Leonard C. Soffer

Earnings Preannouncement Strategies

We examine the disclosure strategies managers follow when theyd “preannounce” quarterly earnings shortly before formal earnings announcements. We document that managers with bad news release essentially all of their news at the preannouncement date, while managers with good news only release about half of their news. Controlling for the combined news released at the preannouncement and earnings announcement dates, firms with negative earnings announcement surprises have significantly lower excess returns for the period from just before the preannouncement to just after the earnings announcement. This finding is consistent with the observed disclosure strategies whereby managers attempt to avoid negative earnings announcement surprises, and suggests that how information is presented can affect the markets reaction to that information.

Discussion: “Earnings Management: IPO Valuation and Subsequent Performance”

For a sample of initial public offerings (IPOs), DuCharme, Malatesta, and Sefcik examine whether earnings management affects the offering price and subsequent performance of the firms. The paper is motivated with two theoretical arguments: the value relevance hypothesis and the disappointment hypothesis. The value relevance hypothesis states that initial value is positively related to pre-IPO earnings management. The disappointment hypothesis is that post-IPO performance is negatively related to pre-IPO earnings management. These two hypotheses are closely related. In fact, the purpose of the second hypothesis is to differentiate between two competing explanations for the value relevance hypothesis. Although the value relevance hypothesis argues for a particular relationship between earnings management and offering price, this could result from two competing explanations. First, managers could manage earnings to exploit the way they believe that investors will react to the reported level of earnings. If investors react mechanically to reported earnings numbers, and do not “see through” the accruals made to achieve the reporting result, then managing earnings amounts to managing the offering price. In this case, earnings management involves a form of deception about underlying asset values, albeit a temporary one. Alternatively, managers could use their accounting discretion to provide information to investors. In this case, there is no deception. Managers simply use their latitude to portray the underlying economics of the firm as accurately as possible. DuCharme et al. use the disappointment hypothesis to try to differentiate between the two explanations for the value relevance hypothesis. If investors are deceived by managers who use their accounting discretion, then there will be subsequent disappointment when the actual results are below investors’ expectations. However, if managers use their discretion to transmit better information, then there will be no disappointment, on average.

Market reactions to repeat preannouncements

Reviews the literature on earnings preannouncements (EPs) and investigates their use as a communication strategy and the difference in investor’s reactions to occasional, regular and one‐off EPs by using 1995‐1997 US data on 1,444 EPs. Finds that in general, market reactions to PSs is larger than to formal earnings announcements, that about half the EPs were one‐offs and that firms tended to release all of their bad news but only some of the good. Analyses abnormal returns to suggest that investors anticipate earnings surprises better for repeated EPs, although there is no evidence that firms using them repeatedly choose their amounts differently from one‐off announcers. Briefly considers consistency with other research and avenues for further research.

Discussion: “The Impact of Forecast Disclosure and Accuracy on Equity Pricing: The IPO Perspective”

For a sample of Australian initial public offerings (IPOs), How and Yeo examine the relationship between disclosure policies and post-IPO stock prices. They argue that the Australian market is a particularly interesting one to investigate because of the lower incidence of litigation in that country, relative to the United States. As a result of the lower potential litigation costs, voluntary forecasts are more prevalent. How and Yeo’s two main conclusions are that (1) IPO price does not depend on whether a firm provides forecasts in its prospectus, and (2) firms that make inaccurate forecasts suffer negative price consequences when actual earnings and dividend amounts are disclosed. I discuss each of these conclusions in turn, and then conclude with what I believe are some additional, open questions.