The Effect of Timeliness and Credit Ratings On The Information Content of Earnings Announcements

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The Effect of Timeliness and Credit Ratings on the Information Content of

Earnings Announcements
Article in International Journal of the Economics of Business · September 2014

DOI: 10.1080/13571516.2014.947194
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The Effect of Timeliness and Credit

Ratings on the Information Content of
Earnings Announcements
ab a c
Stergios Leventis , Apostolos Dasilas & Stephen Owusu-Ansah
a
School of Economics, Business Administration and Legal Studies,
International Hellenic University, 14th klm Thessaloniki-Moudania,
57101 Thessaloniki, Greece
b
Aston Business School, UK
c
Dominion University College, Ghana
Published online: 10 Sep 2014.
To cite this article: Stergios Leventis, Apostolos Dasilas & Stephen Owusu-Ansah (2014)
The Effect of Timeliness and Credit Ratings on the Information Content of Earnings
Announcements, International Journal of the Economics of Business, 21:3, 261-289, DOI:
10.1080/13571516.2014.947194
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Int. J. of the Economics of Business, 2014
Vol. 21, No. 3, 261–289, http://dx.doi.org/10.1080/13571516.2014.947194
The Effect of Timeliness and Credit Ratings on the

Information Content of Earnings Announcements
STERGIOS LEVENTIS, APOSTOLOS DASILAS and

STEPHEN OWUSU-ANSAH
ABSTRACT This paper investigates the impact of timeliness and credit ratings on the
information content of the earnings announcements of Greek listed firms from 2001 to
2008. Using the classical event study methodology and regression analysis, we find
that firms tend to release good news on time and are inclined to delay the release of
bad news. We also provide evidence that the level of corporate risk differentiates the
information content of earnings according to the credit rating category. Specifically,
firms displaying high creditworthiness enjoy positive excess returns on earnings
announcement dates. In contrast, firms with low creditworthiness undergo significant
share price erosions on earnings announcement days. We also observe a substitution
effect between timeliness and credit ratings in relation to the information content of
earnings announcements. Specifically, we find that as the credit category of earnings-
announcing firms improves, the informational role of timeliness is mitigated.
Key Words: Earnings Announcements; Credit Ratings; Timeliness; Information

Asymmetry; Athens Stock Exchange.
JEL classifications: G14, G15.
1. Introduction
Corporate events that transmit management expectations and private
information to investors have been at the epicenter of market participant
interest for several decades. The release of financial results remains one of the
most puzzling features in accounting and finance research. Their importance is
evident from the behavior of market participants such as managers,
The authors would like to thank two anonymous referees for their helpful comments and
suggestions.
Stergios Leventis, School of Economics, Business Administration and Legal Studies, International Hellenic
University, 14th klm Thessaloniki-Moudania, 57101 Thessaloniki, Greece and Aston Business School, UK;
e-mail: [email protected]. Apostolos Dasilas, School of Economics, Business Administration and Legal
Studies, International Hellenic University, 14th klm Thessaloniki-Moudania, 57101 Thessaloniki,
Greece; e-mail: [email protected]. Stephen Owusu-Ansah, Dominion University College, Ghana; e-mail:
[email protected].
Ó 2014 International Journal of the Economics of Business

262 S. Leventis et al.
shareholders, investors, auditors, and public authorities. Earnings disclosures

have been proven to attract much media coverage, to cause financial analysts
to revise their estimations, and to rejuvenate investor interest in capital
markets. Since the seminal papers of Beaver (1968) and Ball and Brown (1968)
who probed into the effects of earnings announcements on share prices, a
strand of studies has attempted to disentangle the information content of
financial results. Considering the timing of managers’ decisions to release these
results, prior research suggests that the dissemination of bad news tends to be
delayed until it becomes unavoidable (e.g., Patell and Wolfson 1982; Leventis
and Weetman 2004; Kothari, Shu, and Wysocki 2009; Crabtree and Kubick
2014) while the acceleration of good news is to be expected.
According to Crabtree and Kubick (2014), several possible theories have
been propounded in the literature to construe the “good news early, bad news
late” hypothesis, including proprietary reporting costs (Verrecchia 1983), the

desire to widen the time interval before disclosing bad news (Doyle and
Magilke 2009), and long horizon-related career concerns (Kothari, Shu, and
Wysocki 2009). Thus, managers strategically decide on the release of “news” by
considering the costs related to competitor reaction and litigation (Verrecchia
1983), information dissemination strategies regarding media and investor
attention (Doyle and Magilke 2009), and career implications (e.g., compensation
and employment opportunities; Kothari, Shu, and Wysocki 2009).
Although the role of earnings disclosures has been extensively examined, it
still remains a very important issue for many academics, investors,
and managers in the wake of increasingly opportunistic earnings management
and the subsequent decline in accounting information quality (Jorion, Shi, and
Zhang 2009). The effect of this rise on opportunistic corporate behavior is the
diminishing credibility of the financial statements released. As a result, an
increasing number of investors and financial analysts have been looking for
alternative channels of corporate information, such as credit ratings. Credit
ratings transmit sensitive information to investors and financial markets
beyond other publicly available information (Ederington and Goh 1998; Jorion,
Liu, and Shi 2005; Tang 2009), since they provide assessments of a firm’s
financial creditworthiness for the foreseeable future. Moreover, credit rating
agencies uncover qualitative information through due diligence processes and
private communications with firm managers (Chou 2013). Therefore, credit
ratings include private forward-looking information that can be used by
investors to evaluate earnings news better.
While credit ratings are commonly employed for assessing the
creditworthiness of issuers of government and corporate bonds, there is
ongoing criticism regarding the accuracy of these credit ratings, their
reputation, their incremental value, and the credibility of their announcements1
(Kliger and Sarig 2000; Boot, Milbourn, and Schmeits 2006; Benmelech and
Dlugosz 2009; Mariano 2012). These criticisms are particularly true within the
European Union (EU), where the operations of credit rating agencies have
been severely criticized and are currently under review by the EU parliament
(Mackenzie 2012). Nevertheless, credit ratings are considered a valuable source
of corporate information by market participants. An and Chan (2008) argue
that credit ratings assist in disseminating important information regarding firm
value to uninformed investors, and for that reason they reduce information
asymmetry in financial markets. In their theoretical work, Boot, Milbourn, and
Effect of Timeliness and Credit Ratings on Content of Earnings Announcements 263
Schmeits (2006) show that credit rating agencies create information that
accelerates the dissemination of private information to the market. Based on
this finding, we argue that credit ratings can also speed up the announcement
of earnings announcements in cases where the conveyed information heads in
the same direction (e.g. “good news” for net income and creditworthiness).
However, these supplementary effects may diverge when the two signals point
in different directions. In this case, a substitution effect might be present since
the role of credit ratings may alleviate the informational role of earnings
announcements and vice versa.
Motivated by the studies of Liu and Malatesta (2006) and An and Chang
(2008), which investigate the informational role of corporate credit ratings
around seasoned equity offerings (SEOs) and initial public offerings (IPOs)
respectively, we extend the literature further by investigating the effects of
corporate credit ratings on the information content of the earnings

announcements of Greek listed firms. Additionally, we examine whether credit
rating changes are informative with respect to the firm’s share price reaction to
the disclosure of financial results. Finally, we explore the interrelationship
between a firm’s credit ratings and the timeliness of earnings announcements
(i.e., the length of time between the actual earnings announcement date and
the last fiscal year-end). This will help us to detect the possible supplementary
or substitution effects of the two channels of corporate information.
Our interest in assessing the impact of credit ratings on earnings
announcements is justified by the following three reasons. First, credit ratings
appear to influence managerial decision making. Specifically, managers adjust
corporate capital structure based on credit rating levels (Kisgen 2006).
Consequently, credit ratings affect a company’s level of debt, interest
payments, profitability, and financial stability. Credit ratings also affect
corporate operations. For example, long-term supply contracts may require
firms to maintain a specific credit rating at the expense of growth and future
profitability (Bosch and Steffen 2011). Second, credit ratings play a significant
role in the investment decisions of institutional investors (Bosch and Steffen
2011). Credit rating agencies certify the quality of the borrower (Megginson
and Weiss 1991), and regulations may require investment only in highly-rated
securities (Bosch and Steffen 2011). Moreover, prior evidence shows that credit
ratings influence market prices and thus capital gains (Griffin and Sanvicente
1982; Yi and Mullineaux 2006; Hand, Holthausen, and Leftwich 1992; Tang
2009). Third, “firms having higher level and lower variability of future
earnings enjoy high credit ratings which enable the market to capitalize more
future earnings news” (Chou 2013, 218). Therefore, relevant decisions on credit
ratings are expected to affect the informational content of earnings disclosures
and provide strong signals about corporate issues to market participants.
To investigate the interactive effects of timeliness and credit ratings on the
information content of earnings announcements, we employ data from firms
listed on the Athens Stock Exchange (ASE) during the period 2001–2008. Two
remarkable events took place in Greece during this period that make it
worthwhile as an empirical study. First, following the European Commission’s
Financial Services (ECFS) 1999 directive on quarterly financial reporting, the
Greek stock market regulator, the Hellenic Capital Markets Commission
(HCMC), has directed Greek firms to make financial reports public on a
quarterly basis since 2000. This directive on quarterly financial reporting was
expected to reduce the information asymmetry between informed and

