THIS DOI METADATA WAS LAST UPDATED: 2024-01-15 14:45
Full Title
FINANCIAL REPORTING
Publisher
FrancoAngeli
ISSN
2036-671X (Printed Journal)
2036-6779 (Online Journal)
Journal Issue Number
2
Journal Issue Designation
2
Journal Issue Date
2023
Full Title
Accrual quality, investor reaction to earnings, and the confirmatory role of sales news
By (author)
First Page
97
Last Page
121
Language of text
English
Publication Date
2023/11
Copyright
2023 FrancoAngeli srl
Main description
Purpose: Agency theory predicts that information asymmetry provides agents with an incentive to manipulate performance signals to maximize their utility, which gives principals reasons to distrust such signals. The accounting and finance literature finds empirical support for this prediction by studying how earnings reliability attributes affect investors' reactions to earnings an-nouncements. However, research pays less empirical attention to whether in-vestors skeptical of earnings reliability look for confirmatory signals in other parts of the income statement. This study aims at filling such this research gap. Design/methodology/approach: This study examines investors' combined use of earnings and sales news. It adopts an event-study methodology to ana-lyze whether sales news moderates the stock market response to annual earn-ings announcements. Findings: The results show that investors do not fully trust earnings news if earnings beat analyst expectations and the firm has a reputation for low accru-al quality. In this case, positive sales data alleviate investors' skepticism of earnings news and, thus, make them react more favorably. In contrast, sales data do not affect the market response if the earnings news is negative, or the firm accrual quality is high. These results are robust to different model speci-fications and explanations. Originality/value: The findings shed new light on how investors use sales data to complement earnings news and our understanding of the consequences of accruals quality on investor information processing.
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