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Contentof Annual
The Information
EarningsAnnouncements
WILLIAM
H.
BEAVER*
AssistantProfessor,Universityof Chicago.
'Merton H. Millerand FrancoModigliani,"Some EstimatesoftheCost ofCapit
to the ElectricUtilityIndustry,1954-57,"AmericanEconomicReview,LVI (Jun
1966),341.
Analysis (New
2 BenjaminGraham,David L. Dodd, and Sidney Cottle,Security
*
68
EMPIRICAL
RESEARCH
IN ACCOUNTING:
SELECTED
STUDIES,
1968
Content
Definitionsof Information
Information
has 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
CONTENT
OF ANNUAL
EARNINGS
ANNOUNCEMENTS
69
Relationshipsbetween
Price and VolumeTests
70
WILLIAM
H. BEAVER
Sample Design
9Efficiency
is definedin termsof E(x6- x*)2, wherex is the forecastedvalue o
reportedearningsand x* is actual value. The closerthe expectationis to zero, th
the forecastis. Note that a forecastmay be unbiasedbut veryinef
moreefficient
and unbiasednessis moreimportantto th
cient.The distinctionbetweenefficiency
presentedlater.
of the findings
interpretation
10Withoutthe cooperationof CRSP, the data collectionchorewould have bee
overwhelming.
CONTENT
OF ANNUAL
EARNINGS
ANNOUNCEMENTS
71
11A pilot studywithsimilarobjectivesdid not excludefirmswith dividendanin thesame weekas earnings.The investorreactionin termsofvolum
nouncements
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 Information,"Report 6705 (Centerfor MathematicalStudies in Business and Ecoin
nomics,GraduateSchool of Business,Universityof Dhiiago,1967),forthcoming
EconomicReview.
the International
72
WILLIAM
H. BEAVER
CONTENT
OF ANNUAL
EARNINGS
ANNOUNCEMENTS
73
VMt=
it=
no. of sharestraded
forall NYSE firms
in week t
I
no. of shares outstanding no. of trading
days in week t
forall NYSE firms
in week t
In [Dit + P]
Rmt = In
(SP)~
L(SP) t-1J
=
cash dividend"paid" on share of firmi in week t,
Dit
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.
12 The properties
ofRit are furtherdescribedin Fama, op. cit.; BenjaminF. King
"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
VolumeAnalysis- UnadjustedforMarketInfluences
CONTENT
OF ANNUAL
EARNINGS
ANNOUNCEMENTS
VolumeAnalysis-AdjustedforMarketInfluences
ai + biVMt + eit.
76
WILLIAM
H. BEAVER
implicitly
favoredhigherturnoversecurities.But it is no
selectioncriterion
obviouswhythat shouldbe truenor what implicationit has forinferenc
content.
regardinginformation
was low, implyingthat removingth
The averagecorrelationcoefficient
influenceof VMtshouldhave littleeffectupon the analysis.In spite of th
was positivefor 13
low association,the sign of the correlationcoefficient
firmsand negativeforonly 4. These two findingstaken togethersugge
that the marketinfluenceon an individualfirm'svolume is significan
different
fromzero but that its magnitudeis small.16
The residual,eit, is that portionof an individualsecurity'svolumetha
in VMt. The mea
eventsas reflected
cannotbe explainedby market-wide
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).
is skewedto the right,as indicatedby the fact that 5
The distribution
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
is providedto investorsin
pretationof the asymmetryis that information
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
t=
I..,
8, ...
50
+8
in the nonreport
period
whereai and bi wereobtainedfromtheregressions
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
is less tha
coefficient
I6 The probabilitythat theexpectedvalue ofthe correlation
or equal to zero is less than 1 chancein 100,000.
17Note thatthesubscripti refers
to firmi or securityi, butj refersto an earning
Hence as and bi may be used a maximumof fivetimes;its frequen
announcement.
of firmi or securit
of use will dependupon the numberof earningsannouncements
i includedin the sample of 506 announcements.