uninformed investors in Greece. Informed investors consist of insiders and
institutional owners who possess privy information regarding a company’s
financial condition. Insiders are actively involved in managing the firm, and so
they rely less on financial statements to derive information regarding corporate
events (Tzovas 2006). Institutional investors, while not having the same access
to private information compared to insiders, can create an informational
advantage through their ability to expend more resources on gathering and
processing information about companies (Amihud and Li 2002). Through
quarterly financial reporting, the information gap between informed and
uninformed investors shrinks as long as more corporate information is
released and less nonpublic information is withheld. So new information is
beneficial to uninformed investors but also to informed ones, since it provides
a basis for the latter group to verify their expectations and prior projections.
As a result, more accurate financial projections are provided by equity analysts
that may help both informed and uninformed investors to evaluate a firm’s
future prospects better.
Second, during the period under investigation, Greek financial reporting
practices were blamed for excessive earnings management (Leuz, Nanda, and
Wysocki 2003; Garcia-Osma and Pope 2011) and fraudulent reporting practices
(Caramanis and Lennox 2008). While several measures to restore investor
confidence were initiated, such as the establishment of a new Oversight Board
in 2003 and the early application of IFRSs under the Law 2992/2002, the local
press and interviews with investment bankers revealed that investors in
Greece used alternative channels other than annual reports to glean corporate
information (including credit ratings and analyst recommendations). Hence,
Greece provides an interesting setting for testing the informational role of
credit ratings in association with earnings announcement releases. To isolate
the effect of the country’s sovereign debt crisis, which severely afflicted
corporate creditworthiness and profitability, we focus our attention on the
period just prior to the debt crisis, when market participants evaluated
company fundamentals and corporate announcements without serious
behavioral biases.
Our findings suggest that timeliness is a significant factor in making
earnings announcements value-relevant, lending support to the “good news
early, bad news late” hypothesis. In particular, firms that announce their
earnings early experience positive excess returns, while firms announcing their
earnings late undergo negative abnormal returns. The informativeness of
earnings announcements becomes stronger when the early announcements
contain positive earnings news. When the role of credit ratings is considered in
our analysis, we find that the level of credit quality magnifies the value
relevance of earnings announcements, especially when these contain positive
earnings news and are released on a more timely basis. We also find an
asymmetric market reaction to credit rating downgrades and upgrades, with
the former inducing a stronger market reaction compared to the latter, and this
reaction becomes even stronger when changes in credit ratings are congruent
with changes in earnings (i.e., upgrades with positive earnings, downgrades
with negative earnings). Finally, we empirically demonstrate a substitution
effect between timeliness and credit ratings in relation to the information
content of earnings announcements. Specifically, the informational role of
timeliness is mitigated in cases of highly rated firms, while for middle- or low-
rated firms it is magnified.
Our research contributes to the ongoing debate over earnings
announcements in several ways. First, although the market reaction to earnings
releases is well documented, the effects of credit ratings on the informational
role of financial reports have not been directly examined before. Jiang (2008)
was the first to investigate whether beating earnings benchmarks reduces the
cost of debt, as proxied by credit ratings. However, our study differs from that
of Jiang (2008), since we examine the role of credit ratings in transmitting
credible information to investors and shareholders alike. Second, this is the
first study that tests the role of timeliness in association with credit ratings.
This allows us to investigate possible concurrent or opposing effects between
the two sources of share price variation. The results show that the two effects
relate to substitution rather than being complementary. Third, given the scant
evidence regarding the role of credit ratings in equity markets, the current
study highlights the importance of credit ratings as an alternative conduit of
information for both informed and uninformed investors.
The remainder of the paper is organized as follows. Section 2 develops the
testable hypotheses. Section 3 describes the data and research methods
employed. The results are presented and discussed in section 4, while section 5
presents the main conclusions of the paper.
2. Literature Review and Hypotheses Development

2.1. Timeliness of Financial Reporting
Timeliness of financial reporting has been recognized as an important
qualitative characteristic of accounting information and, as a consequence, has
been included as an element of many conceptual frameworks for financial
reporting (Epstein and Jermakowicz 2007). In May 1999, the ECFS advocated
for quarterly reporting, which eventually led to the EU’s Transparency
Directive (Directive No. 2004/109/EC). This Directive requires firms listed in
the EU member states to report their financial performance and liquidity,
among other things, on a quarterly basis. However, the EU did not mandate
quarterly reporting but rather encouraged voluntary adoption, which, in effect,
left it to each member state to decide whether to require firms in their
respective countries to report on a quarterly or semi-annual basis, considering
the trade-off of costs and benefits involved. As a consequence, each member
state was at liberty to set its own rules regarding the content of quarterly
financial statements and whether to require firms to release financial reports
for the first and third quarters (Alves and Dos Santos 2008). This led to a
situation where some EU member states (such as Austria, Finland, Greece,
Italy, Portugal, Spain, and Sweden) require quarterly reporting, while others
(such as Denmark, France, and Germany) do not.
The Greek market regulator, the HCMC, requires all listed firms in the
country to release their annual earnings in the first three months after
the financial year-end and to release interim earnings within two months after
the end of each quarter. According to Chen, Cheng, and Gao (2005), the time
constraint for the announcement of earnings can create time pressure, resulting
in a heterogeneous market reaction. In fact, while the business press has
provided many cases of the delayed announcement of “bad news,”2 the extant
academic literature has propounded several managerial incentives for
withholding the release of negative financial results for various reasons. First,
in the absence of an opportunity to hide “bad news” due to regulatory
restrictions, managers will delay an announcement in the hope that it will filter
slowly into stock prices (Watts and Zimmerman 1978). Indeed, Doyle and
Makilge (2009) provide evidence suggesting that “bad news” is released with
some delay and that the market disseminates such information more broadly.
Second, if managerial performance evaluation is related to earnings, managers
will delay “bad news” to buy time in order to prepare a plan to respond to
critics (Laurie and Pastena 1975; Kross 1981, 1982; Bowen et al. 1992).
Alternatively, or probably additionally, managers delay “bad news” in order to
gain more time to prepare a plan to reverse the poor performance (see Begley
and Fischer 1998). Third, managers may withhold “bad news” in the hope that
over the next period, some other favorable corporate events will occur to
overshadow or obscure the negative information contained in the negative
earnings announcement (Verrecchia, 1983). Finally, career concerns can
motivate managers to withhold “bad news” and gamble that subsequent
events will allow them to “bury” it (see Kothari, Shu, and Wysocki 2009).
Career concerns broadly encompass the implications of news on management
compensation, promotion, employment opportunities within and outside the
firm, and board interlocks (Kothari, Shu, and Wysocki 2009).
Indeed, prior studies provide ample empirical evidence to support the
“good news early – bad news late” hypothesis (see Pastena and Ronen 1979;
Patell and Wolfson 1982; Chambers and Penman 1984; Begley and Fischer 1998;
Owusu-Ansah 2000; Leventis and Weetman 2004; Kothari, Shu, and Wysocki
2009). Haw, Qi, and Wu (2000) demonstrate that withholding “bad news”
causes a gradual decline in stock prices, which is less costly to managers vis-à-
vis a sharp fall in stock prices. Dye and Sridhar (1995) find that managers delay
the release of “bad news” until favorable industry-wide news is announced.
Based on theoretical propositions and empirical results, we expect firms that
accelerate the publication of earnings to experience a share price appreciation,
while those that delay the release of earnings will encounter firm value erosion.
Moreover, we conjecture that the positive content (“good news”) of financial
reports provokes strong positive abnormal returns, while the negative (“bad
news”) content of earnings produces significant value losses. On the basis of the
above discussion, we anticipate that firms that combine early announcements
with “good content” bring about a considerable positive market reaction,
whereas firms that delay the release of “bad news” suffer significant share price
losses. Thus, our first hypotheses is as follows:
H1: Ceteris paribus, firms with “good news” that accelerate the disclosure of
earnings experience a positive abnormal market reaction, while those with
“bad news” that delay the release of earnings experience a negative abnormal
market reaction.
2.2. Importance of Credit Ratings

