Intraday stock price reactions to interim-quarter versus fourth-quarter earnings announcements

Abstract

This study empirically investigates intraday patterns of quarterly return-earnings relations. We find that fourth quarter announcements exhibit a lower ERC but a more rapid adjustment to new equilibrium levels of prices and a higher R2 than interim quarter announcements. However, our empirical evidence is fairly weak because the difference in the time speed of initial adjustment is only 60 minutes and the significant difference in the R2s is observed only two out of 13 intraday intervals. Nevertheless, our analysis indicates that the prior evidence of interim quarter earnings having greater explanatory power than fourth quarter earnings or annual earnings may be driven by the use of a two-day event window that is much wider than what it takes for the market to adjust to fourth quarter announcements. Thus, our results are consistent with the conjecture of Brown, Clinch, and Foster (1992) in that the use of intraday returns reduces noise introduced by confounding events and hence increases the explanatory power of earnings around the time of earnings announcements. Our analysis also shows that fourth quarter announcements have a lower ERC because of lower predictability of fourth quarter earnings (Collins, Hopwood and McKeown, 1984). Overall, our results indicate the need for using intraday data and shorter event windows to precisely determine the market's response to informational events. © Blackwell Publishers Ltd. 2000.