A large number of accounting researches showed the low information quality of earnings
announcement and the low relationship between accounting information and stock returns,
after the earnings announcement drift via empirical study first raised(Ball and Brown
1968, pp. 159-178). However, it is fact that continuing interest and attention is paid in
earnings announcements by capital market participants. This essay aims to reconcile the
obviously inconsistent perspectives by reviewing the researches and their conclusions
during the past decades. The conclusion is that earnings announcement has indeed not very
high and strong relationship with stock returns, but it still dominates other information
source individually, the response during earnings announcement days is still stronger than
that in the other days. This essay is divided into three sections. Firstly, the opinions of
earnings announcement’s uselessness are discussed; and then the outlooks opposite to the
former section are addressed; finally, the conclusion and future advices are given.
Earnings announcement drift was first proposed by (Ball and Brown 1968, pp. 159-178). It
was analysed that the investors’ reaction of the 261 listed companies in NYSE from 1946
to 1965. It is found that for companies which release good news in earnings
announcement, their abnormal stock returns inclines to drift upwards for at least 60 days
after their earnings announcement. Similarly, firms which release bad news in earnings
announcement inclines to have their abnormal stock returns drift downwards for a similar
days. Moreover, another finding is that the stock price is changing 12 months before the
announcement released. The low reflection of share price to earnings and the limitation of
information in earnings were first raised in accounting academic research.
After that perspective released, uselessness of earnings and financial reports was boomed
in the accounting academic researches. There are two mainstream reasons for the
uselessness which are low response of participants and the low informativeness of earnings
announcement.
In terms of low response, 2626 listed firms during 1974 and 1986 are examined (Bernard
and Thomas, 1990, pp. 305-340). It is found that the autocorrelation is 0.34 in a season,
0.19 in two seasons, 0.06 in three seasons and -0.24 in four seasons. This result shows the
trend of stock returns changes slightly, but the trend turns opposite after one year. This
phenomenon is explained by them that the participants cannot be aware of the positive
relation of returns changing. In another words, the reason why stock returns cannot fully
reflect the information content in released earnings is the slow and low response of