The role of credit ratings is pivotal in financial markets. A strand of studies
has examined the impact of credit ratings on the debt market, suggesting that
credit rating agencies: (a) certify the quality of the borrower (Megginson and
Weiss 1991); (b) impact on the cost of debt (Whited 1992; Kaplan and Zingales
1997); (c) lessen credit constraints which enables rated firms to raise more debt
capital (Faulkender and Petersen 2006); (d) impact on managerial decisions
regarding corporate capital structure (Kisgen 2009); and (e) increase the
magnitude of syndicated loans, which enables firms to finance new
investments and acquisitions (Sufi 2009).
It has been suggested that the role of credit ratings in equity markets is
comparable to that of debt markets (Chou 2013). The reason for this is twofold.
First, credit ratings consider all publicly available information. Aman and
Nguyen (2013, 15) demonstrate that greater disclosure and transparency of
earnings impacts on the accuracy of the rating. Second, credit ratings convey
private information about the success of a firm’s projects and probable future
prospects that is not available to equity analysts (Ederington et al. 1987; Chou
2013), and therefore they generate information that speeds up the divulgence
of private information to the market (Boot, Milbourn, and Schmeits, 2006).
Such information is considered relevant to decision making, since credit rating
agencies have the power to gather confidential nonpublic information, which
managers may hesitate to disclose publicly for reasons of proprietary costs
(Kisgen 2009). Indeed, Chou (2013) demonstrates that credit rating agencies are
less biased in their firm evaluation and information disclosure compared to
equity analysts (whose incentives are linked to the investment banking
business).
To some extent, credit ratings determine the success of a firm (Mariano
2012), since a bad credit rating increases the cost of debt which can damage
the firm (Kliger and Sarig 2000). Furthermore, downgrades (upgrades) in credit
ratings can lead to significant negative (positive) effects on stock and bond
returns (Hand, Holthausen, and Leftwich 1992). This is because institutional
investors (e.g., broker-dealers, banks, insurance firms, pension funds, etc.) are
required or encouraged to invest in securities that receive acceptable ratings
(White 2002). Additionally, herding behavior has been suggested to be
associated with credit rating decisions, particularly in markets where
information asymmetry is pronounced (Mariano 2012). Thus, corporate
managers target credit ratings in making capital structure decisions (Kisgen
2006, 2007).
While the information content of credit rating announcements has been
well documented by prior studies (e.g., Holthausen and Leftwich 1986; Goh
and Ederington 1993; Dichev and Piotroski 2001), there is a paucity of evidence
regarding the role of credit ratings in predicting the market reaction
surrounding the release of new information.3 For example, Liu and Malatesta
(2006) and An and Chan (2008) explored the informational role of credit
ratings surrounding SEOs and IPOs respectively and found that issuing firms
with credit ratings encounter less underpricing that those without credit
ratings. More recently, Chou (2013) examined whether credit ratings help stock
prices to reflect more future earnings using the future earnings response
coefficient model. In this study, we go a step further by assessing the effect of
credit ratings4 on the information content of financial reports. We opt for
analyzing this effect for a number of reasons. First, credit ratings affect the
profitability of firms through interest payments. Firms with low credit quality
face difficulties in raising funds through debt issue and, if they are able to
raise funds, they normally do so at higher costs. Second, credit ratings

determine the access to debt and equity markets and thus have a direct impact
on a firm’s capital structure (Faulkender and Petersen 2006). Third, credit
ratings are considered to be selective channels of corporate information for
both informed and uninformed investors (Jorion, Liu, and Shi 2005). This
becomes more evident in cases where firms enjoy high credit ratings, which
make them more transparent in terms of information disclosure compared
with those with low credit ratings. The transparency is linked to a reduced
amount of information asymmetry (Liu and Malatesta 2006; DeBoskey and
Gillet 2013; Chou 2013), which helps investors to decode the information
content of earnings releases better. Based on the above, we conjecture that if
firms with high creditworthiness enjoy a lower cost of debt, reduced
information asymmetry, more transparency, and a low probability of default
(as suggested by prior literature), they will announce more favorable

information through earnings releases, which will be reflected in share prices.
Thus, we hypothesize that:
H2: Ceteris paribus, the higher a firm’s credit rating, the better the
information content of its earnings and the stronger the market reaction to
the announcement of its earnings.
3. Data and Methodology

3.1. Sample Selection and Data Collection
Our sample consists of 258 ASE-listed firms that have data on our test
variables over the eight-year period, 2001–2008. We hand-collected the
earnings announcement dates of these firms from daily financial press releases
and the ASE Web site. We define the earnings announcement date as the date
that an annual or quarterly financial report is made public. We extracted data
on earnings (net income) for each sample firm from Thomson One. We also
obtained daily-adjusted closing stock prices from DataStream to estimate the
abnormal share price behavior around earnings announcement dates. Data for
each firm’s credit ratings were obtained from Amadeus. We excluded financial
sector firms (i.e., banking, insurance, investment, and leasing firms) from our
sample due to the unavailability of credit ratings.
Following the classification of the Amadeus credit ratings system, we
identified four discernible groups of firms based on their creditworthiness:
“healthy firms,” “balanced firms,” “vulnerable firms,” and “risky firms.” The
“healthy firms” enjoy ratings between AAA and A levels (highly rated). Firms in
this group have the capacity to meet their financial commitments. They are
notably strong, creditworthy, and are highly solvent. The second group
(“balanced firms”) consists of firms with credit ratings between BBB and BB.
Though the capital structure of these firms is considered adequate, they are
likely to face some ongoing uncertainties or exposure to adverse business and
economic conditions. The third group of firms (“vulnerable firms”) consists of
firms with credit ratings between B and CCC. Firms in this group are vulnerable,
as their fundamentals are weak and more susceptible to adverse market events.
The fourth group of firms (“risky firms”) contains credit ratings between CC and
D. In this group firms display high vulnerability, a low capacity to meet financial
commitments, and a high probability of insolvency. Table 1 provides a detailed

description of the characteristics of each group of firms.
Initially, we identified 4,290 earnings announcement dates during the
examination period. To avoid the problem of thin trading5 (i.e., stocks that
trade infrequently), we excluded firms that had not had any share transactions
for more than 100 days. We also excluded firms with missing data on net
income and credit ratings. We mitigated the effect of outliers by deleting
observations that were in the top or bottom 1.5%6 of the distribution of
abnormal returns as well as unexpected earnings. The final sample consisted of
2,443 announcement dates, of which 635 were annual earnings announcements,
619 first quarter earnings announcements, 602 semi-annual earnings
announcements, and 587 third quarter earnings announcements. Panel A of
Table 2 reports the sample distribution for each quarter and year examined.
Panel B of Table 2 displays the yearly distribution of earnings

announcements according to the credit rating categories of the firms in the
sample. The group of firms with a “balanced” credit rating has the highest
number of earnings announcements (1,660 observations), followed by the
group of “vulnerable” firms (384 observations), and then by the “healthy”
group of firms (347 observations). The group classified as “risky” has the least
number of observations (52 observations). Panel C of Table 2 shows the
number of credit rating upgrades and downgrades that occurred during the
Table 1. Description of credit rating categories

Category Rating Risk Assessment
Healthy AAA The firm’s capacity to meet its financial commitments is extremely strong.
firms The firm shows an excellent economic and financial flow and fund
equilibrium.
AA The firm has a strong creditworthiness. It also has a good capital structure
and economic and financial equilibrium. Difference from “AAA” is slight.
A The firm has a high solvency. The firm is, however, more susceptible to the
adverse effect of changes in circumstances and economic conditions than
firms in higher rated categories.
Balanced BBB Capital structure and economic equilibrium are considered adequate. The
firms firm’s capacity to meet its financial commitments could be affected by
serious unfavorable events.
BB A firm rated “BB” is more vulnerable than companies rated “BBB.”
Furthermore, the firm faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions.
Vulnerable B The firm presents vulnerable signals with regard to its fundamentals.
firms Adverse business, financial, or economic conditions will be likely to impair
the firm’s capacity or willingness to meet its financial commitments.
CCC A firm rated “CCC” has a dangerous disequilibrium in the capital
structure and in its economic and financial fundamentals There is a high
probability that adverse market events and inadequate management could
affect the firm’s solvency.
Risky firms CC The firm shows signs of high vulnerability. In the event of adverse market
and economic conditions, the firm’s strong disequilibrium could increase.
C The firm shows considerable pathological situations. The firm’s capacity to
meet its financial commitment is very low.
D The firm no longer has the capacity to meet its financial commitments.
Note: The Multi Objective Rating Evaluation (MORE) model is essentially used to determine the
level of distress of industrial firms by using data included in financial statements.
Table 2. Distribution of earnings announcement dates per time year and

rating category
Panel A: No. of earnings announcements per quarterly interval
Annual
Year (4th Quarter) 1st Quarter 2nd Quarter 3rd Quarter Total
2001 5 2 0 0 7
2002 15 5 9 11 40
2003 48 29 28 36 141
2004 53 48 35 29 165
2005 81 54 57 49 241
2006 117 101 99 103 420
2007 106 169 174 161 610
2008 210 211 200 198 819
Total 635 619 602 587 2,443
Panel B: No. of earnings announcements per credit rating category

Year “Healthy” Firms “Balanced” Firms “Vulnerable” Firms “Risky” Firms Total
2001 3 4 0 0 7
2002 7 32 1 0 40
2003 19 97 22 2 141
2004 39 95 26 5 165
2005 61 147 33 0 241
2006 56 296 62 6 420
2007 64 438 96 16 610
2008 98 551 148 22 819
Total 347 1,660 384 52 2,443
Panel C: Earnings announcements per credit rating changes

