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07-01-2021 | Issue 2/2021

Review of Accounting Studies 2/2021

Is all disaggregation good for investors? Evidence from earnings announcements

Journal:
Review of Accounting Studies > Issue 2/2021
Authors:
Eric R. Holzman, Nathan T. Marshall, Joseph H. Schroeder, Teri Lombardi Yohn
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Abstract

Research suggests that greater earnings disaggregation in financial statements leads to favorable market outcomes. This perspective is based on a presumption that the disaggregation separates earnings components with heterogeneous characteristics. We hypothesize that the disaggregation of homogeneous earnings components is associated with greater investor disagreement and a less efficient market response to the earnings announcement. We estimate persistence regressions at the industry level and classify earnings components with persistence that differs significantly from the persistence of sales as heterogeneous and components with persistence that does not differ from the persistence of sales as homogeneous. Consistent with our hypothesis, we find a significant positive relation between the level of homogeneous earnings disaggregation and investor disagreement around earnings announcements. We also find significantly greater post-earnings announcement drift after earnings announcements with greater homogeneous earnings disaggregation. This evidence is consistent with homogeneous earnings disaggregation hindering investors’ ability to impound earnings information into price efficiently.

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