Accounting Research Center, Booth School of Business, University of Chicago

The Information Content of Annual Earnings Announcements

Author(s): William H. Beaver
Reviewed work(s):
Source: Journal of Accounting Research, Vol. 6, Empirical Research in Accounting: Selected
Studies 1968 (1968), pp. 67-92
Published by: Wiley-Blackwell on behalf of Accounting Research Center, Booth School of Business,
University of Chicago
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 Contentof Annual
The Information
EarningsAnnouncements

WILLIAM H. BEAVER*

The information contentofearningsis an issue ofobviousimportancean

is a focal point formany measurementcontroversies in accounting.Thi
paper empiricallyexaminesthe extentto which commonstock investo
perceiveearningsto possessinformational value. The study directsits at
tentionto investorreactionto earningsannouncements, as reflectedin th
volume and pricemovementsof commonstocksin the weeks surroundi
the announcementdate.
Valuation theoryhas long posited a relationshipbetweenearningsan
the value of commonstock. Miller and Modiglianipostulatethat one im
portantelementin determining thevalue ofcommonstockis theproducto
earningstimes the appropriateearningsmultiplierfor that risk class
Graham,Dodd, and Cottle take a similarpositionwithrespectto the com
putationof their"intrinsicvalue" of commonstock securities.2MM als
provideempiricalevidencethat suggestsif reportedearningsare adjuste
formeasurementerrorsthroughthe use of instrumentalvariables,the ad
justed earningsare usefulin the predictionof the marketvalue of electr
utilityfirms.In fact,the evidenceindicatedthat the earningstermwas th
mostimportantexplanatoryvariablein the valuation equation.3The rel
tionshipis a necessaryconditionforearningsto have information conten
* AssistantProfessor,Universityof Chicago.
'Merton H. Millerand FrancoModigliani,"Some EstimatesoftheCost ofCapit
to the ElectricUtilityIndustry,1954-57,"AmericanEconomicReview,LVI (Jun
1966),341.
2 BenjaminGraham,David L. Dodd, and Sidney Cottle,SecurityAnalysis (New
68 EMPIRICAL RESEARCH IN ACCOUNTING: SELECTED STUDIES, 1968

but the evidencedoes not precludethe possibilitythat the oppositemay

be true.
Althoughthereare many reasonsforadoptingthe positionthat earnin
lack informationalvalue, two are frequentlyoffered.(1) Measuremen
errorsin earningsare so largethat it would be betterto estimatethe valu
of commonstock directlyfromthe instrumental variablesratherthan us
earningsas an intermediatestep. (2) Even thoughearningsmightconve
information, there are other sources available to investorsthat contai
essentiallythe same information but are moretimely.By the time annua
earningsare released,any potentialinformation contenthas alreadybee
processedby investorsand is impoundedin the marketprice.The implic
tion of both argumentsis earningsreportshave little or no informati
content.
The issue is of major concernto the accountingprofessionbecause it
outcomedirectlyreflectsupon the utilityof the accountingactivity.On
approachto examiningthisissue is to specifyan expectationsmodelofhow
investorsrelate reportedearningsto marketprices. The paper present
by Benston at last year's Conferencefollowedsuch an approach.4Bensto
foundprice changes were largelyinsensitiveto earnings,which taken a
face value is unfavorableto the utilityof earningsdata. But such resul
are always difficult
to interpretbecause the lack of an observedrelationsh
may be due to eitherone or both of two factors.Either no relationsh
existsor the expectationsmodel was improperlyspecified.It is impossib
to determinethe extentto whichthe negativefindingsare due to the latte
ratherthan the former.
The approachtaken hereis to apply tests that requireno assumptio
about the expectationsmodelsof investors.Note that the issue undercon
siderationis of a positive ratherthan a normativenature-that is, th
questionof concernis not whetherinvestorsshouldreact to earningsbu
ratherwhetherinvestorsdo react to earnings.

Content
Definitionsof Information
Informationhas been definedas a changein expectationsabout the out
comeofan event.'Withinthe contextofthisstudy,a firm'searningsrepo
is said to have informationcontentif it leads to a change in investor
assessmentsof the probabilitydistributionof futurereturns(or prices
suchthat thereis a changein equilibriumvalue ofthecurrentmarketprice
GeorgeJ. Benston,"Published CorporateAccountingData and Stock Prices,
Empirical Research in Accounting: Selected Studies, 1967, Supplement to Vol. 5
Journal of Accounting Research, pp. 1-54.
I Henri Theil, Economics and Information Theory (Chicago and Amsterdam
Rand McNally and NorthHolland PublishingCompany,1967),Ch. 1.
6 A further
stipulationis oftenmadethatinformation concernschangesin expecta
tionsaboutan eventthatis a parameterofa decisionmodel.Definingearningsinform
tionin termsofits impacton futurereturns(or prices)is consistentwiththatfurth
 CONTENT OF ANNUAL EARNINGS ANNOUNCEMENTS 69

Althoughneitherthe directionnor the magnitudeof the price changecan

be specifiedwithoutknowingthe expectationsmodel(s) of investors,th
variabilityof price changes is likelyto be greaterwhen earningsare an
nouncedthan at othertimesduringthe year.7
Anotherdefinition of information states that not only must therebe a
changein expectationsbut the changemust be sufficiently large to induc
a changein the decision-maker's behavior.Accordingto this definitiona
firm'searningsreportpossessesinformational value only if it leads to an
alteringof the optimalholdingof that firm'sstock in the portfoliosof in
dividualinvestors.The optimal adjustmentmightbe to buy more share
or to sell some or all of the sharesalreadyheld. In eitherevent,the shiftin
portfoliopositionwouldbe reflected in thevolume.If earningsreportshav
information content,thenumberofsharestradedis likelyto be higherwhe
the earningsreportis releasedthan at othertimesduringthe year.8

Price and VolumeTests

Relationshipsbetween
The relationshipsposited above are consistentwith the economist
notionthat volume reflectsa lack of consensusregardingthe price. Th
lack of consensusis induced by a new piece of information, the earning
report.Since investorsmay differin theway theyinterpretthe report,som
timemay elapse beforea consensusis reached,duringwhichtimeincrease
volumewould be observed.If consensuswere reachedon the firsttransac
tion, therewould be a price reactionbut no volume reaction,assumin
homogeneousrisk preferencesamong investors.If risk preferencesdiffe
therestillcould be a volumereaction,even afterthe equilibriumpricehad
been reached.
An importantdistinctionbetweenthe priceand volumetestsis that th
formerreflectschangesin the expectationsof the marketas a wholewhil
the latter reflectschanges in the expectationsof individualinvestors.A
stipulation.For support,see the literatureon portfoliotheory,especiallyHarryM
Markowitz,PortfolioSelection:Efficient Diversification (New York
of Investments
JohnWiley & Sons, 1959).
7 The changein equilibriumprice is in additionto any price changethat woul
normallyoccur in the absence of any earningsannouncement.The assumptioni
that the two price changesare positivelycorrelated,independent,or mildlycorr
lated. If therewerestrongnegativecorrelation,the price changevariabilitymigh
not be greaterat the announcementdate. In the light of previousresearchin th
behaviorof securityprices,the assumptionof independenceis mostlikelyto be th
correctone. See Eugene F. Fama, ''The Behaviorof StockMarketPrices," Journ
of Business,XXXVIII (January,1965),34-105.
8 As a finalparentheticalcommenton definitions of information,notethat redu
tionofuncertainty chosen.It shouldbe apparenttha
was not one of the definitions
in a dynamicsituation(i.e., whereprobabilitydistribution assessmentsare changin
overtime),a decisionmakermaybe moreuncertainabout a giveneventafterrecei
ing a messageabout the event than he was beforehe receivedthe message.To us
Theil's terminology,the entropymay increaseas a resultof a message,yet the me
sage has information content.See Theil, op. cit.,Ch. 2.
70 WILLIAM H. BEAVER

