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Prior Levels of Voluntary Disclosure and the Market Reaction to Interim Earnings Announcements
Eugene C.M. Cheng, Citigroup Investment Banking Southeast Asia
Stephen M Courtenay, Nanyang Technological University
Asheq R Rahman, Massey University
ABSTRACT. This study examines the association between differential prior voluntary disclosure levels and the market reaction to a forthcoming earnings announcement. Within the Kim and Verrecchia (1991) framework, we find that firms with higher levels of preannouncement voluntary disclosure have less price and volume reaction around earnings announcements, controlling for size, level of unexpected earnings and the precision of the announced information. Increased voluntary disclosure improves the market’s preannouncement information relative to a forthcoming announcement, resulting in less expectation revision around the earnings announcement. However, the strength of the relationship between prior voluntary disclosure and the market reaction appears to be decreasing as analyst following increases. Forward-looking disclosure is more relevant to investors than general business data disclosure and management’s discussion and analysis of past operations.
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