Timeliness of Reporting and the Stock Price Reaction to Earnings Announcements

Abstract

In this paper, we provide descriptive evidence on the relationship between timeliness of earnings reports and stock price behavior surrounding their release. Timeliness is defined in two ways. In the first phase of the paper, we define it as the reporting lag from the end of the fiscal period covered by the report to the date of the report, and compare the variability of stock returns (price changes) associated with the release of reports published relatively promptly after fiscal close with that associated with less timely reports. There is much evidence (e.g., in Beaver [1968] and May [1971]) which documents that the variability of stock returns at the time of announcements of firms' annual and interim earnings differs from that in nonannouncement periods, indicating that more information arrives at the market during periods when earnings reports are released than at other times, on average. However, there is also evidence (such as that in Ball and Brown [1968] and Brown and Kennelly [1972], for example) that much accounting information is reflected in security prices prior to the release of the report. Apparently, other sources of information allow the market to anticipate the earnings report so that the variability of returns (amount of information) associated with earnings reports may be related to reporting lag. More specifically, longer reporting lags provide the opportunity for more of the information in the report to be supplied by other sources, either through