piece ofinformationmay be neutralin the sense ofnot changingthe expec

tationsof the marketas a wholebut it may greatlyalter the expectation
ofindividuals.In this situation,therewould be no pricereaction,but ther
would be shiftsin portfoliopositionsreflectedin the volume. Because th
pricereflectsthe expectationsof many investors,it may implya veryeff
cientforecastof earningsforseveralweeks priorto the announcement.'If
so, the pricetestmay be less sensitivethanvolumeto earningsreports.
The foregoingdiscussionsuggeststhat a reactionmay be observedin
only one of the tests or that the two tests may not respondequally. If
neithertest responds,the utilityof earningsdata and the study's sampl
designwill be suspect.

Sample Design
SelectionofSample. The studyis based upon a sample of annual earning
announcementsreleasedby 143 firmsduringthe years 1961 through1965
Six criteriawereused in the selectionofthe samplefirms.
(1) The firmmust be on the Compustat tape; (2) the firmmust be a
memberof the New York Stock Exchange; (3) the fiscalyear mustend on
a date otherthan December 31; (4) no dividendswere announcedin th
same week as the earnings announcement; (5) no stock splits wer
announcedduringthe 17 week period surroundingthe announcemento
earnings;and (6) therewere less than 20 news announcementsper yea
appearingin the Wall StreetJournal.Table 1 indicatesthe extentto whic
each criterionaffectedthe sample size.
Criterion(1) was selectedbecause the Compustatpopulationrepresen
over90 per centofthe total marketvalue ofthe commonstocksofpublicl
held corporationsand henceis a relevantpopulationforstudy.A secondar
reasonis the ease withwhichfinancialstatementitemscan be obtainedfo
the Compustatfirmsrelativeto firmsnot on the tapes. Althoughno finan
cial statementdata are needed forthe earlierphases of this study,even
tuallythe scope will be extendedto relatingmarketpricesto the financi
statementitems,namelythe earningsnumbers.
Criterion(2) was used because weeklypriceand volume data on NYSE
firmsare relativelyeasy to obtain. The Center for Research in Securit
Prices (CRSP) provided tapes which contain daily price, volume, and
transactioninformationon all firmson the NYSE for the years 196
through1965.10
of announceme
Criterion(3) was selectedin orderto avoid a clustering
9Efficiencyis definedin termsof E(x6- x*)2, wherex is the forecastedvalue o
reportedearningsand x* is actual value. The closerthe expectationis to zero, th
moreefficientthe forecastis. Note that a forecastmay be unbiasedbut veryinef
cient.The distinctionbetweenefficiency and unbiasednessis moreimportantto th
interpretationof the findingspresentedlater.
10Withoutthe cooperationof CRSP, the data collectionchorewould have bee
overwhelming.
 CONTENT OF ANNUAL EARNINGS ANNOUNCEMENTS 71

dates duringany time period. Without this criterion,the sample data

would exhibita large clusteringof announcementsin the monthsof Feb-
ruary,March, and April because two out of three Compustat firmsare
12/31firms.In subsequentanalysis,an attemptwill be made to remov
the effectsof market-wideevents fromthe individualsecurity'svolum
and pricedata. When earningsannouncements cluster,theybecomea form
of market-wideprice indexes and the volume statistics.Hence, any at-
temptto removethe effectsof market-wideevents would eliminatethe
effects ofthe earningsreportas well.
The purposesof criteria(4) and (5) are similarin that they attemptto
minimizeany ambiguityassociatedwithan observedreactionin the week
of the earningsannouncement.If these criteriawere not applied, ther
would be a joint effect,and it would be extremelydifficult to separatethe
announcement effectsofdividendsor stocksplitsfromthoseofthe earning
report."Criterion(6) was chosenso that therewould be weekswherefew
if any, announcementswere released. To the extentthat news items are
announcedin weeksotherthan the earningsannouncementweek,compar
ing thoseweekswiththe earningsannouncementweek comparesthe infor
mation contentof the earningsreportswith that of other types of new
announcements, whichis not the issue understudy.
Both the directionand magnitudeofany potentialbias introducedby the
selectioncriteriaare difficult
to assess. Criteria(1) and (2) led to the selec
tionofthe largerfirmsin the economy.The averagetotal assets (perfinan
cial statements)forthe 143 firmsin 1965 was 167 milliondollars,and thei
averagemarketvalue ofcommonstockoutstandingin 1965 was 189 millio
dollars. The effectof selectinglargerfirmswould tend to induce a bias
against earningsreportsbecause the largerfirmsare generallyassociated
witha greaterflowof additionalinformation than smallerfirms.
The effectof criterion(3) was twofold:(a) Out of the subpopulationof
Compustat,NYSE firms,the criteriontended to select the smallerfirm
even thoughthey are probablystill largerthan average forthe econom
as a whole. In 1965, the average total assets forComputsat,NYSE firm
were 441 milliondollars,and the average marketvalue of commonstock
outstandingwas 564 milliondollars. (b) A greaterproportionof retailer
and foodprocessorsappears in the sample than would have been obtained
if firmshad not been restrictednon-12/31firms.Retailers comprise14.6
per centof the sample,while 17.5 per cent of the firmsare foodprocessor
The expectedpercentageswould have been 6.8 and 10.0, respectively,if
11A pilot studywithsimilarobjectivesdid not excludefirmswith dividendan-
nouncements in thesame weekas earnings.The investorreactionin termsofvolum
was almosttwice as large as the reactionobservedin this study.Stock splits wer
excludedbecause previousresearchhas foundthat stocksplits possess informati
content.See Eugene F. Fama, et al., "The Adjustmentof Stock Prices to New In-
formation,"Report 6705 (Centerfor MathematicalStudies in Business and Eco-
nomics,GraduateSchool of Business,Universityof Dhiiago,1967),forthcoming in
the InternationalEconomicReview.
72 WILLIAM H. BEAVER

