The information asymmetry around earnings announcements has long been the center of finance and accounting research. At the time of an earnings announcement, managers have information not only about their firm’s performance over the last quarter (“within quarter”) but also about performance since the quarter-end (“post quarter”). The announced numbers and the disclosures they rely on help remove within-quarter information asymmetries between managers and external market participants. But these accounting disclosures cannot eliminate any post-quarter information asymmetries that managers could possess. Additional tools—discretionary accruals, formal guidance, and informal call tone—have therefore evolved wherein managers have the opportunity to convey post-quarter information in the current quarterly announcement. Are these discretionary tools, whose transmitted content is difficult to verify, used in the interests of shareholders, or could they instead be used against shareholders, in the interests of managers?
Posted by Namho Kang, University of Connecticut, on Wednesday, July 12, 2017
Editor's Note: Namho Kang is Assistant Professor of Finance at the University of Connecticut. This post is based on a recent paper authored by Professor Kang; Kenneth A. Froot, Research Associate at the National Bureau of Economic Research; Gideon Ozik, Affiliate Professor of Finance at EDHEC Business School; and Ronnie Sadka, Professor of Finance at Boston College Carroll School of Management.