CONTENT
OF ANNUAL
EARNINGS
ANNOUNCEMENTS
78
WILLIAM
H. BEAVER
contentforindiv
supportsthecontentionthat earningshave information
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
the remaining209 are includedin the nonrep
week periodssurrounding
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
studied.How
morepriceand volumeactivitythan the 506 announcements
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
contentof earningsreportswi
involvesa comparisonof the information
the average amount of informationbeing released duringthe nonrep
period.By necessity,thisis a bias againstearningsreportssincethe appr
at all.
priatecomparisonwouldbe a nonreportperiodwithno information
Events
PriceAnalysis-AdjustedforInfluenceofMarket-Wide
See p. 75.
WilliamF. Sharpe, "A SimplifiedModel forPortfolioAnalysis,"Managem
Science,IX (January,1963),277-93.
20
21
CONTENT
OF ANNUAL
EARNINGS
ANNOUNCEMENTS
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
indexofpric
in a market-wide
factorsas reflected
plainedby market-wide
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 uit tha
of the investors'expectationmodel(s), some transformation
is the squar
abstractsfromits sign,is needed. One such transformation
conten
of the residual (i.e., ui t). If earningsreportspossess information
b
2
period.Th
U2 t shouldbe greaterduringweek 0 than duringthe nonreport
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
will be greaterthan one duringweek 0
(averagingacross announcements)
content.
if earningsreportspossessinformation
Period.Estimatesof as, bi, and s,2wereobtaine
AnalysisofNonreport
fromregressionsbased upon the nonreportperiod.The observationsfro
each announcement)wer
the reportperiod(i.e., the 17 weekssurrounding
conten
deletedfromthe regressionbecause if earningshave information
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
as a rate of return,th
marketindex.Since the Rit call also be interpreted
lowerreturnsforthe sample firmswould suggestthat they are less risk
80
WILLIAM
H. BEAVER
1,***, 143
1, ***,506
t =-8, **,+8.
i=
ujt== Rjt-aa-bi-Mi
j=
Ujt = u 1,t
81
1,.. , 143
i-=
, 506
j
t --8 ... ,+8.
op. cit.
cross-sectionalbasi
autocorrelationwas examinedon a week-by-week,
i.e., ot =
-=i (ejtejetA)1/[Z'0 (eit)2], t = -8, *., +8.
27 Fama,
28 The
82
WILLIAM
H. BEAVER
29 The reasonsforunderstatement
are similarto thosestated in thevolumean
sis. See p. 77.
30 The probability
is 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
coefficient
forweeklychangesin thissamplewas --.08, whichwo
autocorrelation
withthe numberof tran
cause thevarianceto increaseless thanproportionately
may be higher(e.g., beca
tions.Withina giventradingday, the autocorrelation
of certaininstitutionalfactors,such as clusteringoflimitordersor stoploss ord
fromb
However,theexistenceof arbitragers
shouldpreventthe autocorrelation
verylarge.In orderforthepriceactivityto be explainedentirelyby increasedtr
action activity,the autocorrelationwould have to be one. This would be hi
forarbit
unlikelybecause of theempiricalevidencecitedand the opportunities
CONTENT
OF ANNUAL
EARNINGS
ANNOUNCEMENTS
83
duringReportPeriod
Frequencyof OtherNews Announcements
84
WILLIAM
H. BEAVER
Suggestions
forFutureResearch
CONTENT
OF ANNUAL
EARNINGS
ANNOUNCEMENTS
SelectedStudies,1966,Supp
Financial Ratios," EmpiricalResearchin Accounting:
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
ofSelectionCriteriauponSampleSize
Effect
No. offirms
Criteria
Compustatfirms(step 1)a.896
.599
Less: 12/31firms
Non-12/31firms(step 2).297
Less: Non-NYSE firms
.55
.242
NYSE and non-12/31(step 3)
Less:
More than 20 announcements
per year...
week................39
Dividends in earningsannouncement
Stock split duringreportperiod.
Otherb........................................
Sample size (step 4)
48
7
99
...................5
..143
Pecntageof timeseari
Percentageoffirmswhosefiscal Percents wre
arnings
yearendedin each month
in each month
....
January
February.........................
March..... .
7.0
6.3
7.8
May.
June.....
