Robert N. Freeman

The association between accounting earnings and security returns for large and small firms

Abstract The differential information hypothesis advanced by Atiase (1980) states that information production and dissemination by private parties for the purpose of identifying mispriced securities is an increasing function of firm size. This study examines two corollaries of that hypothesis. First, security prices of large firms anticipate accounting earnings earlier than security prices of small firms. Second, for a given level of ‘unexpected’ earnings, the cumulative abnormal returns of small firms exceed those of large firms. The results are generally consistent with Atiases hypothesis.

A Nonlinear Model Of Security Price Responses To Unexpected Earnings

This study presents evidence that the marginal response of stock price to unexpected earnings declines as the absolute magnitude of unexpected earnings increases. Most previous studies assume a linear relation between unexpected returns (UR) and unexpected earnings (UE). The constant marginal response of prices to earnings in linear models is typically referred to as the earnings response coefficient (ERC) and estimated as the slope coefficient from simple linear regression of UR on UE. Relative to the linear model, a nonlinear approach provides both significantly higher explanatory power and a richer explanation for differences between ERCs and price-earnings ratios. The nonlinear relation described in this paper rests on the premise that the absolute value of unexpected earnings is negatively correlated with earnings persistence. Valuation theory suggests that analysts and investors should place greater emphasis on forecasting high-persistence earnings than low-persistence earnings, because a given amount of the former has a greater valuation impact than the same amount of the

The Multiperiod Information-Content Of Accounting Earnings - Confirmations And Contradictions Of Previous Earnings Reports

In this study, we propose and test the hypothesis that investors reevaluate earnings announcements in the light of postannouncement information.1 Our argument for multiperiod price reactions to earnings news is motivated by the literature linking price responses to earnings persistence.2 When earnings are announced, we assume that investors are unable to determine with certainty the persistence of an earnings

An earnings prediction approach to examining intercompany information transfers

Abstract We assess potential information transfers by examining the association between the earnings announcements of early and late announcers in an industry. Our earnings prediction models are statistically significant much more frequently than would be expected by chance. The models suggest potential positive information transfers on average, but there is substantial cross-industry variation in the strength of this relation. We find that the greatest price reactions by nonannouncers to same-industry earnings announcements occur in industries with the greatest earnings comovement

Market assessment of industry and firm earnings information

Abstract This study examines the timing of security returns associated with industry-wide earnings and firm-specific earnings. We predict and find that returns associated with differences in performance across industries begin and end earlier than returns associated with differences in firm-specific performance within industries. To earn abnormal profits, a trading strategy based on forecasts of future earnings would require earlier predictions of industry-wide earnings than of firm-specific earnings.