An evaluation of market responses to corporate disclosures in a continuous disclosure environment

Abstract

Corporate disclosure has attracted the attention of researchers from the accounting and capital markets. Researchers have been trying to better understand how capital markets respond to corporate disclosures. This study explores the short- and the long- term market effects of corporate disclosures in a continuous disclosure environment. This study aims to find the answers to the following research questions. (1) How market (price/volume) sensitive is the information contained in each disclosure category in a continuous disclosure environment? (2) How quickly is the value-relevant information incorporated into share prices before the annual earnings announcement is released, and how can company announcements promote this timeliness of price discovery? Specifically, this study examines the extent to which the Australian share market reacts to new public information immediately after the information is released, and the impacts of announcement frequency as to different continuous disclosure categories on the timeliness of price discovery (also known as the speed of price discovery).

Prior research has mostly concentrated on a single type of information event to examine the information’s market consequences by monthly, weekly or daily data. Instead, by covering all public announcements and using tick (transaction) data to calculate intraday abnormal returns and abnormal trading volumes, this study examines which type of announcement has the largest immediate market responses, and compares the magnitude (with positive/negative signs) of market reactions to different announcement categories on the Australian Securities Exchange (ASX). This study is more attractive under the Australian Continuous Disclosure Regime (CDR) because of the classification system regarding the market-sensitive announcements. Whether or not an announcement is market-sensitive is predetermined by ASX ‘specialist staff’ before the announcement is released on the market. This study investigates how the market interprets the announcement, examining market sensitivity from both the share price and trading volume movements after the announcement is available to the market. In other words, to some extent, the ‘market sensitivity tag’ shows the announcement that the market should react to, and this study reveals the announcement that the market does react to.

Focusing on market-sensitive announcements, except for the ASX Query, the significant results show a positive association between announcement categories and intraday Cumulative Abnormal Returns (CARs). Share prices react the most to Progress Reports and to Asset Acquisition & Disposal, and the least to Periodic Reports and Issued Capital. Share price reactions to Distribution Announcements and Other are in the middle. There are at least two possible reasons for the different market reaction magnitudes. One is the information materiality nature: if one type of information is more important to investors than other information, this may cause higher abnormal returns on the market. The other is the information predictability: if there has been a lot of relevant information available in previous days or months, share prices could adjust to the information more smoothly. In terms of the trading volume reactions, intraday Abnormal Trading Volumes (ATVs) are observed after the release of Progress Reports, Asset Acquisition & Disposal, Issued Capital and Periodic Reports. After separating good and bad news subsamples, the results show that Progress Reports and Asset Acquisition & Disposal tend to indicate good signs to the market and cause larger trading volumes. Periodic Reports and Issued Capital could contain either good or bad news, but the trading volumes are driven by bad news. The results also reveal that company size is an important factor. Large companies tend to have relatively small market responses after information is released, which confirms that the larger companies are more stable.

This study also evaluates long-term market effects of corporate disclosures by examining the timeliness of price discovery (also known as the speed of price discovery). It is the timeliness with which the full value relevant information is priced over a year before the annual earnings announcement is released. Previous literature has revealed that earnings announcements convey information, because significant stock returns or increased trading volumes are observed around the time that earnings announcements are released. However, it has also been suggested that there are other more timely information sources available that contain essentially similar or even the same value-relevant information. By the time preliminary final reports become available to the market, any potential value-relevant information has been included in the share price. The CDR again provides an attractive environment to examine the impact of corporate disclosures on the timeliness of price discovery, because listed companies have to disclose to the market before any other media sources. This enables an exploration of the relationship between the timeliness and the frequency of continuous disclosures. If the CDR is efficient in keeping investors fully informed, there should be no stock price surprise after the earnings announcement is released.

Given the importance of the Preliminary Final Reports to the timeliness metric and the fact that the immediate market reaction tests only cover announcements released during trading hours, this study investigates in depth the Preliminary Final Reports and finds some evidence that companies tend to release bad news after the market closes and/or on Fridays. In terms of the impacts of announcement frequency on the timeliness of price discovery, following the step ‘All announcements – Periodic/Non-periodic announcements – Detailed categories of Non-periodic announcements’, the findings reveal that only earnings-related and cash flow announcements (Periodic Reports, Distribution Announcements and Quarterly Cash Flow Reports) can accelerate the timeliness of price discovery. Unfortunately, the results do not confirm that more announcements on the market could promote the timeliness with which the value-relevant (i.e. earning/income) information is incorporated into share prices. In addition to announcement frequency influences, the price discovery process is faster for companies with better share performance, are larger or have greater profitability. Financial companies have a timelier price discovery process than other companies; the price discovery process of financial companies was affected more by the 2008 – 2010 Global Financial Crisis than that of other companies.

This study contributes to the market reaction literature by covering all categories of company announcements and comparing immediate market consequences for each type of announcement, and builds upon the timeliness of the price discovery literature by linking the announcement frequency of each continuous disclosure category to the timeliness with which annual earnings information is incorporated into share prices.