Loss firms' annual report narratives and share price anticipation of earnings

Research output: Contribution to journalArticle

Abstract

We extend prior research into the association between disclosure quality and share price anticipation of earnings by discriminating between firms that report profits and firms that report losses. As a measure of disclosure quality we count the number of forward-looking earnings statements in annual report narratives. To measure the extent to which current share price movements anticipate future earnings changes we regress current stock returns on current and future earnings changes. The coefficients on the future earnings change variables are our measure of share price anticipation of earnings. Our regression results show that the association between annual report narratives and share price anticipation of earnings is not the same for profit and loss firms. For loss firms we find that the ability of stock returns to anticipate next period's earnings change is significantly greater when the firm provides a large number of earnings predictions in annual report narratives. We make no such observation for profit firms. In addition, once we control for variations in the intrinsic lead-lag relation between returns and earnings across industries, the observed difference between profit and loss firms becomes statistically significant. Overall, our results are consistent with annual report narratives being a particularly important source of information for loss-making firms. © 2007 Elsevier Ltd. All rights reserved.

Bibliographical metadata

Original languageEnglish
Pages (from-to)153-171
Number of pages18
JournalBritish Accounting Review
Volume39
Issue number2
DOIs
Publication statusPublished - Jun 2007