should be attached to such changes in the process of aggregation? Moreover, even if an appropriate operational definition of IC were to be discovered under such circumstances, what would be the empirical manifestations? The derived "information content" measure includes volume reaction, price reaction, and the predisclosure expected belief dispersion. The results imply that neither price reaction nor volume reaction alone will provide a complete characterization of information content; both must be jointly observed along with some aspects of the existing information environment to gauge information content fully.

Recently, a growing body of literature has suggested that financial statements have lost their value‐relevance because of a shift from a traditional capital‐intensive economy to a high‐technology, service‐oriented economy. These conclusions are based on studies that find a temporal decline in the association between stock prices and accounting information (earnings and book values). This paper empirically tests a theoretical prediction arising from the noisy rational expectations equilibrium model that suggests that the decline could be driven by non‐information‐based (NIB) trading activity, because such trading reduces the ability of stock prices to reflect accounting information. Specifically, Dontoh, Radhakrishnan, and Ronen (2004) show that when NIB trading increases, the R 2 s of a regression of stock price on accounting information declines. Our empirical tests confirm this prediction; that is, the decline in the association between stock prices and accounting information as measured by R 2 s is driven by an increase in NIB trading.