Footnotes 1 . R. Ball and P. Brown , “ An Empirical Evaluation of Accounting Income Numbers ,” Journal of Accounting Research , 6 ( 1968 ), 159 – 178 . 2 . See R.K. Atiase , “ Predisclosure information, Firm Capitalization and Security Price Behavior Around Earnings Announcements ,” Journal of Accounting Research , 23 ( 1985 ), 221 – 36 . 3 . See B. Lev , “ On the Usefulness of Earnings: Lessons and Directions from Two Decades of Empirical Research , Supplement of Journal of Accounting and Research , 26 ( 1989 ), 331 – 352 . 4 . One contributing factor to the low explanatory power of unexpected earnings is that part of the value change associated with earnings announcements is absorbed by the firm's outstanding debt. A recent study reports that the abnormal bond return associated with unexpected earnings increases and decreases is on the order of 1%, which is approximately the same as the abnormal stock return; the change in the value of the bonds is due to the new information about default probability conveyed by the earnings announcement, and is significantly greater for bonds with low ratings. See S. Datta
Journal of Applied Corporate Finance – Wiley
Published: Mar 1, 1995
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