Earnings Co‐Movements and the Informativeness of Earnings

Abstract

We examine the informativeness of earnings in the presence of earnings co‐movements. Many theoretical studies infer that the more a firm's earnings move with the market the less weight investors need to place on those earnings, thus rendering them less informative. On the other hand, managers have less opportunity to bias the earnings signal the more earnings co‐move, making them more reliable. We measure earnings co‐movement using an industry–firm pairing correlational technique. Overall our results show both the degree of co‐movement and the ordering of earnings announcements impacts on the informativeness of earnings as indicated by earnings response coefficients. Earnings responses are larger for firms that report earnings before their most highly correlated industry peer, but the responses are reduced as earnings co‐movement increases. We interpret our results to indicate that the more earnings co‐move with an industry peer the less informative earnings become, but only when the peer firm is able to obtain information at a later date.