Review of Accounting Studies, 3, 347–363 (1998)
1998 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Is there Information in an Earnings Announcement
Faculty of Commerce and Business Administration, 2053 Main Mall, The University of British Columbia,
Vancouver, B.C., Canada V6T 1Z2
PAUL E. FISCHER
Wharton School, University of Pennsylvania
Abstract. Using a sample of announcements drawn from the 1980s and early 1990s, we reassess the relation
between earnings news and earnings announcement timing. Using analyst forecast errors to proxy for news, we
ﬁnd that early announcements are associated with good news relative to late announcements. The relation between
newsandtiming, however, does not appear to be strictly monotonic. Furthermore, we ﬁnd that unexpected earnings
explain 4% or less of the variation in timing. Finally, we assess whether abnormal returns behave in a manner that
is consistent with a good news early, bad news late relation.
A number of studies in the accounting literature test whether there is a relation between
the timing of earnings announcements and the direction of the earnings news—good news
early, bad news late (for example, Kross (1981), Givoly and Palmon (1982), Chambers
and Penman (1984), and Kross and Schroeder (1984)). The evidence presented in these
studies, which are based upon data from the 1970s, is generally consistent with a good news
early, bad news late hypothesis. This evidence suggests that, for some managers during the
period under study, the beneﬁt of delaying the formal release of earnings exceeded the cost.
Recent anecdotal and empirical evidence indicates that the beneﬁts and costs of delay are
likely to have changed since the 1970s. This change, in turn, raises the possibility that the
good news early, bad news late phenomenon may no longer exist. Consequently, in this
paper, we reassess the good news early, bad news late hypothesis using more current data.
In order to motivate why the beneﬁts/costs of delay have changed it is useful to ﬁrst
identify some of the beneﬁts/costs conjectured in earlier studies and then to discuss why
these are likely to have changed after the 1970s. Earlier studies suggest a variety of reasons
why managers beneﬁt from the delay of bad news. For example, managers may be able to
complete contract negotiations at more favorable terms prior to the disclosure of bad news.
In addition, managers may beneﬁt by getting more time to prepare responses to criticism
and time to prepare a plan to reverse the poor performance. Finally, managers may beneﬁt
by having more time to ﬁnd ways to undo the news through accruals management. Of
course, these and other alleged beneﬁts of delay must exceed the possible reputation and
litigation costs for managers who choose to delay release.
Our belief that a change has arisen in the cost/beneﬁt trade-off is based upon the premise
that litigation risks faced by management and auditors intensiﬁed during the 1980s. This