The Disciplinary Role of Earnings Information

Managers have incentives to voluntarily disclose good news early and delay bad news disclosure, and we propose that earnings announcements offset these asymmetric incentives by assuming a proportionately greater role in the disclosure of bad news relative to good news. We find that when news measured by quarterly market-adjusted returns is negative, the proportion of news variation concentrated around quarterly earnings announcements is significantly greater than the corresponding proportion when the news is positive. In our cross-sectional tests we find that, consistent with our prediction, earnings’ differential role in disclosing bad news relative to good news is more pronounced among firms that suffer from greater information asymmetry between managers and external stakeholders. Finally, we document that there is a significant increase in earnings’ differential role in disclosing bad news after the passage of the Sarbanes Oxley Act. * The paper has benefited greatly from comments given by Derek Johnson, Mozaffar Khan, S.P. Kothari, Konstantin Rozanov, Rodrigo Verdi, Ross Watts, Joe Weber, workshop participants at the University of Minnesota, and the participants at the HBS-MIT and the University of Toronto Conferences. a E52-343B, [email protected] b E52-325C, [email protected]