Year Upgrades Downgrades
No. Cardinal Size No. Cardinal Size
2001 0 0.00 0 0.00

2002 3 1.00 0 0.00
2003 4 1.00 21 1.14
2004 18 1.17 26 1.08
2005 40 1.25 30 1.10
2006 56 1.00 76 1.11
2007 109 1.21 125 1.30
2008 134 1.28 150 1.15
Total 364 428
Notes: “Healthy” firms are those with credit ratings between A and AAA, “Balanced” firms have
credit ratings between BB and BBB, “Vulnerable” firms are those having credit ratings between
CCC and B, and “Risky” firms are those with credit ratings between D and CC. Categorical credit
ratings are converted into a cardinal variable measured on a 10-point scale (1 = AAA rating, 2 =
AA rating, etc.). The cardinal size is the difference between the cardinal value of a new rating and
that of an old rating.
period under examination. About 42% (364) of the firms had their credit
ratings upgraded, while 58% (428) had their credit ratings downgraded. In
addition, Panel C presents the cardinal size of credit rating upgrades and
downgrades. We define the cardinal size of a credit rating as the difference
between the cardinal value of a new rating and that of an old rating.
Following Jorion, Liu, and Shi (2005), we converted credit ratings into cardinal
values measured by a four-point scale (1 = “healthy” firms, 2 = “balanced”
firms, 3 = “vulnerable” firms, and 4 for “risky” firms).
Panel A of Table 3 describes the maximum period, measured in working
days, within which Greek listed firms are required to release their financial
results. Year 2005 was a transition period due to the implementation of the
IFRSs. For this specific year, there was an extension in the regulatory deadline
for disclosing first and second quarter earnings results. A further extension
was given for the release of annual results for 2006, 2007, and 2008.
Panel B of Table 3 displays the average number of working days that pass
before annual and quarterly results are released. It is evident that, on average,
our sample firms announce their earnings results some days earlier than the
regulatory deadline. The average firm issues its annual and quarterly earnings
announcements slightly more than 30 calendar days after its fiscal year-end.
3.2. Methodology
To assess the market reaction to earnings announcements, we use the classical
event study methodology, whereby we define the event day (t = 0) as the day
of disclosure of a firm’s earnings results. We use an estimation window of
three days (−1, 0 and +1) consisting of the day immediately before and
immediately after the event day (inclusive) to capture the market reaction to
the disclosure, since the market reaction to earnings announcements occurs
over a short time span. The use of an event period longer than three days has
Table 3. The average and maximum number of days before releasing
financial results
Panel A: The maximum number of working days before releasing financial results
Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2001 41 44 45 40
2002 40 44 43 42
2003 39 43 42 41
2004 40 43 42 39
2005 62 65 42 40
2006 38 43 44 63
2007 40 44 45 63
2008 41 43 42 58
Panel B: The average number of working days before releasing financial results
Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2001 30 n/a n/a 37

2002 27 39 38 38
2003 34 37 35 39
2004 34 33 34 37
2005 54 54 36 37
2006 33 37 37 53
2007 35 38 39 52
2008 37 39 38 53
Notes: The maximum number of working days to pass before releasing financial results are
determined by Greek corporate law. Year 2005 was a transitional year (the implementation of the
IFRS) for releasing annual and first-quarter financial results. n/a, not available.
the consequence of normalizing or reducing the effect of the release of

earnings announcements that we intend to capture.
The effect of new information on the value of a given equity stock, i, is
measured by the difference between the actual return on day t, Ri,t, and the
expected return on that day, E(Ri,t). This difference is called abnormal return,
ARi,t, and is given as:
ARi;t ¼ Ri;t E(Ri;t Þ (1)
The expected return can be derived from estimating the market model as:
E(Ri;t Þ ¼ a þ b Rm;t (2)

where Rm,t is the return on the market portfolio on day t and serves as a proxy
for the ASE General Index (ASEI), and α and β are the Ordinary Least-Squares
parameters using the 200 daily returns data7 prior to the event window.
Chung and Lee (1998) and Kim, Krinsky, and Lee (1997) also used 200 daily
returns data to estimate α and β in their market model in order to compute
market reaction to earnings announcements.
To investigate the effect of annual and quarterly (interim) earnings
announcements across the event period, we compute average abnormal returns
(AAR) for all firm portfolios using the formula below:
P
N
ARi;t
AARp;t ¼ t¼1 (3)
N
where ARi,t is the actual abnormal return for earnings announcement firms, and
N is the number of observations in a portfolio. We also compute cumulative
average abnormal returns (CAARs) for the three-day event period as follows:
X t2
CAAR ðt1 tþ1 Þ ¼ AARt (4)
t¼t1
To investigate the timeliness of the earnings announcements of Greek listed firms,

we define the reporting lag of earnings announcements as the number of working
days from the beginning of the period (either annual or quarterly) to the actual
date of the announcement. To this end, we follow Chen, Cheng, and Gao (2005) by
forming an announcement timing index (ATI) to proxy the reporting lag, which is
defined as ATI = n/N, where n is the nth first working day after firms are
required by the regulatory agency to announce earnings (i.e., January 2 for annual
earnings announcements, April 1 for first quarter, July 1 for second quarter, and
September 1 for third quarter); and N is the total number of working days in the
regulatory interval for earnings announcements, depending on whether the
announcement is for annual or quarterly earnings (i.e., January 2–March 31 for
annual earnings announcement, April 1–May 31 for first quarter, July 1–August 31
for second quarter, and September 1–November 30 for third quarter).
Furthermore, we assess whether firms that experience positive unexpected
earnings changes expedite their disclosure of earnings, while those that exhibit
negative unexpected earnings changes delay their earnings announcements.

Using the random walk model,8 we define unexpected earnings changes (UE)
as the difference between a firm’s current year earnings (Ei,t) and its previous
year earnings (Ei,t - 1), which could be positive or negative. Thus:
UE ¼ Ei;t Ei;t1 (5)
The unexpected earnings change is positive if Ei,t > Ei,t - 1, neutral if Ei,t = Ei,t - 1,
and negative if Ei,t < Ei,t - 1.
4. Empirical Results
4.1. Timeliness of Earnings Announcements and Stock Price Reaction
As mentioned earlier, the HCMC requires that all ASE-listed firms disclose
both their annual and quarterly earnings during a predetermined time interval.
Panel A of Table 4 displays the results from the full sample of earnings
announcements. We observe that the disclosure of financial results provokes a
weak positive abnormal return of 0.036% on day 0. The CAAR for three days
is −0.100% and not statistically significant at any conventional level. These
results demonstrate that earnings announcements are not informative per se.
However, when splitting the full sample of earnings announcements according
to the content conveyed (positive vs. negative earnings changes), we find
support for H1. In particular, financial disclosures with “good content”
produce significant excess returns on day 0 of 0.323% (t = 2.89) and a CAAR of
the three days of 0.492% (t = 2.54). On the other hand, firms that announce
negative unexpected earnings undergo price losses of −0.217% on day 0 and of
−0.623% over the three days surrounding the announcement date (t = −2.63).
The above results confirm the findings of prior studies that the information
contained in financial results is the key driver of stock price variations
surrounding the announcement date.
Another aspect of financial disclosures that has been widely explored in the
past is timeliness. In this study, we examined the impact of timeliness on the
information content of earnings announcements, initially isolating the effect of
the earnings component and then incorporating it into our analysis. Panel B of
Table 4 displays the results for the timeliness of the earnings announcements
analysis. To assess timeliness, we used the mean announcement date, which is
calculated by averaging across firms the number of days that elapse between
the first day that financial disclosure is permitted (e.g., January 2 for annual
results) and the actual earnings announcement date. We found that the earliest
announcements exhibit statistically significant positive abnormal returns on
day 0 of 0.415% (t = 3.66), while the latest announcers experience abnormal
returns of −0.088%, though not statistically significant (t = −1.18).
We further examined the value relevance of the timeliness of earnings
announcements considering the unexpected earnings component. The results
show that firms announcing positive unexpected earnings before the mean
announcement date experience a strong abnormal return on day 0 of 0.714%,
which is statistically significant at the 0.01 level. However, we found no
statistically significant market reaction when firms announce negative
unexpected earnings (0.057% on day 0), which suggests that early-announcing
Table 4. Abnormal returns around earnings announcements dates

CAAR
Obs. Day −1 t-statistic Day 0 t-statistic Day +1 t-statistic (−1, +1) t-statistic
Panel A: Announcements by sign of earnings

Full sample 2,443 −0.004 −0.04 0.036 0.33 −0.132 −1.22 −0.100 −0.53
Full sample: positive unexpected earnings 1,145 0.051 0.46 0.323*** 2.89 0.118 1.06 0.492** 2.54
Full sample: negative unexpected earnings 1,298 −0.053 −0.39 −0.217 −1.59 −0.353*** −2.58 −0.623*** −2.63
Panel B: Announcements by mean announcement date

Before mean announcement date 587 0.166 1.53 0.415*** 3.66 0.031 0.25 0.613*** 3.18
Before mean announcement date: positive unexpected 320 0.341** 2.41 0.714*** 4.85 0.300* 1.95 1.355*** 4.27
earnings
Before mean announcement date: negative unexpected 267 −0.043 −0.26 0.057 0.33 −0.291 −1.40 −0.276 −1.14
earnings
After mean announcement date 1,818 −0.059 −0.88 −0.088 −1.18 −0.205*** −2.59 −0.352 −1.51
After mean announcement date: positive unexpected earnings 809 −0.085 −0.88 0.155 1.42 0.034 0.28 0.104 0.47
After mean announcement date: negative unexpected earnings 1,009 −0.037 −0.40 −0.283*** −2.77 −0.398*** −3.82 −0.718** −2.38
Panel C: Announcements by regulatory deadline

