Implications of the integral approach to quarterly reporting for the post-earnings-announcement drift

Article Abstract:

The time-series properties of quarterly earnings depend on the fiscal quarters to which earnings belong, consistent with the requirements of the integral approach to interim reporting. These time-series properties resulting from quarterly reporting requirements are systematically underestimated by earnings expectations embedded in stock prices, which is attributed to a lack of understanding among many investors of these time-series properties of quarterly earnings. The timing and magnitude of abnormal stock returns are consistent with the differences in the auto-regressive structure of seasonally differenced quarterly earnings. These results affirm the naive expectation hypothesis proposed by Bernard and Thomas in 1990 that the difference between quarterly earnings series and a seasonal random walk is not adequately reflected by stock prices.

Reporting & Disclosure, Analysis, Evaluation, Stocks, Profits, Corporation reports, Company reports, Autoregression (Statistics), Corporate profits

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Earnings, adaptation and equity value

Article Abstract:

An option-style valuation model of firm value explicitly indicates that the potential to adjust firm resources to an alternative application reflects an option accessible to the firm. Moreover, the model provides that the ex ante value of the option should be represented in market value. The principal hypothesis of the model is that equity value is a convex function of earnings as well as book value, where the function is influenced by the relative values of earnings and book value. For the study, earnings is used to quantify current use of the firm's resources while book value is used to measure the value of the resources regardless of their application. Findings based on different empirical specifications justify the convexity prediction.

Models, Resource allocation, Earnings per share, Book value (Accounting)

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