a randomsample were drawnfromthe Compustat,NYSE subpopulatio

With respectto the implicationsforinformation content,thereare to b
no obviousreasonswhythesefirmswould constitutea biased sample,wit
the one exceptionthat retailerstend to reportfinancialstatementdat
monthlywhichwould tend to induce a bias againstfindinginformatio
value in annual earningsreports.In fact,in the analysis describedlater
boththe priceand volumereactionswereless dramaticforthe retailersan
foodprocessorsthan forthe otherfirmsin the sample.
It is possiblethat the selectioncriteria,especiallycriterion(6), may in
duce some bias in the oppositedirection.As long as the criteriaare visib
ex ante, the populationforwhichthe study'sfindingsare relevantcan b
easily identified.Also, the sample criteriacan be relaxedin futurestudie
to discoverthe generalityof the findingspresentedhereforotherpopula
tions.
Data Collection. The firststep was the identification of firmsthat woul
comprisethe sample. Meeting the criteriain any one of the five year
(1961-1965) was a sufficient conditionfora firm'sinclusionforthat year
The resultwas a sample of 143 firms.Because all firmsdid not meet th
criteriain everyyear, the 143 firmsgave rise to 506 annual earningsan
nouncements.The date of the earningsannouncementwas obtainedfro
the Wall StreetJournalIndex.
The distributions of financialstatementdates and announcementdate
appear in Table 2. Restrictingthe sample to non-12/31firmswas succes
fulin reducingthe clusteringof dates. The mostfrequentmonthin whic
the fiscalyear ended (June) representsonly 23.8 per cent of the sampl
whilean unrestricted sample would have resultedin 67 per centin a sing
month (December). With respect to announcementdates, the highe
three-month period(September,October,and November)contains37.6 pe
centofthe announcements, whileunderan unrestricted samplingprocedu
the highestpercentagewouldhave been approximately 67 per cent (durin
February,March, and April). The mostfrequentmonthof announceme
(October) represents13.4 per cent of the announcements,which is onl
slightlyhigherthan the percentagethat would be obtained under a com
pletelyuniformdistribution throughoutthe year (9.1 per cent).
One by-productof the data gatheringwas some insightinto the tim
lag betweenthe financialstatementdate and the announcementdate (se
Table 3). The median lag was 9 weeks,only 3 per cent of the announc
mentsweremade by the end of 4 weeks,and 93 per cent of the earnin
had been reportedby the end of 13 weeks. A possible avenue forfutu
researchwould be to study the information contentof the time lag itse
(e.g., is "bad" news reportedless rapidlythan "good" news?).
Definitionof Variables. The next step was to compute the followi
variablesforeach firmon a weeklybasis forthe 261 weeks (fromJanuar
1, 1961 to December31, 1965):
 CONTENT OF ANNUAL EARNINGS ANNOUNCEMENTS 73

no. of sharesof firmi

tradedin week t X
it= I
no. of shares outstanding no. of trading
forfirmi in week t days in week t
no. of sharestraded
forall NYSE firms
in week t
VMt= I
no. of shares outstanding no. of trading
forall NYSE firms days in week t
in week t

it= In [Dit + P]

Rmt = In (SP)~
L(SP) t-1J
Dit = cash dividend"paid" on share of firmi in week t,
Pit = closingpriceforshare offirmi at end of week t,
= closingprice at end of week t - 1, adjusted forcapital chang
(e.g., stocksplitsand stockdividends),
(SP) = closingvalue ofStandardand Poor's PriceIndex at end ofweek
(SP) t-1 = closingvalue at end of week t - 1.
Vit is a weeklyaverageof the daily percentageofsharestraded.Weekl
volumewas dividedby the numberofsharesoutstandingso that the resul
would not be dominatedby those firmswiththe largestnumberof share
outstanding.The percentageof shares traded per week were then divide
by the numberof tradingdays in orderto adjust forthe fact that not a
weekshave the same numberof tradingdays.
VMtreflectsthelevelofvolumeforall NYSE firms.The weightingschem
implicitin thisvolumeindexassignsgreaterweightto percentageof shar
traded of firmswith the largernumberof shares outstanding.While th
featureis not entirelysatisfying,its use is defendedon the groundstha
thisindexis mucheasierto obtainthan an indexthat assignsequal weigh
to all firmsand because thereis no reason to believe the use of this inde
leads to eitheran upwardor a downwardbias in the findingsregardingth
information contentof earningsreports.
Jit is the naturallogarithmof the pricerelativeand can be viewedas
measureof price change or as the rate of returnof the securityassumin
continuouscompounding.12 RMt is a similar measure for 425 industr

ofRit are furtherdescribedin Fama, op. cit.; BenjaminF. King

12 The properties

"Market and IndustryFactors in Stock Price Behavior," Journal of Busines

XXXIX (January,1966), 139-90;JamesH. Lorie and LawrenceFisher, "Rates o
Returnon Investmentin CommonStocks,"JournalofBusiness,XXXVII (Januar
1964),1-21.
74 WILLIAM H. BEAVER

NYSE firms.This statistichas some limitationsas a market-wideinde

of pricechangeand in many respectsis less preferablethan some recent
developed indexes,notably Fisher's Link Relative.'3 However, again it
use is defendedon the same groundsas thoseforthe market-wide index o
volume. The Fisher Link Relative has been computedformonthlydat
only. To constructa similarindex on a weeklybasis is a researchprojec
in itself.Not onlyis the S & P index easier to obtain but it was foundi
otherstudiesthat resultswereinsensitiveto whichindex is used.'4Withi
the contextof this study,thereis no reason to believethat the use of th
S & P based indexwill lead to an overstatement or understatement of th
information contentof earningsreports.

VolumeAnalysis- UnadjustedforMarketInfluences
Vjt was computedforeach week t in the reportperiodforeach of the 50
earningsannouncement j. The reportperiodis definedas the 17 weekperio
surroundingthe announcementdate (8 weeks beforethe announceme
week,and 8 weeks after).Then the '[t (averagingacrossj) was compute
foreach ofthe 17 weeks,and the resultsappear in Figure1. The dottedlin
denotesthe value of Vt in the nonreportperiod (i.e., that portionof th
261 weeksnot includedin the 17 week reportperiods).
The evidenceindicatesa ratherdramaticincreasein volume in the an
nouncementweek (week 0). In fact,the mean volumein week 0 is 33 pe
cent largerthan the mean volume duringthe nonreportperiod,and it i
by far the largestvalue observedduringthe 17 weeks. Investorsdo shi
portfoliopositionsat the timeof the earningsannouncement, and thisshi
is consistentwith the contentionthat earningsreportshave informat
content.
The contentionis furthersupportedby the behaviorof investorsin th
other weeks. Eight weeks prior to the announcement,volume is belo
normal,whichsuggeststhat investorsmay postponetheirpurchasesan
sales of the securityuntil the earningsreportis released.The fourweek
after the announcement,when the annual reportsare received,exhib
slightlyabove normalvolumeand hencepermita morethoroughevaluatio
of the earningsdata.
The investorresponseappears to be very rapid, for almost all of th
above-normalactivityoccursduringweek0. This findingsupportsprevio
studies that also show investorsrespond quickly (as reflectedin pric
changes) to new pieces of information(see Fama, et al.).
Perhaps some commentis in orderregardingthe overalllevel of volum
throughoutthe year. The volumestatisticsreportedin Figure 1 are mult
Fisher's Index, see Lawren
13 For a discussionof the S & P Index vis-A-vis

Fisher,"Some New StockMarketIndices," JournalofBusiness,XXXIX (Januar

1966),191-225.
I4 Fama, et al., op. cit.
 CONTENT OF ANNUAL EARNINGS ANNOUNCEMENTS 7

plied by the factorof 103.The average volume in the nonreportperiod

.00112-that is, the average daily percentageof shares traded is slight
greaterthan one-tenthof one per cent of the sharesoutstanding.This im
plies an annual turnoverof approximately25 per cent and a weeklytur
overof.5 ofonepercent.If corporation X has 10 millionsharesoutstandin
duringa normalweek50,000shareswillbe tradedwithan expectedvolum
of 66,667sharesduringthe earningsreportweek.

