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Earnings characteristics and analysts’ differential interpretation of earnings announcements: An empirical analysis

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Abstract:

Abstract

This study provides empirical evidence on factors that drive differential interpretation of earnings announcements. We document that Kandel and Pearson's forecast measures of differential interpretation are decreasing in proxies for earnings quality and pre-announcement information quality. This evidence yields new and useful insights regarding which earnings announcements are less likely to generate newfound disagreement among analysts and investors. Recent research suggests that investor disagreement can increase investment risk, increase the cost of capital, and cause stock prices to deviate from fundamental value. Therefore, our results support prior intuition that increasing the quality of earnings and pre-announcement information can improve the efficiency of capital markets.

Keywords: Analyst forecasts; Differential interpretation; Earnings announcements; G14; M41

Document Type: Research Article

DOI: https://doi.org/10.1111/j.1467-629X.2008.00292.x

Affiliations: 1: Mays Business School, Texas A&M University, College Station, 77843-4113, USA 2: College of Business Administration, Sogang University, Seoul, 121-742, South Korea 3: College of Business, Florida State University, Tallahassee, 32306-1110, USA

Publication date: 2009-06-01

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