Advertisement

Quantifying News Reports to Proxy “Other Information” in ERC Models

  • Kuo-Tay Chen
  • Jian-Shuen Lian
  • Yu-Ting Hsieh
Part of the Lecture Notes in Computer Science book series (LNCS, volume 5477)

Abstract

Many previous studies have investigated how earning announcement affects stock price. They measure the effect by employing earning response coefficient (ERC) models. However, the traditional models did not explicitly consider textual information received by investors. Rather they simply referred to it as “other information”. However, investor’s exposure to textual information (e.g. news report) might have significant influence on how stock prices will respond to earning announcements. This study attempts to investigate whether earning surprises cause stock fluctuations and how the effect is influenced by news coverage prior to earning announcements. We find that: (1) earning surprise significantly affects stock price; (2) more news coverage tends to decrease the ERC; (3) positive earning surprises have higher influence on stock price; and (4) different combinations of news sentiment and earning surprise result in different ERC.

Keywords

earning response coefficient (ERC) model textual information news coverage news sentiment 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. 1.
    Ball, R., Brown, P.: An Empirical Evaluation of Accounting Income Numbers. Journal of Accounting Research 6, 159–178 (1968)CrossRefGoogle Scholar
  2. 2.
    Fama, E.F., Fisher, L., Jensen, M., Roll, R.: The adjustment of stock prices to new information. International Economic Review 10, 1–21 (1969)CrossRefGoogle Scholar
  3. 3.
    Scott, W.R.: Financial Accounting Theory, 4th edn. Pearson Prentice Hall, Toronto (2006)Google Scholar
  4. 4.
    Tetlock, P.C., Saar-Tsechansky, M., Macskassy, S.: More Than Words: Quantifying Language to Measure Firms’ Fundamentals. Journal of Finance 63, 1437–1467 (2008)CrossRefGoogle Scholar
  5. 5.
    Beaver, W.: The Information Content of Annual Earnings Announcements. Journal of Accounting Research, 67–92 (1968)Google Scholar
  6. 6.
    Beaver, W., Clarke, R., Wright, W.: The Association Between Unsystematic Security Rerurns and the Magnitude of the Earnings Forecast Error. Journal of Accounting Research, 316—340 (1979)Google Scholar
  7. 7.
    Kothari, S.P.: Capital markets research in accounting. Journal of Accounting and Economics 31, 105–231 (2001)CrossRefGoogle Scholar
  8. 8.
    Kormendi, R.C., Lipe, R.: Earnings Innovations, Earnings Persistence, and Stock Returns. Journal of Business, 323—346 (1987)Google Scholar
  9. 9.
    Easton, P.D., Zmijewski, M.E.: Cross-Sectional Variation in the Stock-Market Response to Accounting Earnings Announcements. Journal of Accounting and Economics, 117–141 (1989)Google Scholar
  10. 10.
    Ramakrishnan, R.T.S., Thomas, J.k.: Valuation of Permanent, Transitory and Price-Irrelevant Components of Reported earnings. Working paper, Columbia University Business School (1991)Google Scholar
  11. 11.
    Collins, D.W., Kothari, S.P.: An Analysis of the Intertemporal and Cross-Sectional Determinants of Earnings Response Coefficients. Journal of Accounting and Economics, 143—181 (1989)Google Scholar
  12. 12.
    Dhaliwal, D.S., Lee, K.J., Fargher, N.L.: The Association Between Unexpected Earnings and Abnormal Security Returns in the Presence of Financial Leverage. Contemporary Accounting Research, 20–41 (1991)Google Scholar
  13. 13.
    Dechow, P.M., Dichev, I.: The Quality of Accruals and Earnings: The Role of Accrual Estimation errors. The Accounting Review, 35–59 (2002)Google Scholar
  14. 14.
    Francis, J., LaFond, R., Olsson, P., Schipper, K.: Costs of Equity and Earnings Attributes. The Accounting Review, 967–1010 (2004)Google Scholar
  15. 15.
    Abarbanell, J.S., Lanen, W.N., Verrecchia, R.E.: Analysts’ forecasts as Proxies for Investor Beliefs in empirical Research. Journal of Accounting and Economics, 31–60 (1995)Google Scholar
  16. 16.
    Beaver, W., Lambert, R., Morse, D.: The information content of Security Prices. Journal of Accounting and Economics 2, 3–28 (1980)CrossRefGoogle Scholar
  17. 17.
    Foster, G., Olsen, C., Shevlin, T.: Earnings Releases, Anomalies, and the Behavior of Security Returns. The Accounting Review, 574–603 (1984)Google Scholar
  18. 18.
    Bernard, V.L., Thomas, J.: Post-Earnings Announcement Drift: Delayed Price Reaction or Risk Premium? Journal of Accounting Research, 1–36 (1989)Google Scholar
  19. 19.
    Ball, R., Bartov, E.: How Naïve Is the Stock Market’s Use of Earnings Information? Journal of Accounting and Economics, 319–337 (1996)Google Scholar
  20. 20.
    Bartov, E., Radhakrishnan, S., Krinsky, S.: Investor Sophistication and Patterns in stock Returns after Earnings Announcements. The Accounting Review, 43–63 (2000)Google Scholar
  21. 21.
    Brown, L.D., Han, J.C.Y.: Do Stock Prices Fully Reflect the Implications of Current Earnings for Future Earnings for ARI firms? Journal of Accounting Research, 149–164 (2000)Google Scholar
  22. 22.
    Fama, E.F., French, K.R.: Common risk factors in the returns of stocks and bonds. Journal of Financial Economics 33, 3–56 (1993)CrossRefzbMATHGoogle Scholar
  23. 23.
    Livnat, J., Mendenhall, R.R.: Comparing the Post-Earnings Announcement Drift for Surprises Calculated from Analyst and Time Series Forecasts. Journal of Accounting Research 44, 177–205 (2006)CrossRefGoogle Scholar
  24. 24.
    Fama, E.F., French, K.R.: The Cross-section of Expected Stock Returns. Journal of Finance 47, 427–465 (1992)CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2009

Authors and Affiliations

  • Kuo-Tay Chen
    • 1
  • Jian-Shuen Lian
    • 1
  • Yu-Ting Hsieh
    • 1
  1. 1.Department of accounting College of ManagementNational Taiwan UniversityTaipeiTaiwan

Personalised recommendations