VolumeAnalysis-AdjustedforMarketInfluences
The sectionwillpresentan analysiswhichattemptsto removethe effe
of market-wide eventsupon the individualsecurity'svolume.The motiv
tionforthe analysisis two-fold.(1) It is possiblethat the abnormallyhig
volumemay be caused in part by market-widepieces of information th
are released at the same time as the earningsannouncements.Since th
earningsannouncements are releasedalmostuniformly throughouttheyea
this is not a very plausible explanationof the findings.Nevertheless,r
movingthe marketwide effectsshould allay any fearsthat this unlike
situationdoes accountforthe results.(2) More importantly, the analys
will serve to reduce "noise" in the volume data. Noise is any movemen
in volume due to unspecifiedfactors,one of whichis market-wideeven
that would cause increasesin the volume.
AnalysisforNonreport Period.The followingmodelwas used to abstra
frommarket-wide factors:15

Vit = ai + biVMt + eit.

Estimates of as and bi were obtained fromlinear regressionsbased upo

observationsfromthe nonreportperiod.The observationsfromthe repo
periodweredeletedfromthe regressionbecause if earningsannounceme
have information content,the assumptionsof the classicalregression
mod
are violated duringthe reportperiod (e.g., E(eit) - 0).
Some summarystatisticsrelatingto the regressionsappear in Table 4
The mean volume of the sample firmsis much higherthan that of th
marketindex.One reasonis the different weightingschemeimplicitin eac
measure.The marketindexassignsgreaterweightto firmswiththe great
numberof sharesoutstanding.If thesefirmshave lowervolume (express
as a percentageof shares outstanding),then the marketindex would b
expected to have a lower mean. Anotherexplanationis that the samp
15 The rationale for using this particularmodel is two-fold:(1) It is a simp
relationship,and thereis no obvious reasonwhy a morecomplexmodel would b
moreappropriate.(2) It is analogousto themodelthatwillbe used to removeeffe
ofmarket-wide eventsuponthepricechangesofindividualsecurities.The paperw
laterindicatethatsuch a modelseemsto be a reasonableway to characterizepri
changes.Hence, it wouldseem reasonableto assume a similarprocessis generat
volumeover timeas well.
76 WILLIAM H. BEAVER

selectioncriterionimplicitly favoredhigherturnoversecurities.But it is no
obviouswhythat shouldbe truenor what implicationit has forinferenc
regardinginformation content.
The averagecorrelationcoefficient was low, implyingthat removingth
influenceof VMtshouldhave littleeffectupon the analysis.In spite of th
low association,the sign of the correlationcoefficientwas positivefor 13
firmsand negativeforonly 4. These two findingstaken togethersugge
that the marketinfluenceon an individualfirm'svolume is significan
differentfromzero but that its magnitudeis small.16
The residual,eit, is that portionof an individualsecurity'svolumetha
cannotbe explainedby market-wide eventsas reflectedin VMt. The mea
of es (averagingacross time forgiven firmi) is forcedto be zero by th
mechanicsof the regressioncomputations.However,the mean of et (aver
age acrossfirmsfora givenweek t) may be nonzero.An inspectionof it
distributionfor the 261 weeks provides some interestinginsights (se
Figure2).
The distribution is skewedto the right,as indicatedby the fact that 5
per cent of it are negativeand 42 per cent are positive.The median of e
is -.02 and its mean is zero (again this must be true because of the me
chanics of the regressioncomputations).The ei's are even more asym
metrical,with64.6 per centnegativeand 35.4 per centpositive.One inte
pretationof the asymmetryis that information is providedto investorsin
discontinuous"lumps" ratherthan smoothlyor continuouslyovertime.
ResidualAnalysisfortheReportPeriod.The residual,ejt, was compute
foreach week t of the reportperiodforeach of the 506 earningsannounc
mentsj in the followingmanner:

ejt = Vjt - -bVMt _ I.., 50

t= 8, ... +8
whereai and bi wereobtainedfromtheregressions in the nonreport
period
Then the it was computedforeach of the 17 weeks,and the resultsappea
in Figure 3. A positive residual implies above normalvolume; negativ
belownormal;and zero,normalvolume.
The behaviorof the volumeresidualis the same as that of the previou
analysis. There is a large peak in week 0, wherethe mean volume is ap
proximately30 per cent higherthan duringthe nonreportperiod (i.e
.33/1.12,mean residualin week0/meanvolumein the nonreportperiod
and is about 40 per cent higherthan the mean volumein the weeksprio
I6 The probabilitythat theexpectedvalue ofthe correlation coefficientis less tha
or equal to zero is less than 1 chancein 100,000.
17Note thatthesubscripti refers to firmi or securityi, butj refersto an earning
announcement. Hence as and bi may be used a maximumof fivetimes;its frequen
of use will dependupon the numberof earningsannouncements of firmi or securit
i includedin the sample of 506 announcements.
 CONTENT OF ANNUAL EARNINGS ANNOUNCEMENTS

to the announcement. Again the volume duringtheseweeksis abnorma

low, whileslightlyabove normalvolume persistsforfourweeksfollow
the announcement week.The interpretationofthesefindings is the same
that of the previousanalysis.In short,the resultsare veryconsistentw
the contentionthat earningsannouncements possessinformation content
Because a comparisonofmean values can oftenbe misleading,two ad
tional comparisonswere made to see how unusual is an it of .33, wh
was the value observed in week 0. The firstcomparisonexamined t
values of it in the reportperiod and those in the nonreportperiod (s
Figure2). Out of the 261 nonreportperiodvalues of it, only4 had valu
exceeding.33. Althoughsuch a comparisonis admittedlya crude appro
mation,it does suggestthat the value in week0 is unusuallyhigh.
Moreover this comparisontends to understatethe unusual nature
the week 0 residual.The it duringthe nonreportperiodis based upon
maximumof 143 observationsper mean, while the it in week 0 (as w
as the rest of the reportperiod) was based upon 506 observations.Sin
correlated,the dispersionof the distribu
the eit's are less thanperfectly
of et would decrease as the numberof observationsper mean increas
Hence, if the distributionin the nonreportperiod were also based up
506 observationsper mean,its dispersionwould be smallerand the num
of values above .33 would be fewer.Anotherfactorleading to an und
statementis that et in the nonreportperiodwas based upon residualstak
fromthe same week, while the mean residualin week 0 was based up
observationstaken from different weeks. If contemporaneousresidu
are more highlycorrelatedthan noncontemporaneous residuals (and t
evidence suggeststhey are), then a distributionof it in the nonrep
periodbased upon noncontemporaneous observationswouldhave a smal
dispersionand fewervalues above .33.18The major pointis the compari
indicatesthat the mean residualin week0 is unusuallyhigh,in spite oft
fact that the comparisontendsto understatehow unusual it reallyis.
A second comparisoninvolvedthe analysis of the frequencyof posit
residualsin each reportperiodweek as comparedwiththe numberdur
the nonreportperiod (see Figure4). The behaviorof the positiveresidu
is consistentwith the previousrelationshipsobservedin Figures 1 and
Prior to the announcement,the frequencyof positive residualsis bel
that of the nonreportperiod,whilethe frequencyis slightlyabove norm
afterthe announcement. By farthe largestfrequencyoccursin week 0, a
thereis an extremely smallprobabilitythat such a highnumberof posit
residualscould have occurredby chance.'9 This second comparisonsu
geststhe same inferencedrawnfromthe first-namely,the volumein we
0 is an unusuallyhigh value. In sum, the behaviorof volume unifor
is reflectedin the positiveautocorrelationcoefficien
18 The serial correlation