Before regulatory deadline 1,599 0.064 0.95 0.237*** 3.29 −0.167** 2.19 0.134 0.81
Before regulatory deadline: positive unexpected earnings 784 0.149 1.60 0.555*** 5.71 0.160 1.49 0.864*** 3.95
Before regulatory deadline: negative unexpected earnings 815 −0.018 −0.19 −0.070 −0.67 −0.481*** −4.50 −0.569** −2.32
On regulatory deadline 805 −0.140 −1.32 −0.378*** −3.11 −0.106 −0.79 −0.624 −1.52
On regulatory deadline: positive unexpected earnings 345 −0.222 −1.42 −0.237 −1.27 −0.004 −0.02 −0.463 −1.02
On regulatory deadline: negative unexpected earnings 460 −0.079 −0.54 −0.484*** −3.01 −0.182 1.04 −0.744 −0.01
Notes: The mean announcement date is calculated by averaging across firms the number of days that elapse between the first day that financial disclosure is
permitted and the actual date of announcement. Regulatory deadline is defined as the ultimate date of announcement by law. The regulatory deadline is March 31
of the next year for annual results, May 31 for the first quarter, June 30 for semi-annual results, and November 30 for the third quarter results. Abnormal returns
are computed using the market model and unexpected earnings are calculated using the random walk model. We define the event period of announcement as the
three days surrounding the announcement day (days −1, 0, and +1). Market model parameters (α and β) were estimated using 200 daily returns data prior to the
event window. *, **, *** denote statistical significance at the 10%, 5%, and 1% levels respectively.
firms presenting negative news do not undergo significant price losses. Firms
that announce positive unexpected earnings after the mean announcement date
earn positive abnormal returns of 0.155% on day 0, which is, however, less in
magnitude compared to firms that announce their earnings early (0.714%). The
market reaction is strong in cases where earnings are released late and contain
“bad news.” In these cases, the abnormal return on day 0 is −0.283% and
statistically significant at the 0.01 level.
To probe deeper into the effects of timeliness on earnings releases, we split
the sample along the regulatory deadline. Panel C of Table 4 presents the results
for the timeliness of all quarterly announcements according to the regulatory
deadline (fiscal quarter-end). On the one hand, firms releasing earnings reports
before the regulatory deadline earn significant abnormal returns on day 0 of
0.237% (t = 3.29). On the other hand, firms that delay the release of earnings
reports until the last day (the regulatory deadline) experience significant
negative abnormal returns on day 0 of −0.378% (t = −3.11). Moreover, firms that
accelerate the announcement of earnings with favorable content experience a
statistically significant abnormal return of 0.555% on day 0 (t = 5.71), while those
that delay the announcement of earnings with unfavorable content until the last
day undergo a statistically significant abnormal return of −0.484% (t = −3.01).
Overall, these results suggest that the timeliness of earnings announcements per
se can produce a significant market reaction. However, the role of timeliness
grows stronger depending on the content of the financial results. In cases of early
announcements, the “good” content of earnings drives up stock prices, while in
cases of delayed announcements the “bad” content of earnings drives stock
prices down. The two effects of timeliness and earnings content are cancelled out
in cases of “early bad” and “late good” announcements, sending a neutral signal
to the market. Collectively, the above results lend support to the “good news
early, bad news late” hypothesis.
4.2. Informativeness of Credit Ratings

While prior empirical evidence suggests that credit ratings reduce information
asymmetry and affect corporate profitability (An and Chan 2008), we
investigate whether credit ratings enhance the informativeness of financial
reports. Table 5 presents the results from the effect of credit ratings on the
information content of earnings announcements. For the group of “healthy”
firms, we find a positive market reaction of 0.126% on the announcement date,
although this is not statistically significant (t = 0.79). When we relate credit
ratings with the unexpected component of earnings, we observe that the
information content of earnings reports changes. In particular, for the group of
“healthy” firms, positive unexpected earnings produce strong positive
abnormal returns of 0.503% on the announcement date (t = 2.55) and a CAAR
of three days of 0.453% (t = 1.33). In contrast, negative unexpected earnings
provoke share price losses of −0.260% (t = −1.10) and a CAAR of three days of
−0.777% (t = −1.90).
The group of “balanced” firms exhibits insignificant returns around
earnings releases (0.090% on day 0), which implies that the credit ratings for
this group send a neutral signal to the market. However, when we consider
the interaction of unexpected earnings changes and credit ratings for this
group of firms, we find significant positive abnormal returns in the case of

positive unexpected earnings (0.430% on day 0 and 0.919% over three days),
but a negative stock market reaction in the case of negative unexpected
earnings (−0.220% on day 0 and −0.629% over three days). These results
suggest that firms from the “healthy” or “balanced” group generate a
significant share price response to the earnings announcements during the
three-day window, depending on the sign of earnings change (positive or
negative). Therefore, for these two groups of firms the market places more
emphasis on the financial report content rather than on credit ratings.
The group of “vulnerable” firms experience marginally significant negative
CAARs of −0.707% during the three-day window (t = 1.66). This negative
reaction persists even in cases of positive earnings content for each of the three
days of the event period. In fact, the CAAR of three days is −1.117%,
statistically significant at the 0.05 level. Surprisingly, the market reaction is

moderate in cases of negative earnings announcements (−0.158% on day 0 and
a CAAR of −0.378%). This result implies that the market might have already
adjusted to the bad content of earnings announcements for this low-rated
group of firms. The lowest-rated firms (“risky”) are generally those that are
over borrowed, exposed to high interest expenses, and have high debt and
weak fundamentals. Therefore, regardless of the sign of the earnings release
(positive or negative), credit ratings appear to determine the informativeness
of financial statements. The market does not even perceive positive changes in
earnings as an indicator of improvement in a “risky” firm’s financial standing.
The market conceives such improvement as a temporary phenomenon. As a
consequence, the reaction of the market is negative, even in cases of positive
unexpected earnings (−0.680% on day 0 and a CAAR of −2.881% for the three-
day event period).
In sum, our results suggest that credit ratings do explain the information
content of earnings announcements. However, the role of credit ratings is
magnified when earnings components are included in our analysis. In fact, the
earnings sign is the main determinant of the market reaction to financial
disclosures in the first two groups of credit ratings (i.e., “healthy” and
“balanced”). However, the informational role of earnings content is mitigated
for those firms belonging to the last two categories of credit quality (i.e.,
“vulnerable” and “risky”). For these two groups of firms, credit ratings appear
to overshadow the information content in earnings releases. Thus, even when
companies announce positive unexpected earnings they still experience market
value losses. As an implication of the above results, we can assert that
managers should be concerned with increasing the overall creditworthiness of
their firms rather than focusing on merely increasing profitability.
Additionally, we examine the joint effects of the timeliness of earnings
announcements and the creditworthiness of firms on the information content
of earnings. In their theoretical work, Boot, Milbourn, and Schmeits (2006)
demonstrated that credit ratings agencies compile credible private and public
information which speeds up the dissemination of private information to the
market. An and Chan (2008) argued that high credit ratings help firms to
announce corporate news in a timely manner, since high creditworthiness
reduces information asymmetry through the dissemination of important
information to uninformed investors. Aman and Nguyen (2013) showed that
the extent and timeliness of information disclosures are associated with higher
Table 5. Abnormal returns of earnings announcements by credit ratings

Obs. Day −1 t-statistic Day 0 t-statistic Day +1 t-statistic CAAR (-1, +1) t-statistic
Healthy firms 346 0.076 0.48 0.126 0.79 −0.357** −2.22 −0.154 −0.56
Healthy firms: positive unexpected earnings 175 0.117 0.59 0.503** 2.55 −0.167 −0.85 0.453 1.33
Healthy firms: negative unexpected earnings 171 0.035 0.15 −0.260 −1.10 −0.551** −2.34 −0.777* −1.90
Balanced firms 1,661 0.008 0.08 0.090 0.83 0.011 0.10 0.109 0.58
Balanced firms: positive unexpected earnings 792 0.097 0.80 0.430*** 3.56 0.392*** 3.24 0.919*** 4.39
Balanced firms: negative unexpected earnings 869 −0.073 −0.53 −0.220 −1.59 −0.337** −2.43 −0.629*** −2.63
Vulnerable firms 384 −0.053 −0.22 −0.211 −0.86 −0.443* −1.80 −0.707* −1.66
Vulnerable firms: positive unexpected earnings 158 −0.120 −0.41 −0.287 −0.99 −0.771*** −2.65 −1.117** −2.34
Vulnerable firms: negative unexpected earnings 226 0.006 −0.02 −0.158 −0.48 −0.213 −0.64 −0.378 −0.89
Risky firms 52 −0.586 −0.76 −0.465 −0.60 −0.897 −1.16 −1.947 −1.45
Risky firms: positive unexpected earnings 20 −0.994 −0.76 −0.680 −0.52 −1.208 −0.93 −2.881 −1.27
Risky firms: negative unexpected earnings 32 −0.331 −0.37 −0.330 −0.37 −0.702 −0.78 −1.363 −0.88
Notes: “Healthy” firms are those with credit ratings between A and AAA, “Balanced” firms have credit ratings between BB and BBB, “Vulnerable” firms are those
having credit ratings between CCC and B, and “Risky” firms are those with credit ratings between D and CC. Abnormal returns are computed using the market
model. Unexpected earnings changes are computed using the random walk model. We define the event period of announcement as the three days surrounding the
announcement day (days −1, 0, and +1). Market model parameters (α and β) were estimated using 200 daily returns data prior to the event window. *, **, *** denote
statistical significance at the 10%, 5%, and 1% levels respectively.
Effect of Timeliness and Credit Ratings on Content of Earnings Announcements
277
credit ratings. This can be attributed to investor interest in better-quality and

