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

By Thomas Schleicher, K. Hussainey, Martin Walker. 2007

120 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/4bbe331d1a78215f3bdf1fb050c1f812733aed1c

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Citations in the corpus

Is forward-looking financial disclosure really informative? Evidence from UK narrative statements (2015, background): “In addition, Schleicher et al. (2007) find that loss-making firms provide more relevant forward-looking information to investors than profit-making firms.”
Corporate Social Responsibility Report Narratives and Analyst Forecast Accuracy (2017, background): “Hussainey et al. (2003), Schleicher et al. (2007), and Hussainey and Walker (2009) show that forward-looking MD &A disclosures in the U.K. are informative.”
Do Chinese government subsidies affect firm value (2014, background): “The fact that firms are in distress in the first place implies a fundamental reduction in their earnings generating capacity (Schleicher et al., 2007).”
Bias in the tone of forward‐looking narratives (2010, background): “First, Schleicher et al. (2007) demonstrate that this income number is highly correlated with other measures of ‘permanent’ earnings.”
The effects of voluntary disclosure and dividend propensity on prices leading earnings (2009, methodology): “…e.g. Banghøj and Plenborg, 2008; Dhiensiri et al., 2005; Ettredge et al., 2005; Gelb and Zarowin, 2002; Hanlon et al., 2007; Hussainey et al., 2003; Lee et al., 2007; Lundholm and Myers, 2002; Orpurt and Zang, 2006; Oswald and Zarowin, 2007; Schleicher et al., 2007 and Tucker and Zarowin, 2006.”