Market Responses To Industry Earnings And Earnings Information

This paper examines the timing of industry-wide components of earnings and firm-specific components of earnings in security prices. Industry-wide information is timelier and widely available from a variety of public sources, and its valuation implications are more transparent, thus could be reflected in security prices quickly. In contrast, firm-specific information is less timely, and its valuation implications are less transparent, thus could be reflected in security prices with a delay. So this paper predicts that market reactions to industry-wide earnings information begin and end earlier than reactions to firm-specific earnings information.The empirical results, based on regressions of current cumulated abnormal returns on lagged, contemporaneous and subsequent industry and firm earnings components, support the hypothesis. Specifically, current returns are positively associated with lagged firm-specific earnings, but have no significant relation to lagged industry-wide earnings. So if the market has delayed responses to earnings announcements, the resulting post-earnings announcement drift is more associated with firm-specific earnings information than with industry-wide information. Besides, the regression coefficient is larger for subsequent-year industry earnings than for firm-specific earnings. This means the market anticipates the industry-wide components of subsequent earnings earlier than the firm-specific components.What's more, this paper finds that firm size influences the timing of both industry-wide and firm-specific earnings in security prices. Stock prices of small firms lag prices of large firms with respect to both components of earnings. Specifically, current returns of small firms have positive association with lagged industry-wide earnings, and higher association with lagged firm-specific earnings; returns of large firms anticipate both components of subsequent earnings earlier than small firms. So size-based private search incentives cannot provide complete explanations for the influence of size on return-earnings relation, and market frictions could cause delayed price reactions for small firms.