well-timed information that reduces risk and uncertainty and which is then
reflected by better credit ratings. Contrarily, a longer time between the fiscal
closing date and the release of financial reports can be linked to lower credit
ratings, since the delay in disseminating information is considered as an
attempt to conceal unfavorable news until this becomes unavoidable. We
therefore expect credit ratings, in association with timeliness, to exert a
combined effect on the information content of financial accounts.
The results from the interrelation between credit quality and timely
earnings announcements are reported in Table 6. We observe that “healthy”
firms enjoy positive (though statistically insignificant) abnormal returns
regardless of the timing of the announcement. Specifically, “healthy” firms that
are early (late) announcers elicit an abnormal return of 0.252% (0.085%) on the
announcement date. This result implies that the market might have already
incorporated the “good” content of the financial reports of high-rated firms.
However, when the earnings component is taken into account, the results
show a significant market reaction for both early and late announcers with
positive earnings content (0.445% and 0.578% respectively). The market
reaction is negative in the case of firms which delay announcing “bad” news
(−0.369%).
Interestingly, the results for “balanced” firms show that the market
applauds early earnings announcements by producing an excess return of
0.409% on day 0 (t = 2.86) and a CAAR of 0.850% during the three-day event
period (t = 3.98). Contrarily, late announcing firms undergo mild price
reductions during the three-day period surrounding the announcement date
(CAAR of −0.154%). As in the “healthy” group, the sign of earnings magnifies
the signal sent by “balanced” firms through earnings releases. Thus, early
(late) announcers with positive earnings content receive strong abnormal
returns of 0.751% (0.271%) on day 0, while those with negative content
experience price reductions (−0.012% and −0.262% respectively).
While “vulnerable” firms that release financial results early enjoy higher
price appreciations of 0.848% on day 0, those that delay earnings
announcements undergo significant share price losses of −0.378% on day 0.
When taking into account the earnings component, we see a heterogeneous
market reaction in contrast to the “balanced” group of firms. Late announcers
with either good or bad earnings content experience significant share price
losses of −0.504% and −0.287% respectively. This result implies that credit
ratings overshadow the effect of the earnings content for the group of firms
with low creditworthiness. Moreover, looking into the interrelationship
between timeliness and credit quality, we observe a substitution effect.
Specifically, the impact of timeliness gets stronger as credit quality
deteriorates. For instance, timeliness seems to exert no effect on the
information content of earnings in the highest-rated firms. The market does not
react to the firm being on time or delayed. For the “healthy” group of firms,
the earnings component is the key driver of market reaction. As the credit
quality worsens, timeliness appears to some extent to determine the market
reaction to earnings releases. In other words, for the low-rated group of firms,9
timeliness could serve as the best channel for transmitting important corporate
information to investors.
Table 6. Abnormal returns of earnings announcements by credit ratings, timeliness and unexpected earnings
Obs. Day −1 t-statistic Day 0 t-statistic Day +1 t-statistic CAAR (−1, +1) t-statistic
Healthy firms
Before mean announcement date 118 0.114 0.53 0.252 1.33 −0.845*** −3.35 −0.480 −1.04
(i) Positive unexpected earnings 67 0.364 1.44 0.445* 1.85 −0.554** −2.04 0.255 0.48
(ii) Negative unexpected earnings 51 −0.215 −0.58 −0.002 −0.01 −1.228*** −2.67 −1.445* −1.83
After mean announcement date 219 0.089 0.60 0.085 0.48 −0.112 −0.63 0.062 0.21
(i) Positive unexpected earnings 105 −0.041 −0.20 0.578** 2.04 0.051 0.19 0.588 1.40
(ii) Negative unexpected earnings 114 0.208 0.96 −0.369* −1.70 −0.262 −1.09 −0.423 −1.03
Balanced firms
Before mean announcement date 420 0.140 1.07 0.409*** 2.86 0.301* 1.96 0.850*** 3.98
(i) Positive unexpected earnings 232 0.264 1.57 0.751*** 4.12 0.626*** 3.33 1.640*** 4.38
(ii) Negative unexpected earnings 188 −0.012 −0.06 −0.012 −0.05 −0.100 −0.40 −0.124 −0.57
After mean announcement date 1,217 −0.040 −0.50 −0.023 −0.26 −0.092 −1.00 −0.154 −0.72
(i) Positive unexpected earnings 547 −0.004 −0.04 0.271** 2.26 0.286** 2.05 0.552** 2.55
(ii) Negative unexpected earnings 670 −0.069 −0.63 −0.262** −2.13 −0.401*** −3.33 −0.731** −2.34
Vulnerable firms
Before mean announcement date 49 0.615 1.52 0.848** 2.22 -0.074 -0.19 1.389* 1.84
(i) Positive unexpected earnings 20 1.163 1.50 1.215* 1.81 -0.576 -1.02 1.802* 1.67
(ii) Negative unexpected earnings 29 0.209 0.52 −0.577** −2.29 0.297 0.54 −0.070 −0.07
After mean announcement date 332 −0.153 −0.90 −0.378* −1.92 −0.587*** −2.77 −1.118*** −2.60
(i) Positive unexpected earnings 138 −0.306 −1.24 −0.504* −1.70 −0.799** −2.51 −1.609*** −2.64
(ii) Negative unexpected earnings 194 −0.044 −0.19 −0.287 −1.10 −0.437 −1.54 −0.768** −1.97
Risky firms
After mean announcement date 49 −0.537 −0.71 −0.525 −0.65 −0.842 −0.99 −1.904 −1.11
(i) Positive unexpected earnings 19 −1.060 −0.71 −0.723 −0.46 −1.248 −0.74 −3.031 −1.18
(ii) Negative unexpected earnings 30 −0.217 −0.26 −0.404 −0.46 −0.593 −0.64 −1.213 −0.71
Notes: “Healthy” firms are those with credit ratings between A and AAA, “Balanced” firms have credit ratings between BB and BBB, “Vulnerable” firms are those
having credit ratings between CCC and B, and “Risky” firms are those with credit ratings between D and CC. Abnormal returns are computed using the market
model. A mean announcement date is defined as the number of days that elapse between the quarter-end and the average date of announcement. Unexpected
earnings changes are computed using the random walk model. We define the event period of announcement as the three days surrounding the announcement day
(days −1, 0, and +1). Market model parameters (α and β) were estimated using 200 daily returns data prior to the event window. *, **, *** denote statistical
significance at the 10%, 5%, and 1% levels respectively.
279
The results of the analysis investigating the impact of changes in credit

ratings on earnings announcements are reported in Table 7. We identify 364
cases of credit rating upgrades and 428 cases of credit rating downgrades
during the examined period. Following Jorion, Liu, and Shi (2005), we convert
credit ratings into cardinal variables measured on a four-point scale (1 =
“healthy” firms, 2 = “balanced” firms, 3 = “vulnerable” firms, and 4 = “risky”
firms). We also identify two main credit rating gradation types: “within” and
“across.” The “within” type occurs when a firm’s credit rating changes within
the same band of ratings, that is, a change from A to AA or vice versa. In
contrast, the “across” type occurs when a firm’s credit rating changes between
different band of ratings, that is, a change from A to B or vice versa.
Panel A of Table 7 shows that credit rating upgrades provoke a
nonsignificant market reaction on day 0 of 0.211%. However, when credit
rating upgrades are taken into account together with positive unexpected
earnings, we observe significant share price appreciations on day 0 of 0.433%,
which is statistically significant at the 0.05 level. The market reaction becomes
stronger when the upgrade is an “across” type (0.586% on day 0) vis-à-vis a
“within” type (0.403% on day 0). These results imply that the information
content of earnings is magnified when the change in credit ratings is an
upgrade. In other words, the market rewards positive earnings releases when
they are associated with notable credit rating upgrades. On the other hand, the
combination of credit rating upgrades and negative unexpected earnings is
associated with a nonsignificant market reaction on day 0 (−0.002% on day 0).
Moreover, neither the “within” nor the “across” type excite the market in any
way. These results imply that credit upgrading is offset by the negative
content of earnings releases.
Panel B of Table 7 documents the effect of credit rating downgrades on
earnings announcements. Unlike the results from credit rating upgrades, credit
rating downgrades bring about a significant share price erosion during the
three-day event period (CAAR of −0.580%). This result is consistent with prior
research, which suggests that the market reacts significantly to downgrades
(Holthausen and Leftwich 1986; Hand, Holthausen, and Leftwich 1992; Goh
and Ederington 1993; Jorion, Liu, and Shi 2005). However, when credit rating
downgrades interact with the sign of the change in earnings releases, the
results change considerably. Specifically, the information content of positive
earnings releases is eliminated when the credit rating of the announcing firm
deteriorates. In fact, this result is comparable to that of the negative earnings
releases and credit rating upgrades reported earlier. On the other hand, when
credit rating downgrades are associated with bad earnings releases, this
produces significant market value losses. Specifically, the combination of credit
rating downgrades and negative earnings results brings about a −0.468%
reaction on day 0. This negative market reaction is slightly higher when the
downgrading is of the “across” type (−0.489% on day 0) as opposed to the
“within” type (−0.483% on day 0). The above results partly support the
proposition that changes in credit ratings reveal private information regarding
a firm’s value, and that credit rating upgrades (downgrades) are decoded
positively (negatively) by the market when they are associated with positive
(negative) unexpected earnings releases.
Table 7. Credit rating changes and the information content of earnings announcements
Obs. Day −1 t-statistic Day 0 t-statistic Day +1 t-statistic CAAR (−1, +1) t-statistic
Panel A: Informational effect of credit rating upgrades

