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 out-weighed by the political costs associated with timely releases of the information.]

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.

[One indication of information usefulness is its ability to increase the precision of individuals' estimates of events of interest (FASB 1980; ljiri and Jaedicke 1966). In this context, earnings reports are useful if they increase the precision of investors' forecasts of future earnings when the latter proxy for the event of interest, future cash flows. The cross-sectional variance of analysts' earnings expectations often is used as a proxy for the unobservable precision of their earnings estimates (Ajinkya and Gift 1985; Brown et al. 1987; Imhoff and Lobo 1992). We show that, when combined with the time-series properties of accounting earnings and prior research in analyst forecasts, Bayesian revisions suggest that year t earnings reports should, on average, increase the convergence of analysts' year t + 1 earnings forecasts. Operationally, we examine whether the information contained in year t earnings decreases the cross-sectional variance of analysts' year t + 1 forecasts. Morse et al. (1991) use I/B/E/S Summary data, and conclude that the information contained in year t earnings announcements increases the cross-sectional variance of analyst forecasts of year t + 1. This is a surprising result. One feature of the I/B/E/S Summary data is that they do not contain dates of the analysts' earnings forecasts. Thus, researchers who use these data do not know the set of information upon which the analyst's earnings forecast is based. In contrast to the I/B/E/S Summary data, the I/B/E/S Detail data are precise regarding the date that the individual analyst's earnings forecast entered the I/B/E/S system. We use I/B/E/S Detail data to reexamine the relation between annual earnings announcements and convergence of beliefs. Using the Detail data, we show that the information contained in year t earnings decreases the cross-sectional variance of analysts' earnings forecasts of year t + 1. Moreover, our finding is insensitive to year of study. Using the Summary data, we find that the information contained in year t earnings increases the cross-sectional variance of analysts' earnings forecasts of year t + 1, but this finding is sensitive to year of study. Morse et al. (1991) hypothesize and provide evidence that reduction in variance is less likely to occur when "standardized" surprise is large. Using the Detail data, we show that significant decreases in variance occur for the seven smallest deciles of standardized surprise, and that significant increases in variance occur only for the largest decile. Using the Summary data for the same "window" as the Detail data, we find no deciles of standardized surprise associated with significant decreases in variance, and we observe significant increases in variance for the three largest deciles of standardized surprise. In sum, our results using I/B/E/S Detail data suggest that, on average: (1) annual earnings announcements increase convergence of analysts' forecasts of firms' future earnings; (2) annual earnings announcements decrease convergence only for the largest decile of earnings surprise. In contrast, we do not obtain consistent results with I/B/E/S Summary data.]

Examines the influence of annual earnings announcements on financial forecasts. Convergence of beliefs; Earnings surprise; Suggestion that annual earnings announcement should increase the convergence of analysts' forecasts of future earnings.

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.