Analyst information precision and small earnings surprises

This study proposes and tests an alternative to the extant earnings management explanation for zero and small positive earnings surprises (i.e., analyst forecast errors). We argue that analysts’ ability to strategically induce slight pessimism in earnings forecasts varies with the precision of their information. Accordingly, we predict that the probability that a firm reports a small positive instead of a small negative earnings surprise is negatively related to earnings forecast uncertainty, and we present evidence consistent with this prediction. Our findings have important implications for the earnings management interpretation of the asymmetry around zero in the frequency distribution of earnings surprises. We demonstrate how empirically controlling for earnings forecast uncertainty can materially change inferences in studies that employ the incidence of zero and small positive earnings surprises to categorize firms as suspected of managing earnings

New product announcements, innovation disclosure, and future firm performance

This study examines the properties of innovation disclosures contained in new product announcements (NPAs), a form of voluntary, non-financial disclosure. We analyze these properties using a novel, text-based measure of the extent of product innovation disclosed in NPAs. We find that stock prices react more positively to NPAs with more extensive innovation disclosure. In our main analyses, we first find that a higher level of innovation disclosure predicts a greater increase in future sales. We further find that this predictive ability is reduced when managers have stronger incentives to maximize their wealth, and when the corporate governance structure and customers’ bargaining power are weaker. Our research enhances the understanding of the properties of managerial voluntary, non-financial disclosures and contributes a text-based measure of innovation that captures managerial assessment of the extent of innovation in new products. This new measure is more generalizable and incrementally informative for firm value and future performance than conventional innovation measures that depend on the existence of patents or research and development expenses.Yuan He acknowledges financial support from the National Natural Science Foundation of China (No. 72202189; No. 72232007) and Fundamental Research Funds for the Central Universities (No. 20720221055)