July..........................
August.
September.
....
October.
November........................
..
December.
1.4
23.8
9.6
7.8
15.3
9.1
5.6
0.0
April..........................
Total............................100.0
7.5
....................
2.3
2.8
5.0
6.3
8.7
6.5
....................
6.8
11.3
11.9
13.4
12.3
11.5
100.0
CONTENT
OF ANNUAL
EARNINGS
ANNOUNCEMENTS
3
TABLE
Fiscal Year-Endand Date of Announcement
Numberof Weeksbetween
No. ofweeks
Percentageof announcements
Cumulativepercentage
Less than 4
4
1.7
1.5
1.7
3.2
18.9
32.9
46.7
57.9
68.9
77.5
86.1
93.0
96.0
98.2
100.0
11.6
14.0
13.8
11.2
11.0
8.6
8.6
6.9
3.0
2.2
1.8
6
7
8
9
10
11
12
13
14
15
More than 15
100.0
Totala
a
7.3
4.1
is 506.
Total numberof announcements
4
TABLE
SummaryofRegressionStatisticsVolumeAnalysis
Item
Item
Fractile
.10
.25
.50
.75
.90
165
176
193
210
227
.33
.53
.88
1.56
2.36
.577
.583
.588
.595
.608
.06
.16
.28
.39
.46
.21
.29
.39
.50
.62
5
TABLE
StatisticsPrice Analysis
SummaryofRegression
Item
per
~~vations
in non~~firm
Mean
187
Fractile
.10
.25
.50
.75
.90
165
176
193
210
227
1.25
-2.13
-.26
1.51
2.88
3.98
1.73
.89
.26
.96
1.25
1.51
2.04
2.96
.42
.62
.87
1.13
1.44
.13
.22
.27
.32
.37
88
WILLIAM
H. BEAVER
TABLE
6
Analysisof Mean Price Residual
Mean residual
Week
. .
~~~~~~~~(25iz6
juitIS06)
.00183
.00105
.00029
.00064
.00096
.00019
- .00047
.00229
.00500
.00204
.00163
.00120
.00109
.00354
- .00040
.00257
.00343
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
TABLE
7
Occurrence
ofOtherNews Announcements
Week
No ofdividend
announcements
a
~~~~announcements
-4
-3
-2
-1
0
1
2
3
4
43
39
42
16
0
16
33
32
41
3
2
4
5
4
4
4
3
2
Total
262
31
VtX 1O
L5
, =2;6 ( /506,wheret =-8,**., +8.
i~~~~l
X ~~~~~report
a
L4
I I
---Average
Ft X 103 during
nonperiod= 1.12.
1.2
1.0-
0.9'
-4
-6
-8
+4
0
+2
-2
Weeksafterannouncement
+9
+6
C /143,
t =1,, 261
.14
.10
.06
1 observation
.02
-.40
-.30
-.20
-.10
Valueofj,
.10
.20
.30
.40
90
WILLIAM
et
H. BEAVER
X l03
.40
.30
/06
j62j e26)/506,wheret
e,
=,
-8,,
+8
i -
.20
.10
-.10
-.20
-8
-6
-4
-2
0
+2
Week afterannouncement
+4
+6
+8
260
no.of positive epys
-Expected
based on relative frequencyin
nonreportperiod.
240
220
200
180 s _
160
-8
-6
-4
-2
0
Weeks
+2
+4
+6
+8
12
.10X
.08:
.06
.04
.5observatio
.02
0.6
0.4
0.8
1.6
1.2 _ 1.4
Valueof U,
FIG. 5. Ut in Nonreport Period
1.0
2.0
1.
Ut
16
506
506
t= -8,
'
+8
1.5
uji = Rj, - ai -
,
1.3
=1
baRN,
varianceofresidualin the
nonreport
period.
1.2
1.1
1.0----?
.90
.80
-8
-6
+2
+4
-2
0
Weekafterannouncement
FIG. 6. Price Residual Analysis
-4
+6
+8
92
WILLIAM
H. BEAVER
180
-Expected
160
140
120
100
-8
-6
-4
-2
+2
+4
+6
+8