Credit rating upgrades 364 −0.144 −0.71 0.211 1.04 −0.115 −0.57 −0.049 −0.14
Credit rating upgrades “within” type 304 −0.220 −1.02 0.118 0.55 −0.073 −0.34 −0.175 −0.47
Credit rating upgrades “across” type 60 0.239 0.53 0.681 1.52 −0.329 −0.74 0.590 0.76
Upgrades and positive unexpected earnings 178 −0.319 −1.48 0.433** 2.01 0.235 1.09 0.349 0.94
Upgrades “within” type and positive unexpected earnings 149 −0.359 −1.58 0.403* 1.78 0.372 1.64 0.417 1.06
Upgrades “across” type and positive unexpected earnings 29 −0.113 −0.19 0.586* 1.98 −0.472 −0.79 0.000 0.00
Upgrades and negative unexpected earnings 186 0.022 0.08 −0.002 0.08 −0.450 −1.52 −0.429 −0.84
Upgrades “within” type and negative unexpected earnings 155 −0.087 −0.26 −0.156 −0.47 −0.501 −1.51 −0.743 −1.29
Upgrades “across” type and negative unexpected earnings 31 0.568 0.92 0.770 1.25 −0.196 −0.32 1.142 1.07
Panel B: Informational effect of credit rating downgrades

Credit rating downgrades 428 −0.045 −0.24 −0.278 1.49 −0.257 −1.37 −0.580* −1.79
Credit rating downgrades “within” type 359 −0.053 −0.27 −0.295 −1.49 −0.227 −1.15 −0.575* −1.68
Credit rating downgrades “across” type 69 −0.005 −0.01 −0.193 −0.40 −0.412 −0.86 −0.580 −0.70
Downgrades and positive unexpected earnings 205 −0.128 −0.55 −0.072 −0.31 −0.467** −1.99 −0.668* −1.66
Downgrades “within” type and positive unexpected earnings 171 −0.168 −0.64 −0.088 −0.33 −0.416 −1.58 −0.673 −1.47
Downgrades “across” type and positive unexpected earnings 34 0.075 0.14 0.008 0.01 −0.726 −1.34 −0.643 −0.69
Downgrades and negative unexpected earnings 223 0.031 0.11 −0.468* −1.72 −0.063 −0.23 −0.500 −1.06
Downgrades “within” type and negative unexpected earnings 188 0.052 0.20 −0.483* −1.83 −0.054 −0.21 −0.485 −1.06
Downgrades “across” type and negative unexpected earnings 35 −0.083 −0.10 −0.489* −1.89 −0.108 −0.14 −0.680 −1.42
Notes: “Within” class indicates whether the credit rating change occurs within gradations of the same group of ratings (e.g., A, AA, and AAA). “Across” class
indicates changes in credit ratings that take place between different groups of firms (e.g., from “healthy” to “balanced”). Abnormal returns are computed using the
market model and unexpected earnings are calculated using the random walk model. We define the event period of announcement as the three days surrounding
the announcement day (days −1, 0, and +1). Market model parameters (α and β) were estimated using 200 daily returns data prior to the event window. *, **, ***
denote statistical significance at the 10%, 5%, and 1% levels, respectively.
281
4.3. Regression Analysis

We performed a multivariate regression analysis to check the validity of the
results already reported. Specifically, we estimated the Fama–MacBeth (1973)
regression, which is immune to problems of cross-sectional dependence
(Dichev and Piotroski 2001), to detect the factors that affect the information
content of earnings. In this analysis, we used either the average abnormal
return (AAR) of earnings announcements on day 0 or the cumulative average
abnormal return of three days (CAAR) of the full sample as the dependent
variable, and we controlled for: (i) the credit ratings level (Cardinal) that takes
the value of 1 for “healthy” firms, 2 for “balanced” firms, 3 for “vulnerable”
firms, and 4 for “risky” firms; (ii) the unexpected earnings change (ΔUE) that
takes the value of 1 for a positive unexpected change and 0 otherwise; (iii) the
timeliness variable (Timeliness) that takes the value of 1 for announcements
before the regulatory deadline and 0 otherwise; (iv) the interaction between
credit ratings and change in unexpected earnings (Cardinal × ΔUE); (v) the
interaction between timeliness and change in unexpected earnings (Timeliness
× ΔUE); and (vi) the interaction between credit ratings and timeliness
(Cardinal × Timeliness).
Panel A of Table 8 reports the results for the analysis investigating the
determinants of abnormal returns on earnings announcements. The coefficient
of Cardinal is negative and statistically significant at the 0.05 level. This result
implies that the higher the cardinal value (i.e., the lower the credit quality), the
lower the market reaction to earnings releases. As expected, the coefficient of
unexpected earnings change (ΔUE) is positive and statistically significant at the
0.05 level. This result is consistent with our earlier results, suggesting that the
sign of earnings change has a strong impact on earnings announcements. In
addition, timeliness has a positive and statistically significant coefficient at the
0.05 level. This result corroborates findings from prior research, which suggest
that the market reacts strongly to earnings reports that are released to the
public early. Furthermore, the results show that the interactive term between
timeliness and unexpected earnings change (Timeliness × ΔUE) positively
affects the informational component of earnings, lending support to the “good
news early, bad news late” hypothesis. However, the interaction between
cardinal and unexpected earnings change and also the interaction between
cardinal and timeliness are statistically nonsignificant. Interestingly, the
positive and significant interaction between cardinal and timeliness, when the
CAAR of three days is the dependent variable, suggests that, as
creditworthiness deteriorates (higher cardinal values), timeliness plays a more
significant role in conveying news to the public. The above results corroborate
the findings of Table 6 regarding the observed substitution effect between
credit quality and timeliness.
Panel B of Table 8 reports the results from the impact of credit rating
upgrades and downgrades on the abnormal returns of earnings
announcements. As before, we used either the average abnormal return (AAR)
of earnings announcements on day 0 or the cumulative average abnormal
return of the three-day event window (CAAR) as the dependent variable.
Again, we controlled for: Cardinal Size, which is the cardinal value of the new
rating minus the cardinal value of the old rating; unexpected earnings change
(ΔUE), which takes the value of 1 for a positive unexpected change and 0
Table 8. Regression analysis

AAR CAAR
Coefficient t-statistic Coefficient t-statistic
Panel A: Results for determinants of abnormal returns on earnings announcements.

Model: AAR (CAAR) = b0 þ b1 Cardinal þ b2 DUE þ b3 Timeliness þ b4 Cardinal DUE þ b5 Timeliness DUE þ b6 Cardinal Timeliness þ e
Intercept 0.007 1.57 0.023*** 2.98

Cardinal −0.002** −2.52 −0.006*** −3.92
ΔUE 0.001** 2.18 0.001** 2.54
Timeliness 0.002** 2.40 0.018* 1.92
Cardinal*ΔUE −0.001 −1.16 −0.001 −0.62
Timeliness*ΔUE 0.001* 1.67 0.001 0.78
Cardinal*Timeliness 0.002 1.45 0.005*** 2.62
No. of obs. 2,404 2,404
F-statistic 5.67*** 4.55***
Adjusted R2 0.11 0.09
Panel B: Results for assessing credit rating upgrades and downgrades on earnings announcements.
Model: AAR (CAAR) = a0 þ a1 Cardinal Size þ a2 DUE þ a3 DCR
Intercept −0.006* −1.68 −0.006 −0.12

Cardinal Size 0.001 0.44 −0.004 −0.74
ΔUE 0.005** 2.06 0.003* 1.71
ΔCR 0.004* 1.74 0.005** 2.22
No. of obs. 792 792
F-statistic 2.46 1.95
Adjusted R2 0.06 0.01
Notes: Regression analysis is performed using the OLS with White’s (1980) heteroscedasticity–consistent standard errors. The dependent variable is either the average
abnormal return on the earnings announcement day (AAR) or the cumulative average abnormal returns of the three days around the earnings announcement date
(CAAR). The independent variables are: the unexpected earnings change (ΔUE) that takes the value of 1 for a positive unexpected change and 0 otherwise; the
timeliness dummy (Timeliness) that takes a value of 1 for announcements before the regulatory deadline and 0 otherwise; and the credit ratings level (Cardinal) that
takes a value of 1 for “healthy” firms, 2 for “balanced” firms, 3 for “vulnerable” firms and 4 for “risky” firms. Cardinal × ΔUE is an interaction between credit
ratings and change in unexpected earnings. Timeliness × UE is an interaction between timeliness and change in unexpected earnings. Cardinal × Timeliness is an
interaction between credit ratings and timeliness. Cardinal Size of rating changes is the cardinal value of the new rating minus the cardinal value of the old rating.
283
Credit rating change (ΔCR) takes the value of 1 for a credit rating upgrade and 0 otherwise. *, **, *** denote statistical significance at the 10%, 5%, and 1% levels
respectively.
otherwise; and credit rating change (ΔCR), which takes the value of 1 for a
credit rating upgrade and 0 otherwise. The results show that the coefficients of
both unexpected earnings change (ΔUE) and credit ratings change (ΔCR)
positively and significantly affect the market on earnings announcement dates.
Cardinal Size seems not to significantly affect the market reaction. Overall, our
findings suggest that the content of earnings releases, the time-lag of earnings
dissemination, and the creditworthiness of firms are all significantly associated
with the informativeness of earnings announcements.
4.4. Sensitivity Tests

