The Information Content of

Annual Earning
Announcements
William H. Beaver
Journal of Accounting Research (1968)
Contents

1. Motivation

2. Research Question and Conclusion

3. Sample and Data

4. Empirical Test

5. Empirical Result

6. Contribution and Suggestion

7. Expansion of Research
Section 1. Motivation

Motivation

Valuation
theory
a relationship Miller and Modigliani(1954-57)
between • the value of common stock = f(earning x earnings multiplier for that risk class, …)
earnings and the • Empirical evidence: If reported earnings are adjusted for measurement errors
value of through the use of instrumental variables, the adjusted earnings are useful in the
common stock prediction of the market value of electric utility firms

The earnings term is the most important explanatory variable in valuation

equation

Earnings lack • Measurement errors in earnings are so large

informational • Other sources available to investors that contain essentially the same information
value but are more timely

Earnings reports have little or no information content

To provide empirical evidence to ascertain whether accounting numbers

Motivation contained or conveyed information about a firm’s financial performance

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Section 2. Research Question and Conclusion

Research Question and Conclusion

Does common stock investors perceive earnings to

possess informational value ?

Definition. of Information A firm’s earnings report is informative (Information content)

Change in expectations • If it leads to a change in investors’ assessments of the

about the outcome of an
event
Sufficiently large change
to induce a change
in the decision-maker’s
behavior
probability distribution of future returns (or price)
 Change in equilibrium value of the market price
• If it leads to an altering of the optimal holding of that firm’s
stock in the portfolios of individual investors
 Shift in portfolio position would be reflected in the volume

Expectations of individual investors and the market as a whole

are altered by the earnings report
 Earnings reports possess information content
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Section 2. Research
Question
Primary Research method

Analyze investor reaction to earnings announcement,

as reflected in the “ volume” and “price” movements of
common stocks in the weeks surrounding the announcement
date
Different Increasing Change in If risk
Earnings Lack of
interpretation volume before a equilibrium preferences
announcement consensus
among investors consensus is value differ, volume
regarding the reached reaction
price
Volume Price
test test
Changes in the Changes in the
expectations of expectations of the
individual investors market as a whole

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Section 3. Sample and
Data
Sample and Data

Sample and Data Collection

• Sample period: 1961~1965

1. Firm on Compustat tape

2. New York Stock Exchange firms
3. Non-12/31 firms
4. No dividend announcement in the same week as
the
earning announcements
5. No stock splits announcement during the 17
week period surrounding the earning
announcements
6. Less than 20 news announcements per
year appearing in the WSJ
• 143 firms
• 506 annual earnings announcements

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Section 4. Empirical
Test
Volume Analysis-Unadjusted for Market Influence

Hypothesis Results

If earning reports convey information in the sense

of leading to changes in the optimal portfolio
positions, the number of shares traded should be
higher in week 0 than during nonreport period.

Analysis method

Vjt = Computed for each week t in the report period for each
of the 506 earning announcement j

Earnings reports have information content

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Section 4. Empirical
Test
Volume Analysis-Adjusted for Market Influence

Hypothesis Results

If earning reports convey information in the sense

of leading to changes in the optimal portfolio
positions, the number of shares traded should be
higher in week 0 than during nonreport period.

Analysis method

Nonreport
period

Report
period
Earnings reports have information content

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Section 4. Empirical
Test
Price Analysis-Adjusted for Market Influence

If earning reports convey information in the sense of leading to changes in the equilibrium
Hypothesis value of the current market price, the magnitude of the price change(without respect to
sign) should be larger in week 0 than during nonreport period.

Analysis method
uit = portion of the individual security’s
firm-specific price change

Nonreport = the square of residual (to

u2 it
period eliminate the effect of the signal of
residual)

si2 = mean of u2 it during the nonreport

period (= Var(u2it ))

Report
period

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Section 4. Empirical
Test
Price Analysis-Adjusted for Market Influence, continued

Results

Earnings reports have information content

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Section 5. Empirical
Result
Empirical Result

The information contents of

Analysis Empirical Results
annual earnings announcements

1
Volume
(unadjusted)
Not only are expectations of
The largest increase in volume
individual investors altered by
2 in the announcement week
earnings report,
Volume
(adjusted)

3
The largest change in price in
Price But also the expectations of the
(adjusted) the announcement week
market as a whole.

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Section 5. Empirical
Result
Relationship between the Volume and the Price Findings

The issue “How much of the increase price activity can be attributed merely to the fact that
there is more “action” in the security, rather than to changes in equilibrium prices?”

1 2 The expectations of the all investors influence

Price changes = sum of price
the market price, whether or not they engage in
changes on each transaction
a purchase or a sale

• The variance of the weekly price change will

• The total number of transactions, explicit
increase in direct to proportion to the number
and implicit, are the same per time period
of transactions that occur during the time
period _ _
More action (et ) = 1.3 Changes More action (et ) = 0
Changes in _price
activity (Ut) Changes in in _price activity Changes in equilibrium
equilibrium prices = (Ut) prices = 1.67
= 1.67
0.37 = 1.67
 Additional empirical research is needed before this issue will be resolved.
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Section 6. Contribution and
Suggestion
Contribution

Prior Research This Research

• To use trading volumes as well as stock

• To use stock prices as an dependent prices as an dependent variable to
variable to evaluate the usefulness of evaluate the usefulness of reported
reported earnings earnings

Volume test Price test

Changes in the Changes in the

expectations of expectations of the
individual investors market as a whole

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Section 6. Contribution and
Suggestion
Suggestions for Future Research

Suggestions
1 • To explore the possibility of constructing expectations models
that will permit a prediction of the direction and magnitude of
Expectation model
the price residual
• Ball and Brown(1968), Beaver-Clark-Wright(1979)

• To apply this methodology to other types of news

2
Other types of news announcements
• Green and Segall: interim earnings reports
announcements
• Dividend announcements

• “Should decision makers perceive earnings reports to possess

3
information value?
Normative issue • To select an event of interest to decision makers and to
investigate the ability of earnings data to predict that event

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Section 6. Expansion of Research

Expansion of Research

May (1971) • 분기별회계이익이공시되는주에도주식수익률분산이증가함을실증

• 이익공시일 전후의 일자별 주가변동과 거래량증가감 분석

Morse (1981)
• 회계이익공시일 전일에 가장 높은 주가변동과 거래량 증가

• 대기업과 소기업의 이익공시 주의 주가변동 차이비교

Atiase (1985)
• 대기업 4.2% 증가 vs 소기업 115.9% 증가

• 이익공시주가간 전후 3 일가간의 초과수익률과 unexpected

Hagerman- earning 가간의 상관관계 조사
Zmijewski-Shah(1984) • 이익공시일 전후의 주가변동방향과 unexpected earning 의
부호 (good news/bad news) 가간에 높은 상관관계

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