theresiduals(see Table 4). Anotherindicationis thatthefourvalues ofe exceed

.33 occurredin a five-week period.
19The probabilityis less than 1 chancein 100,000.
78 WILLIAM H. BEAVER

supportsthecontentionthat earningshave information contentforindiv

ual investors.
In somerespects,thesefindingsdo not reflectthe entireextentto wh
activityis above normalin week0. Not all of the earningsannounceme
of the 143 firmswereused-in fact,only 506 out of a possible715. The
week periodssurrounding the remaining209 are includedin the nonrep
period.This willtendto inducea bias againstearningsreportssincevolu
activityis increasedin the nonreportperiod by the inclusionof the 2
"reportperiods." The extentof this bias could be seriousbecause one
the reasonsforplacing a reportin the 209 groupwas the announcem
of earningsand dividendsin the same week which would produce ev
morepriceand volumeactivitythan the 506 announcements studied.How
ever,thereare also compensatingfactors.Althoughthe activityin week
was above normal,the activityin the weeks priorwere below normalf
the 506 observations.If thistendsto be trueof the deletedannounceme
as well,the bias may not be so great.If the 209 observationsweredelet
fromthe nonreportperiod,to be completelyconsistent,othertypesofne
announcementswould also have to be deletedfor the same reasons. Th
resultwould be virtuallyno observationsin the nonreportperiod.Sin
the nonreportperioddoes includethese events,it is importantto stresst
fact that comparingthe earningsreportperiodswiththe nonreportperi
involvesa comparisonof the information contentof earningsreportswi
the average amount of informationbeing released duringthe nonrep
period.By necessity,thisis a bias againstearningsreportssincethe appr
priatecomparisonwouldbe a nonreportperiodwithno information at all.

Events
PriceAnalysis-AdjustedforInfluenceofMarket-Wide
If earningsreportsconveyinformation in the sense ofleadingto chang
in the equilibriumvalue of the currentmarketprice,the magnitudeof t
price change (withoutrespectto sign) should be largerin week 0 th
duringthe nonreportperiod.The firststep in makingthispredictionoper
tional is to removethe effectof market-wideevents upon the individ
security'sprice change. The reasons for wishingto abstract fromth
events are similarto those cited in the volume analysis.20The model us
herewas firstsuggestedby Sharpe,and it providedthemotivationforusi
an analogousmodelforvolume.2'The Sharpe modelstates:
Rit = at + biRMt+ uit.
Rit is a measureof the pricechangeof securityi duringtimeperiodt, an
RMt is a measureof averageprice change duringtime periodt for425 i
dustrialNYSE firms.Both variables were definedearlier.The residu
20See p. 75.
21WilliamF. Sharpe, "A SimplifiedModel forPortfolioAnalysis,"Managem
Science,IX (January,1963),277-93.
 CONTENT OF ANNUAL EARNINGS ANNOUNCEMENTS 7

that portionof the individualsecurity'sprice change tha

uit, represents
cannotbe accountedforby the effectsof market-wideevents as reflect
in RMt.
The Sharpe model has been investigatedby Fama et al. and by Schole
and was helpfulin abstractingfromthe influenceof market-widefactor
King's studyof monthlypricechangesfoundthat, on the average,31 pe
cent of the variationin an individualsecurity'sprice change can be ex
plainedby market-wide factorsas reflected in a market-wide indexofpric
change.22For these reasons,a price change analysis, unadjusted for th
influenceof market-widefactors,was not conducted. The evidence wi
laterindicatethatifsuchan analysishad beenconducted,the resultswoul
be essentiallythe same as thosereportedhere.
Since the directionof the pricechange cannotbe specified,a knowled
of the investors'expectationmodel(s), some transformation of uit tha
abstractsfromits sign,is needed. One such transformation is the squar
of the residual (i.e., ui t). If earningsreportspossess information conten
2 b
U2 t shouldbe greaterduringweek 0 than duringthe nonreport period.Th
mean of U2t duringthe nonreportperiod is simplythe variance of tha
variable (s,2).23
The relationshipbetweenthe squared residualin week0 and the averag
squared residualduringthe nonreportperiodcan be expressedin the for
of the ratio,Uit, wherethe numeratoris uit and the denominatoris si2. I
the ratiois greaterthanone,the residualpricechangeis largerthannorma
and converselyfora ratioofless than one. The predictionis the mean of U
(averagingacross announcements) will be greaterthan one duringweek 0
if earningsreportspossessinformation content.
AnalysisofNonreport Period.Estimatesof as, bi, and s,2wereobtaine
fromregressionsbased upon the nonreportperiod.The observationsfro
the reportperiod(i.e., the 17 weekssurrounding each announcement)wer
deletedfromthe regressionbecause if earningshave information conten
the assumptionsof the classical regressionmodel are violated duringth
reportperiod (e.g., the variance of the residualsduringthe reportperio
is not equal to the varianceduringthe nonreportperiod).
Some summarystatisticsrelatingto the regressionsappear in Table 5
The mean pricechangestend to be lowerforthe samplefirmsthan forth
marketindex.Since the Rit call also be interpreted as a rate of return,th
lowerreturnsforthe sample firmswould suggestthat they are less risk
22 Fama, et al., op. cit.; MyronScholes, "The Effectsof SecondaryDistributio

upon the Market Price" (paper presentedat the November,1967 session of th

ConferencefortheStudyofSecurityPricesheldat the GraduateSchoolofBusines
UniversityofChicago); and King,op. cit.The percentagerefersto theperiodAugus
1952throughDecember,1960.
23 The variance
(j2 [
= - is the estimateof yj2, computedfro
sample data. Sz2 = [Ze=i(uit)E(uj)]2.
sj2 ]/T, where T = number of weekly observations fo
the nonreportperiodforsecurityi.
80 WILLIAM H. BEAVER

