John J. Wild

The Audit Committee and Earnings Quality

This paper provides empirical evidence on the association between audit committee formation and the quality of accounting earnings. The audit committee is responsible for overseeing the financial reporting and auditing process of the firm. This paper assesses the effectiveness of the audit committee in discharging these responsibilities by comparing the quality, or informativeness, of earnings reports before and after audit committee formation. For this paper, informativeness is measured by the extent to which the market reacts to the release of earnings reports. Economic theory predicts that the magnitude of the markets reaction to earnings is a nondecreasing function of earnings quality. The results show a significant increase in the markets reaction to earnings reports subsequent to the formation of the audit committee. Specifically, the reaction to earnings reports is more than 20 percent greater after the formation of the committee than before. These findings are robust to alternative variations in the research design. Overall, the evidence is consistent with the audit committee providing meaningful oversight of the financial reporting and auditing process.

Timeliness of Reporting and Earnings Information Transfers

This study examines earnings timeliness and its effect on earnings information transfers. Empirical analyses focus on a sample of approximately fifteen hundred earnings reports and nearly four thousand information transfers. The principal findings are: (1) earlier earnings releases yield negative information transfers, (2) earnings releases yield negative (nominal) information transfers to firms that previously (subsequently) release their earnings reports, and (3) earlier earnings releases yield negative information transfers to firms that have not yet disclosed earnings. These findings show that the timing of earnings reports has significant and far-reaching economic consequences. Copyright Blackwell Publishers Ltd 1997.

Predisclosure Information, Firm Capitalization, and Earnings Information Transfers

Abstract Prior evidence shows small firms experience greater stock price revaluations to earnings reports than do large firms. This finding is attributed to different levels of predisclosure information production and dissemination. Accordingly, because information search activities yield higher expected trading profits for larger firms, prices are “more informative” for larger firms and their earnings reports convey less information. This phenomenon is called the size-related differential information hypothesis. Moreover, asset pricing theory views prices as a function of all information—including information about other firms. This multilateral perspective is consistent with earnings reports yielding price revaluations for other firms, called earnings information transfers. This article hypothesizes that the size-related differential information hypothesis extends to earnings information transfers. It predict and shows that price revaluations to earnings are inversely related to the size of both disclosing and non-disclosing firms. This evidence supports the multilateral price implications of earnings.