Sequential information arrival and security performance: Theory and empirical evaluation of earnings and dividend information
Abstract
The study documents the effects of earnings and dividend information releases in a multiperiod framework with sequential information arrival. This research analyzes from a theoretical perspective the uncertainty resolution effects of sequential earnings and dividend information releases on the rational expectations of the value of a firm. The thesis provides empirical support to the analytical hypotheses developed in the first part by using residual analysis, regression, and analysis of return variability. Regarding earnings announcements, a significant difference in cumulative excess returns between the firms with following dividend announcements and the firms with preceding dividend announcements was observed. The empirical findings also reveal that the coefficient of earnings persistence does have power in explaining the variations in the stock market reactions to earnings announcements. The excess returns of an earnings announcement is greater for a firm with a larger coefficient than a firm with a smaller coefficient. In other words, the magnitude of excess returns is amplified by a larger value of the coefficient and is a component in models of rational expectations of market responses. In the only instance of overturning a theoretical hypothesis with respect to dividend announcements, we observe empirically that a divident change announcement has information content regardless of whether or not there is a preceding earnings announcement. Resolution of uncertainty two-period model does not explain the behavior of excess returns in response to dividend announcements, although it does so for earnings announcements. The sequence of information arrival in the market is of great importance in information content studies, because the impact of an announcement on its stock prices depends not only on the content of the current news, but also on the preceding news on which the expectations about the current news was conditioned, and the coefficient of earnings persistence which proxies for cumulative earnings forecast errors.
Degree
Ph.D.
Advisors
Ro, Purdue University.
Subject Area
Finance
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