Bringing the Future Forward: The Effect of Disclosure on the Returns‐Earnings Relation

2002/06/01 by Russell J. Lundholm, Russell Lundholm, Linda A. Myers · 4 citations
Business, Management and Accounting · Economics, Econometrics and Finance · #Auditing, Earnings Management, Governance #Financial Markets and Investment Strategies #Corporate Finance and Governance

paper · doi:10.1111/1475-679x.00072

Abstract

This paper studies how firm disclosure activity affects the relation between current annual stock returns, contemporaneous annual earnings and future earnings. Our results show that firms with relatively more informative disclosures “bring the future forward” so that current returns reflect more future earnings news. We also find that changes in disclosure activity are positively related to changes in the importance of future earnings news for current returns. These results suggest that a firm’s disclosure activity reveals credible, relevant information not in current earnings, and that this information is incorporated into the current stock price.

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