Perceive it or Not: Information Quality and the Investors’ Response to Earning Surprises of Technologically Advanced Companies

Abstract

One of the primary measures of information systems (IS) success that has been the subject of much investigation in a variety of contexts is information quality (DeLone & McLean, 1992; 2003). This paper hones in on the impact of perceived information quality in the context of the financial markets, where quality of accounting information is particularly important, as it informs investment decisions and impacts stock prices. In particular, seminal accounting research has consistently found that earnings announcements possess informational value (information content) based upon which the market reacts (Beaver, 1968). Market reaction to surprises in earnings announcements has long been used to understand the quality of the earnings announced and studies have explored various factors affecting the response. The current study adds to this body of research by factoring in the perceived quality of the information systems environment. We hypothesize that information reported by companies known for developing and employing sophisticated IT systems is weighed more heavily by investors. We conduct an analysis of stock price before and after earnings announcement surprises among firms known for sophisticated IT systems. Results provide direct support for our hypothesis, indicating that the market reacts more strongly to earnings surprises (both positive and negative) reported by innovative users of IT as compared to less innovative users of IT. These results contribute to a new insight into the circumstances that affect the information content of earnings announcements as well as a richer perspective on the impact of investment in advanced information systems in terms of perceived quality of a company’s information environment by the financial markets.