To confirm the robustness of our results, we conducted three additional tests.
First, we reran the tests using the market-adjusted returns model (see Brown
and Warner 1985) to compute the abnormal share price reaction surrounding
earnings announcement dates. Untabulated results show that the mean
abnormal return on day 0 is 0.482% for firms announcing earnings reports
before the mean announcement date, and −0.214% for those announcing their
earnings late. When firms announce positive (negative) unexpected earnings,
we observe a statistically significant abnormal return of 0.793% (0.112%) for
early announcers on day 0. Late announcers experience an abnormal return of
−0.082% when disclosing unexpected positive earnings and −0.320% when
disclosing negative financial results. “Healthy” firms that announce positive
(negative) financial results experience significant abnormal returns of 0.458%
(−0.431%) on the announcement date. “Balanced” firms that announce positive
(negative) financial results experience significant abnormal returns of 0.374%
(−0.337%) on the announcement date. “Vulnerable” firms that disclose positive
(negative) financial results experience significant price erosions of −1.535%
(−1.567%) over the three-day announcement period. Finally, “risky” firms that
announce positive (negative) financial results experience insignificant abnormal
returns of -0.750% (−0.880%) on the announcement date.
Second, we reassessed the share price behavior based on the sign of the
earnings figure (i.e., positive earnings versus negative earnings) in lieu of
unexpected earnings changes. The results demonstrate significant share price
appreciations of 0.262% on day 0 for firms experiencing positive earnings and
−0.563% for those announcing negative earnings. The same share price pattern
is recorded in all categories of firms (i.e., “healthy,” “balanced,” “vulnerable,”
and “risky”). Third, we reran the regressions by using earnings figures in lieu
of unexpected earnings as a control variable. The results are qualitatively
similar to those reported in Table 8.
5. Conclusions
This paper examines the impact of timeliness and credit ratings on the
information content of earnings announcements by employing data from the
Greek stock market. The adoption of European directives (e.g., Transparency
Directive No. 2004/109/EC) and regulatory reforms (such as the application of
IFRSs and the establishment of ELTE, a new accounting oversight board) were
aimed at improving the quality of financial reporting. However, lack of
enforcement (Christensen, Hail, and Leuz 2012) has resulted in marginal
benefits (see Garcia-Osma and Pope 2011). Thus, timely information is

important in mitigating asymmetries, leaks, and rumors (Owusu-Ansah 2000).
Additionally, in such markets, investors often follow “credible” channels of
information such as credit ratings, which sometimes leads to herding behavior
(Economou, Kostakis, and Phillipas 2011). While the role of credit ratings in
bond markets has been well examined, the employment of credit ratings in
equity markets remains under-researched. We therefore examined the impact
of both timeliness and credit ratings on corporate earnings announcements.
Our results show that the timeliness of earnings announcements is indeed
value relevant. In particular, we find evidence of a significant share price
appreciation for firms that make their financial statements available to the
public earlier than the regulatory deadline. The informativeness of earnings
becomes stronger when the early announcements contain positive earnings
news. The results for the analysis investigating the role of credit ratings
indicate that the level of credit quality strengthens the value relevance of
earnings announcements, especially when combined with the sign of earnings
figures. When considering the interrelation between credit ratings and
timeliness, we detect an interesting substitution effect between these two
conduits of corporate information. In essence, the role of timeliness in
determining the informational content of earnings results increases as the
credit quality deteriorates. Finally, we find a heterogeneous market reaction to
earnings announcements when they are associated with credit rating upgrades
and downgrades. On the one hand, credit rating downgrades provoke a
stronger market reaction compared to upgrades, especially when changes in
credit ratings are in the same direction with earnings changes (i.e., upgrades
with positive earnings, downgrades with negative earnings). On the other
hand, when changes in credit ratings move in the opposite direction to
changes in earnings results, we observe no abnormal returns. This implies that
the two contradictory changes almost outweigh the information content of
financial results.
Our study provides several contributions to the ongoing debate about
earnings announcements. First, we extend prior research by offering evidence
regarding the impact of credit ratings on the informational role of financial
reports. We provide new evidence about the role of credit ratings in
transmitting credible information to investors and shareholders alike. Second,
this is the first study that tests the role of timeliness in association with credit
ratings. This allows us to investigate possible concurrent or opposing effects
between the two sources of share price variation. Our results show that the
two sources are involved in a substitution rather than a complementary effect.
Third, given the scant evidence regarding the role that credit ratings play in
equity markets, the current study sheds light on the importance of credit
ratings as an alternative conduit of information for both informed and
uninformed investors.
Our results have several implications. From a practical point of view, our
analysis could be of interest to those who invest in managerial-entrenched
firms and seek ways to increase their wealth. The results also demonstrate
that, although financial reports might be informative, they are subject to
criticism of low financial reporting quality. Moreover, our results might be
useful to corporate managers who implement measures to improve their firm’s
credit ratings. Credit ratings seem to constitute alternative channels for
corporate information in cases where corporate news such as earnings

announcements “obscure” content from the public. For investors, the
employment of credit ratings provides useful insights into how these can be
applied to equity markets in order to assess corporate information.
The study has several limitations. First, we did not test for the effects of
certain variables that have been found to be significant in explaining variations
in earnings information, such as industry clustering, intangible intensity, and
earnings persistence. Second, due to the lack of data on credit ratings for firms
in the financial sector, we could not include such firms in our analysis. Third,
due to data unavailability regarding financial analyst earnings forecasts in
Greece, we were not able to calculate the unexpected earnings as the difference
between actual earnings per share minus the mean analyst consensus forecast.
The results and limitations of the study provide avenues for further research.
Notes
1. In a famous case, the ratings for the now defunct Enron remained at investment grade four days
before it went bankrupt, despite the fact that credit rating agencies had been well aware of its
problems for months (Borrus 2002).
2. For example, there have been press releases concerning EADS, the parent company of the
Airbus jet manufacturer, about postponing the news of delayed delivery of the new A380
jetliner from April 2006 to June 2006. This caused severe criticism of the managers, which, in
turn, led EADS to lose a quarter of its value (Kothari, Shu, and Wysocki 2009). For further
examples and evidence, see Burns and Kedia (2006) and Cheng and Warfield (2005).
3. Jiang (2008) probed into the causal effect of earnings on the cost of debt as proxied by credit
ratings, but not the reverse effect.
4. We use credit rating data from Amadeus, one of the leading credit rating agencies on corporate
creditworthiness in Europe.
5. According to Brown and Warner (1985), the nonsynchronous trading problem may result in
biased estimates of market model parameters.
6. Results remain similar at different thresholds (e.g., 1% and 2%).
7. According to Bartholdy et al. (2007), the standard estimation period for thin markets is between
200 and 250 observations (i.e., about a year of trading prior to the three-day event period).
8. An alternative way of calculating unexpected earnings changes is to use the consensus of
financial analyst forecasts as a benchmark (the expected earnings). However, financial analyst
forecasts were available for only a very limited number of Greek listed firms.
9. The number of firms belonging to the “risky” group is profoundly smaller compared to the
other groups and, for this reason, solid conclusions could not be reached. Moreover, we cannot
identify early announcing firms for this group of firms.
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The Effect of Timeliness and Credit Ratings on the Information Content of

Article in International Journal of the Economics of Business · September 2014

Stergios Leventis Apostolos Dasilas

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International Journal of the Economics

The Effect of Timeliness and Credit

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The Effect of Timeliness and Credit Ratings on the

STERGIOS LEVENTIS, APOSTOLOS DASILAS and

Key Words: Earnings Announcements; Credit Ratings; Timeliness; Information

JEL classifications: G14, G15.

Ó 2014 International Journal of the Economics of Business

shareholders, investors, auditors, and public authorities. Earnings disclosures

late” hypothesis, including proprietary reporting costs (Verrecchia 1983), the

corporate credit ratings on the information content of the earnings

expected to reduce the information asymmetry between informed and

2. Literature Review and Hypotheses Development

2.2. Importance of Credit Ratings

raise funds, they normally do so at higher costs. Second, credit ratings

(as suggested by prior literature), they will announce more favorable

3. Data and Methodology

commitments, and a high probability of insolvency. Table 1 provides a detailed

Panel B of Table 2 displays the yearly distribution of earnings

Table 1. Description of credit rating categories

Table 2. Distribution of earnings announcement dates per time year and

Total 635 619 602 587 2,443

Panel B: No. of earnings announcements per credit rating category

Panel C: Earnings announcements per credit rating changes

No. Cardinal Size No. Cardinal Size

2001 0 0.00 0 0.00

2001 30 n/a n/a 37

the consequence of normalizing or reducing the effect of the release of

ARi;t ¼ Ri;t E(Ri;t Þ (1)

E(Ri;t Þ ¼ a þ b Rm;t (2)

To investigate the timeliness of the earnings announcements of Greek listed firms,

negative unexpected earnings changes delay their earnings announcements.

UE ¼ Ei;t Ei;t1 (5)

Table 4. Abnormal returns around earnings announcements dates

Panel A: Announcements by sign of earnings

Panel B: Announcements by mean announcement date

Panel C: Announcements by regulatory deadline

4.2. Informativeness of Credit Ratings

group of firms, we find significant positive abnormal returns in the case of

statistically significant at the 0.05 level. Surprisingly, the market reaction is

Table 5. Abnormal returns of earnings announcements by credit ratings

credit ratings. This can be attributed to investor interest in better-quality and

The results of the analysis investigating the impact of changes in credit

Panel A: Informational effect of credit rating upgrades

Panel B: Informational effect of credit rating downgrades

4.3. Regression Analysis

Table 8. Regression analysis

Coefficient t-statistic Coefficient t-statistic

Panel A: Results for determinants of abnormal returns on earnings announcements.

Intercept 0.007 1.57 0.023*** 2.98

Intercept −0.006* −1.68 −0.006 −0.12