Asymmetric Timeliness and the Resolution of Investor Disagreement and Uncertainty at Earnings Announcements

Abstract:  This study finds that greater asymmetric timeliness of earnings in reflecting good and bad news is associated with slower resolution of investor disagreement and uncertainty at earnings announcements. These findings indicate that a potential cost of asymmetric timeliness is added complexity from requiring investors to disaggregate earnings into good and bad news components to assess the implications of the earnings announcement for their investment decisions. Such a disaggregation impedes the speed with which investor disagreement and uncertainty resolve. The findings indicate asymmetric timeliness also delays price discovery at earnings announcements. We also find a positive relation between asymmetric timeliness and stock returns during the earnings announcement period after the initial price reaction to the announcement, which is consistent with resolution of valuation uncertainty. However, we do not find clear evidence of more net stock purchases during this period by insiders of firms with greater asymmetric timeliness.

Information from Implied Volatility Comovements and Insider Trades

Abstract: We investigate whether implied volatility comovements reflect the degree to which a firm’s private information is informative about future macroeconomic news. We compute IVC, the comovement of the implied volatilities between the firm and the aggregate market. IVC measures the extent to which option investors expect the coincidence of future firm and macroeconomic information arrival. Using insider purchases as a proxy for firms’ private information and future aggregate equity returns as a proxy for macroeconomic news, we find that IVC moderates the association between firms’ private information and macroeconomic news. Consistent with this finding, we also find that firms with higher IVC have stock returns that are more informative about future aggregate earnings and have stronger aggregate market reactions to their earnings announcements. Overall, IVC effectively measures the relevance of a firm’s private information to aggregate markets.

Analyst Forecast Revision Consistency and Bias in Earnings Forecast Revisions

Abstract: We address whether analysts bias earnings forecast revisions and convey the bias using forecast revision consistency, i.e., the extent to which analyst reports with earnings forecast revisions include stock recommendation and target price revisions consistent in sign with the earnings forecast revisions, the sign of which is the sign of earnings forecast revision. Incentives to curry favor with management can constrain analysts to issue biased earnings forecast revisions. As predicted, we find that forecast revision consistency is (i) positively associated with the market reaction to the analyst report; (ii) positively associated with consensus analyst forecast error (AFE), i.e., actual earnings minus the consensus of the analysts’ forecasts; and (iii) negatively associated with earnings announcement returns, incremental to AFE. Absolute forecast revision consistency is smaller (larger) when firms eliminate (initiate) guidance. These findings are consistent with analysts using forecast revision consistency to convey information about bias in their earnings forecast revisions.