than the firmscomprisingthe index.An inspectionof the distribution of b

also lends supportto that contention.Sharpe states that bi can be viewe
as an operationalmeasureof a security'sriskiness,withlargervalues of b
implyinggreaterriskiness.24 A bi of one denotes a securityof "average
riskiness.The average bi forthe sample firmsis less than one (.89), whic
suggeststhat the samplefirmsare less risky.However,the discussionin th
sectionon definition ofvariablesindicatedthat the definitionof RMt base
upon the S & P indexmay be subject to measurementerror.An errors-
variablesmodelsuggeststhat measurementerrorin the independentvaria
ble, even if it has a zero expectation,will induce a downwardbias in th
estimates of the regressioncoefficientassociated with the independe
variable (i.e., bi).25 Effortswere undertakento assess the extent of th
downwardbias by computingbi forthe sample firms,usingmonthlydat
and Fisher'sLink Relative as a definition ofRMt . The medianbi was .993
suggestingthe sample firmsare of average riskinessrelative to NYSE
firms(i.e., the firmsthat comprisethe FisherIndex).
On the average,the associationbetweenRit and RMt was low. Only 6
per cent of the variationin Rit can be explainedby the variationin RM
as measuredby the square of the average correlationcoefficient. The im
plicationis two-fold:(1) Removingthe influenceof RMtshould have litt
effectupon the results,relativeto what would have been obtainedif M
were analyzed ratherthan uit. (2) The explanatorypoweris much lowe
than that obtainedby King, suggestingthat eitherweeklydata have mor
noise than monthlydata or that RMt was not properlydefined,or both
The presenceof eitherfactorwill make it moredifficult to detectany pric
effectsof the earningsreports.
The distributionof UC (averaging across 143 firms,t = 2, ,261
duringthe nonreportperiodis shownin Figure5. It will be used as a basi
forassessingthesignificance ofthe Ut's observedduringthe reportperiod
Price Residual Analysisfor ReportPeriod. The residual,ujt, was com
puted foreach week t of the reportperiodand foreach of the 506 earnin
announcements j in the followingmanner:
i= 1,***, 143
ujt== Rjt-aa-bi-Mi j= 1, ***,506
t =-8, **,+8.
The residualwas thensquared and dividedby the varianceof the residua
forits firmduringthe nonreportperiod,as follows:
24WilliamF. Sharpe, "Capital Asset Prices: A Theory of Market Equilibriu
underConditionsof Risk," JournalofFinance,XIX (September,1964),425-42.
25 J. Johnston, Methods(New York: McGraw-Hill,1963),148ff.
Econometric
is skewedto the right.One explanationforthis phenomen
26 The distribution
is theleptokurticnatureoftheunderlying uit's (see Fama, op. cit.). The distributi
of ustis also skewedin thesame direction.Althoughthe mean ofu~tis one for eac
securityduringthenonreport period,only26 percentoftheobservationsexceedon
 CONTENT OF ANNUAL EARNINGS ANNOUNCEMENTS 81

i-= 1,.. , 143

Ujt = u 1,t j , 506
t --8 ... ,+8.
U, (averagingacrossj) was computedforeach of the 17 weeksof therepo
period,and the resultsappear in Figure6.
The magnitudeofthe pricechangesin week0 is muchlarger(67 per cen
higher)than the average duringthe nonreportperiod.The above norm
price activityis what would be expectedif changesin equilibriumprice
are more likelyto occur when earningsreportswere released,and henc
the evidenceis very consistentwith earningsreportspossessinginform
tionalvalue.
Althoughthe priceactivityis highestin week 0, the next largestvalue
occur in the weeks immediatelycontingentto week 0. Price changes ar
above averagein the week immediatelypriorto the announcement, whic
may reflectinformation leakage or the fact that the Wall StreetJourn
was not the firstsourceto reportthe earningsin some cases. Above norm
activityis also presentfortwoweeksafterthe announcement, duringwhic
timethe annualreportsare releasedand are evaluatedby investors.
The below price activityin weeks -8 through-2 is open to at leas
two interpretations:(1) There is a below normal amount of informati
comingonto the marketat this time. (2) The below normalprice activit
is a result of the below normal volume also observed duringthe sam
period.More will be said about both (1) and (2) later.
The behaviorofthe mean residual,at , also indicatesgreaterpriceactiv
ityinweek0 (see Table 6). The meanin week0 is .00500,whichis thelarge
value observedduringthe 17 weeksand is fourtimeslargerthan the aver
age value of Rit duringthe nonreportperiod (.00125, see Table 5). Th
means give the impressionthat serial correlationmay be presentin th
data. However,the averageautocorrelation of the priceresidualswas quit
low (-.08) duringthe reportperiod. The low degree of autocorrelati
supportsthe similarfindingsof Fama and his conclusionthat the mark
moves to new equilibriumpositionsquickly.27 Furtherevidenceof this i
reflected in thefactthat the bulk ofthe pricereactiondoes occurin week
(see Figure6). The low autocorrelationalso suggeststhatthe pricechang
were permanentin natureand were not reversedin subsequentweeks. In
fact, the autocorrelationof the residualsin the weeks immediatelyaft
the announcementweek was slightlypositive.28
Two additional comparisons(analogous to those made in the volum
analysis)wereconductedto see how unusualan Ut of 1.67 is. The firstcom
parison examined UO in the nonreportperiod (see Figure 5). Out of 26
values, only 11 exceeded 1.67. The comparisonsuggeststhat the price ac
27 Fama, op. cit.
28 The autocorrelationwas examinedon a week-by-week, cross-sectionalbasi
i.e., ot = -=i (ejtejetA)1/[Z'0 (eit)2], t = -8, *., +8.
82 WILLIAM H. BEAVER

tivityin week0 is unusuallyhigh,in spiteof the fact that such a comp

son tendsto understatehow unusual it reallyis.29The secondcompar
examinedthe frequencyof Up's largerthan one relativeto the frequ
that occurredduringthe nonreportperiod (see Figure 7). The frequ
of values above one is greatestin week 0, withthe nexthighestvalues
curringin the weeks adjacent to the announcementweek. There is an
tremelysmall probabilitythat such a high number(181 in week 0) co
have occurredby chance.30The interpretation is the same as that of
mean analysis-namely,thereis above normalpriceactivitywhenearn
reportsare released.What thisanalysisrevealsthat the mean analysisd
not is the fact that the abnormallyhighmean is not caused by a few
servationsdominatingthe resultsbut ratherby a substantialpropor
of the sample data.
In summary,the behaviorof the price changesuniformly supports
contentionthat earningsreportspossess informationcontent.Observ
a price reactionas well as a volume reactionindicatesthat not only
expectationsof individualinvestorsalteredby the earningsreportbut a
the expectationsof the marketas a whole,as reflectedin the change
equilibrium prices.
Relationshipbetweenthe Volumeand thePrice Findings. The prev
sentenceraises the issue, "how muchof the increasedpriceactivitycan
attributedmerelyto the fact that thereis more 'action' in the secur
ratherthan to changesin equilibriumprices?"
One way to approach this questionis to view the price change dur
a giventimeperiodas a sum of pricechangeson each transactionthat
curredduringthat period.In a worldof uncertainty, the pricechangef
each transactioncan be treatedas an observationfroma probability
tributionof the investor'sassessmentof what the price changeshould
The pricechangeper period,then,is a sum of randomvariables.If tr
actions occur as if they are independentover time (evidence on da
weekly,and monthlyprice changessuggestthey do), the variance of
weeldy price change will increase in directproportionto the numbe
transactionsthat occurduringthe timeperiod.3"
29 The reasonsforunderstatement are similarto thosestated in thevolumean
sis. See p. 77.
30 The probabilityis less than 1 chance in 100,000.
31The evidenceregarding serial correlationof daily and monthlyprice chan
can be foundin Fama, op. cit. and Fama, et al., op. cit., respectively.The aver
autocorrelation coefficientforweeklychangesin thissamplewas --.08, whichwo
cause thevarianceto increaseless thanproportionately withthe numberof tran
tions.Withina giventradingday, the autocorrelation may be higher(e.g., beca
of certaininstitutionalfactors,such as clusteringoflimitordersor stoploss ord
However,theexistenceof arbitragers shouldpreventthe autocorrelation fromb
verylarge.In orderforthepriceactivityto be explainedentirelyby increasedtr
action activity,the autocorrelationwould have to be one. This would be hi
unlikelybecause of theempiricalevidencecitedand the opportunities forarbit
 CONTENT OF ANNUAL EARNINGS ANNOUNCEMENTS 83

