The Incremental Information Content of Unexpected Revenue
Date Issued
2009
Date
2009
Author(s)
Liu, Tzu-Jui
Abstract
The purpose of this study is to examine the relation between revenue surprises (unexpected revenue) and contemporaneous and future stock returns in Taiwan. According to a large body of research investigating how the market reacts to unexpected earnings, most of them documents significant positive associations between unexpected earnings and abnormal returns around the preliminary earnings announcements. Recent research, however, increasingly focuses on additional data in financial statements to understand how they affect future earnings and stock price. These researches show that financial statement information beyond earnings has significant value implications. Therefore, this study examines the incremental information convey by revenues reported during preliminary earnings announcement by using quarterly financial data in Taiwan. We start by examining whether unexpected revenue convey useful information about future earnings growth over and above the information contained in contemporaneous unexpected earnings. We then examine whether the market fully incorporates the information about the persistence of earnings growth conveyed by unexpected revenue.he empirical outcomes are presented as follows:1)After controlling for past unexpected earnings, earnings growth is positively related to past unexpected revenue.2)After controlling for unexpected earnings, the market indeed reacts the incremental information convey by unexpected revenue within earnings announcement windows. 3)Investors overestimate the persistence of future earnings growth implied by unexpected revenue at the time they are announced.
Subjects
Unexpected revenue
Unexpected earnings
Earnings persistence
Cumulative abnormal returns
Incremental information content
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