Information transfers and information leakage associated with earnings releases

This study investigates (nonreporting) firms\u27 stock price reaction to a (reporting) firm\u27s earning announcement, when they are in the same industry. Previous studies confirm such reaction. However, indirect, piecemeal evidence of prior studies suggests that earnings information might be leaked to the market prior to public disclosures. If so, nonreporting firms\u27 stock prices could react differentially depending on their own earnings information. This study attempts to investigate this differential reaction. The test results without controlling for firm size effects confirm that for the event period (day -1 to day 0) a nonreporting firm\u27s stock price changes are jointly explained by both a reporting firm\u27s announced earnings and a nonreporting firm\u27s forthcoming earnings, when the former firm announces earnings. However, neither firm\u27s earnings explain the nonreporting firm\u27s stock price behavior for the post-event period, implying that the earnings information of both firms is incorporated in the nonreporting firm\u27s stock price for the event period. Effects of announcement lags between reporting and nonreporting firms exist, since the shorter the announcement lags, the more prominent the joint explanation. Regarding timing effects, the joint explanation is not supported by the evidence concerning first and second announcements, although the direction is consistent with the joint explanation. Thus, announcement lags between reporting and nonreporting firms are more important than first and second announcements in explaining nonreporting firms\u27 stock price behavior. Finally, the size effects exist in that the test results show the same joint explanation among large firms, while the tests do not reject the null hypothesis among small firms nor between large and small firms