The issue now is what is the appropriatemeasure of the numberof

transactionsoccurringduringa given period. If the volume is used as a
measure,then Ut in week 0 would be expectedto be 1.30 merelybecaus
of moreactionin the security.The remainingportionwould be attribute
to changesin the equilibriumprices of the securities.However,it is no
at all clearthat volume(or evennumberoftransactions)is the appropria
measure,because it reflectsonly the explicittransactionsthat occur.
It could be argued,with considerablesupportfromeconomictheory
that the expectationsof all investorsinfluencethe marketprice,whethe
or nottheyengagein a purchaseor a sale. If themarketacts in thismanne
the total numberof transactions,explicitand implicit,are the same pe
timeperiod.Hence all ofthe above averagepriceactivitycan be attribute
to changesin equilibriumprices.
Additionalempiricalresearchis needed beforethisissue will be resolved
The researchwould consistof studyingincreasedvolume activitydue to
reasonsotherthaninformation comingonto the market.An initialanalysi
of the seasonal variationin volume (VMt) from1946 through1966 reveale
that the volumeis greatestduringthe monthsDecemberand January.The
explanationseems to stem fromtax considerationsratherthan an abov
normalflowofinformation. Researchalso indicatedthat the pricevariabil
ity ofRMt duringthesemonths(i.e., Ut) was only.996,indicatingno abov
average pricevariabilityduringthese months.This findinglends suppor
to the positionthat none of the price activityin week 0 is due merelyto
moremotion.
Beforeleavingthis topic,note that isolatingthe volume effectson pric
changesis of concernonlyto the extentone wishesto distinguishbetwee
information that altersthe expectationsof the marketas a wholefromin
formationthat alters only the expectationsof individualinvestors.All o
the price activitycan be attributedto information in the lattersense.

duringReportPeriod
Frequencyof OtherNews Announcements
The purposeof this analysiswas to discoverif therewas any clusterin
of othernews announcementsaroundweek 0 that mightpossiblyaccoun
forthe volumeand pricereactions.As indicatedearlier,the sample desig
excludedany firmsthat announceddividendsin the same week as earning
or any firmsthat splittheirstockduringthe reportperiod.However,it is
conceivablethat dividendsannouncements mightclusterin weeksimmed
atelypriorto and afterweek 0 or that othertypesof announcements(e.g.
managementearningsforecasts)mightclusterin week 0. To examinethi
possibility,the occurrenceof othernews announcements in the Wall Stre
Journalduringthe 506 reportperiodswas examined(see Table 7).
By far the most frequenttype of announcementwas dividends,whic
exceededthefrequencyof all othertypes of announcementsby a factoro
84 WILLIAM H. BEAVER

9 to 1. Withrespectto thepurposeof thisanalysis,thereis no clusteringo

dividendannouncements in weeks -1 or +1; in factthe oppositeseemst
be true.Also thereis no clusteringof any othertype of announcements a
any timeduringthe period,includingweek 0. The volumeand pricereac
tionin week0 does not appear to be attributableto the clusteringof othe
news announcements.32

forFutureResearch
Suggestions
The dramaticpriceand volumereactionindicatesthat investorsdo look
directlyat reportedearningsand do not use othervariablesto the exclusio
of reportedearnings.The evidencealso indicatesthat news announcemen
occurringpriorto the earningsreportdo not entirelypreemptthe inform
tion contentof reportedearnings.Given these findings,one of the fir
extensionsof the study will be to explorethe possibilityof constructi
expectationsmodels that will permita predictionof the directionand
magnitudeof the priceresidual.
The resultsof a recentstudy by Ball and Brown in this area are ver
encouraging.33 They used an earningsmodel similarin formto the pric
and volumemodelsdescribedin thisstudy (e.g., changesin the earningso
an individualsecuritywereviewedas a linearfunctionofmarket-wide inde
of earningschanges). The sample was dividedinto two groups:instance
wherethe earningsresidualwas positive(actual earningswerehigherthan
"expected") and instanceswherethe earningsresidualwas negative(actua
earningslower than "expected"). The behaviorof the price residualsfo
thesetwo groupswas examined,and the findingswere: (1) The signof th
cumulativeprice residual (summedover a 12 monthperiodincludingth
announcementmonth)was highlyassociatedwiththe sign of the earning
residual. (2) There was a persistentupward driftin the cumulativemean
priceresidualsforthe positiveearningsresidualgroup.This driftstarted1
monthspriorto the earningsannouncement,and over 90 per cent of th
drifthad taken place by the beginningof the announcementmonth.The
negativeearningsgroupexhibitedan analogousbehaviorpattern.
The findings indicatethat reportedearningsare associatedwithunderly
ing events that are perceivedby investorsto affectthe marketprice.Be
cause earliernews announcements conveysome of the same information as
the earningsreports,investorsare able to use this information to revis
theirforecastsof earningsand to adjust the price accordingly.In fact,by
the beginningof the announcement month,investorsformlargelyunbias
forecastsofreportedearnings,even thoughthe reportedearningsare abov
32 As measuredin termsof numberof news announcements per week,the flowo
informationduringtheweekspriorto theannouncement does not appearto be below
normaland hencewouldnotaccountforthebelownormalpriceactivityduringweek
-2 through-8.
33Ray Ball and Philip Brown,"An EmpiricalEvaluation of AccountingIncom
Numbers," Journal of Accounting Research, 6 (Autumn, 1968), pp. 159-78.
 CONTENT OF ANNUAL EARNINGS ANNOUNCEMENTS

or below normalrelativeto theirhistoricalrelationshipwithmarket-w

earnings.
Althoughthe forecastsare unbiased,they are not very efficient, for
theywere,therewouldbe no volumeorpricereactionwhenearningsrepo
were released.34The Ball and Brown findingsand the findingspresen
here are mutuallysupportivewith respectto the information content
earningsreportsand also are uniformlyconsistentwith the finding
previousstudiesin the behaviorof securityprices.One extensionof the
searchpresentedherewill be to replicatethe Ball and Brownstudyon t
sampleofnon-12/31firms(the Ball and Brownstudydealt exclusivelyw
12/31firms)and thento attemptto predictthe magnitude,as well as t
sign,of the priceresidual.
A second area of furtherresearchis the applicationof this methodol
to othertypes of news announcements. At an earliermeetingof the Co
ference,Green and Segall exploredthe information contentof interim
ports.An analysisofvolumeand pricechangesduringthe announcemen
interimearningswouldprovidea different approachto thissame issue. T
information contentof dividendannouncementsis anothertopic that h
receivedmuchattentionand stillis in needofadditionalempiricalinvest
tion. Such researchwill indicate the importanceof annual earningsa
nouncementsrelativeto otherkindsof information.
Perhaps the most importantextensionof this study would be deal
withthenormativeissue,"Should decisionmakersperceiveearningsrepo
to possessinformational value?" The normativequestioncan be approach
by selectingan event of interestto decisionmakers (preferablyas free
possiblefromthe influenceof theirperceptions)and by investigatingt
abilityofearningsdata to predictthatevent.A fewstudiesofthistypeha
been presentedat earliermeetingsof the Conference, but muchmorewo
is neededin this area.85Hopefully,the findingspresentedherewithresp
to the positive question will provide greaterinsightinto the normat
issue as well.
34 The was discussedin footno
distinctionbetweenunbiasednessand efficiency
35James0. Horrigan,"The Determinationof Long-TermCredit Standingw
Financial Ratios," EmpiricalResearchin Accounting: SelectedStudies,1966,Supp
mentto Vol. 4, Journalof AccountingResearch,pp. 44-62, and William Beav
"Financial Ratios as Predictorsof Failure," ibid,pp. 71-102.
86 WILLIAM H. BEAVER

