1. ACCOUNTING EARNINGS & STOCK PRICES

2. INFORMATION CONTENT OF EARNINGS Distinguish between: Earnings reflecting factors that affect stock prices Earnings announcements conveying information to the stock market To test this hypothesis: observe the stock price change at the time the earnings are announced

3. SIGN OF UNEXPECTED EARNINGS AND MEAN ABNORMAL RETURNS Ball & Brown (1968) Other studies of annual earnings Braun (1970): Australian companies Differences: price adjustment during the year is less rapid on Australian Exchanges than on NYSE and there is more price adjustment in the announcement month on the Australian Exchanges

4. Interim Earnings Created some problems in interpreting Ball & Brown results: Interim report could be responsible for some of the stock price adjustment to annual earnings that occur in the year before the annual earnings announcement. Information content of the earnings announcements could be under/over stated SIGN OF UNEXPECTED EARNINGS AND MEAN ABNORMAL RETURNS

5. Interim Earnings: Foster (1977): The evidence is consistent with the hypothesis that quarterly earnings reflect factors impounded in stock prices and quarterly earnings convey information to the capital market SIGN OF UNEXPECTED EARNINGS AND MEAN ABNORMAL RETURNS

6. MAGNITUDE OF UNEXPECTED EARNINGS AND MEAN ABNORMAL RETURNS Beaver, Clarke, and Wright (1979) Investigate the magnitude There is a relation between the magnitude of the unexpected earnings change and the abnormal rate of return Beaver, Lambert, and Morse (1980) Consistent result

7. EARNINGS ANNOUNCEMENT AND VARIANCE OF ABNORMAL RETURNS Beaver (1968a) To avoid specifying a model for expected earnings Average abnormal return variance is larger in the week of announcement of annual earnings Other variance Studies May (1971): American Stock Exchange (ASE) Hagerman (1971): OTC Market

8. EARNINGS ANNOUNCEMENT AND IMPLICIT RETURN VARIANCE Pattel & Wolfson (1979, 1981): use call option prices to test whether the market anticipates the variance increase at the time of earnings announcement The evidence is consistent with the market anticipating the release of the information in earnings announcements

9. EARNINGS ANNOUNCEMENT AND TRADING VOLUME Beaver (1968a): also investigates changes in the volume of trading associated with earnings announcement Result: large increase in volume in the earnings announcement week

10. EARNINGS AND CASH FLOWS Several studies (Ball & Brown (1968), Beaver & Dukes (1972)) find that current cash flows are less highly associated with abnormal return. Pattel & Kaplan (1977): cash flows do not have marginal information content It should be noted: none of those studies actually uses operating cash flows

11. VARIATION IN INFORMATION CONTENT Grant (1980) The information content of earnings announcements varies with the number of alternative sources of information McNichols & Manegold (1983) Reduction in the relative information content of annual earnings announcements following the introduction of quarterly reporting