James M. Patell, Mark A. Wolfson, The Ex Ante and Ex Post Price Effects of Quarterly Earnings Announcements Reflected in Option and Stock Prices, Journal of Accounting Research, Vol. 19, No. 2 (Autumn, 1981), pp. 434-458

Discount dividend-reinvestment and stock-purchase plans allow shareholders to capture part of the underwriting fees incurred in new stock offerings and save sponsoring firms some of the usual underwriting costs. We tested the degree to which individual investors can profitably serve this investment banking function by implementing simple investment/trading strategies designed to capture the discounts and distribute the shares in the market. The large profits earned by our strategies raise serious questions about why it takes firms so long to raise the target level of capital and why many eligible shareholders do not participate in these discount plans.

This paper examines the effects of Broad Tape news releases of earnings and dividend announcements on three aspects of intraday stock price behavior: mean returns, return variance, and serial correlation in consecutive price changes. The initial price reaction is evident in the first pair of price changes following the release (i.e., within a few minutes, at most). The returns earned by simple trading rules dissipate within five to ten minutes, although significant returns are detected in the overnight period and at the opening of trading on the next day. Disturbances in the variance and serial correlation persist for several hours and extend into the following trading day. As a class, dividend announcements induce much less activity than do earnings, although the response to dividend changes is comparable to the earnings announcement effect.

[Models that characterize Pareto-efficient sharing of joint venture profits or constrained Pareto-efficient sharing of income in principal-agent contracting problems have ignored tax considerations. We extend the theory by showing that the effect of taxes on optimal contracting (both in the face of and in the absence of moral hazard problems) is related to the effect of changes in risk attitudes towards lotteries over pre-tax income. For example, optimal contracts will reflect the tax-induced demand for insurance of a risk-neutral individual who faces a progressive income tax schedule; that is, the risk-neutral individual will not bear all the risk, and in the face of moral hazard on the act selection of a risk-neutral agent, demand for monitoring will be created where none existed in the absence of the progressive tax. We also show that Pareto-optimal risk-sharing contracts do not generally result in expected tax minimization, even when taxes are modeled as a deadweight loss to the system.]

Abstract ABSTRACT: Models that characterize Pareto-efficient sharing of joint venture profits or constrained Pareto-efficient sharing of income in principal-agent contracting problems have ignored tax considerations. We extend the theory by showing that the effect of taxes on optimal contracting (both in the face of and in the absence of moral hazard problems) is related to the effect of changes in risk attitudes towards lotteries over pre-tax income. For example, optimal contracts will reflect the tax-induced demand for insurance of a risk-neutral individual who faces a progressive income tax schedule; that is, the risk-neutral individual will not bear all the risk, and in the face of moral hazard on the act selection of a risk-neutral agent, demand for monitoring will be created where none existed in the absence of the progressive tax. We also show that Pareto-optimal risk-sharing contracts do not generally result in expected tax minimization, even when taxes are modeled as a deadweight loss to the system.

ABSTRACT: This study examines firms' behavior with respect to the systematic intraday timing of earnings and dividend announcements. In particular, it tests the hypothesis that good news is more likely to be released when the security markets are open while bad news appears more frequently after the close of trading. Both endogenous (stock price change) and exogenous (comparison to the preceding period's earnings or dividends) classifications are used to distinguish good news from bad, and both forms support the "good news during, bad news after" hypothesis. An information content analysis using daily stock price data is then performed to illustrate how differences in disclosure timing may affect inferences about the magnitude of stock price response, announcement anticipation or news leakage, and the speed of price adjustment.

Abstract Reviews the book "Inflation Accounting, Capital Market Efficiency and Security Prices," by S. Basu.