TABLE 1
ofSelectionCriteriauponSampleSize
Effect
Criteria No. offirms

Compustatfirms(step 1)a.896
.599
Less: 12/31firms

Non-12/31firms(step 2).297
Less: Non-NYSE firms . .55

NYSE and non-12/31(step 3) .242

Less:
More than 20 announcements per year... 48
Dividends in earningsannouncement week................39
Stock split duringreportperiod. 7
Otherb........................................ 99
...................5

Sample size (step 4) ..143

a Sample criteriawere applied sequentiallyin fourstages. The sample size afte
each stage is denotedby parentheticalcomment(e.g., steps 1, etc.).
b Miscellaneousreasonssuch as firm'searningswere not reportedin Wall Stree

Journal.

TABLE 2
Dates
and Announcement
Distributionof FinancialStatement
Pecntageof timeseari
Month Percentageoffirmswhosefiscal Percents wre arnings
yearendedin each month in each month

January.... 7.0 . 7.5

....................
February......................... 6.3 2.3
March..... . 7.8 2.8
April.......................... 6.3 5.0
May. 1.4 8.7
June..... 23.8 . 6.5
....................
July.......................... 9.6 6.8
August. 7.8 11.3
September. 15.3 11.9
October. .... 9.1 13.4
November........................ 5.6 12.3
December. .. 0.0 11.5

Total............................100.0 100.0

a Total numberoffirmsequals 143,and total numberofannouncements

equals 506
 CONTENT OF ANNUAL EARNINGS ANNOUNCEMENTS 8

TABLE 3
Fiscal Year-Endand Date of Announcement
Numberof Weeksbetween
No. ofweeks Percentageof announcements Cumulativepercentage

Less than 4 1.7 1.7

4 1.5 3.2
5 4.1 7.3
6 11.6 18.9
7 14.0 32.9
8 13.8 46.7
9 11.2 57.9
10 11.0 68.9
11 8.6 77.5
12 8.6 86.1
13 6.9 93.0
14 3.0 96.0
15 2.2 98.2
More than 15 1.8 100.0

Totala 100.0

a Total numberof announcements

is 506.

TABLE 4
SummaryofRegressionStatisticsVolumeAnalysis
No. ofobser- Mean ofdepend- Mean of inde- Autocorrelat
Item
Item fvationsper
in non-
~~firm ent variable pendentvariable Correlation coefficient
-coefficient of
coefficientl
reportperiod (Vi) x lo0 (Vi) X 10lrsdul

Fractile
.10 165 .33 .577 .06 .21
.25 176 .53 .583 .16 .29
.50 193 .88 .588 .28 .39
.75 210 1.56 .595 .39 .50
.90 227 2.36 .608 .46 .62

TABLE 5
StatisticsPrice Analysis
SummaryofRegression
No. ofobser- Mean ofdepend- Mean of inde- Regressioncoef- Correlatio
Item per
~~vations - variable pendetvral
ent coefficien
in non-
~~firm etaibeficient ofRmt
reportperiod (Ri) X 108 (Rm) X 10'

Mean 187 1.25 1.73 .89 .26

Fractile
.10 165 -2.13 .96 .42 .13
.25 176 -.26 1.25 .62 .22
.50 193 1.51 1.51 .87 .27
.75 210 2.88 2.04 1.13 .32
.90 227 3.98 2.96 1.44 .37
88 WILLIAM H. BEAVER

TABLE 6
Analysisof Mean Price Residual

Week Mean residual

. . ~~~~~~~~(25iz6
juitIS06)

-8 .00183
-7 - .00105
-6 - .00029
-5 - .00064
-4 - .00096
-3 .00019
-2 - .00047
-1 .00229
0 .00500
1 .00204
2 .00163
3 .00120
4 .00109
5 .00354
6 - .00040
7 .00257
8 .00343

TABLE 7
Occurrence
ofOtherNews Announcements

No ofdividend No. of all other

Week announcements
a typesof
~~~~announcements

-4 43 3
-3 39 2
-2 42 4
-1 16 5
0 0 4
1 16 4
2 33 4
3 32 3
4 41 2

Total 262 31
 CONTENT OF ANNUAL EARNINGS ANNOUNCEMENTS 8

VtX 1O

L5
, =2;6 ( /506,wheret =-8,**., +8. ---Average Ft X 103 during
non-
g i~~~~l
X ~~~~~report
a I I period= 1.12.
L4

1.2

1.0-

0.9'

-8 -6 -4 -2 0 +2 +4 +6 +9
Weeksafterannouncement
FIG. 1. Volume Analysis

Relative
frequency

et1 C /143,
t =1,, 261

oi8 ssTil= -aa- biVt @

.14

.10

.06
1 observation I

.02

-.40 -.30 -.20 -.10 0 .10 .20 .30 .40

Valueofj,
FIG. 2. Distribution of et in the Nonreport Period
90 WILLIAM H. BEAVER

et X l03

.40

/06
.30 e, j62j e26)/506,wheret -8,, +8 -Mean j, X 10' duringnon -
reportperiod= 0.
=, i -

.20

.10

-.10

-.20

-8 -6 -4 -2 0 +2 +4 +6 +8
Week afterannouncement
FIG. 3. Residual VolumeAnalysis

No. of
Vejts

260
-Expected no.of positive epys
based on relative frequencyin
240 nonreportperiod.

220

200

180 s _

160

-8 -6 -4 -2 0 +2 +4 +6 +8
Weeks
FIG. 4. Frequencyof Positive eit's-Residual VolumeAnalysis
 CONTENT OF ANNUAL EARNINGS ANNOUNCEMENTS

Relative
frequency

12

.10X

.08:

.06

.04

.02 .5observatio

0.4 0.6 0.8 1.0 1.2 _ 1.4 1.6 1. 2.0 2

Valueof U,
FIG. 5. Ut in Nonreport Period

Ut

16 _ =1 t= -8, -Mean U, during nonreport

506 506 ' period= L00.
1.5 +8

uji = Rj, - ai - baRN,

, varianceofresidualin the
nonreport
period.
1.3

1.2

1.1

1.0----? B

.90

.80
-8 -6 -4 -2 0 +2 +4 +6 +8
Weekafterannouncement
FIG. 6. Price Residual Analysis
92 WILLIAM H. BEAVER

180

-Expected no. of Uj,'s > 1.00bas

on relative frequencyin nonre
160 period

140

120

100 -8 -6 -4 -2 0 +2 +4 +6 +8

FIG. 7. Frequencyof Uit's > 1.00-Residual Price Analysis