Purpose: Agency theory predicts that information asymmetry provides agents
with an incentive to manipulate performance signals to maximize their utility, which
gives principals reasons to distrust such signals. The accounting and finance literature
finds empirical support for this prediction by studying how earnings reliability
attributes affect investors’ reactions to earnings announcements. However, research
pays less empirical attention to whether investors skeptical of earnings reliability
look for confirmatory signals in other parts of the income statement. This study aims
at filling such this research gap.
Design/methodology/approach: This study examines investors’ combined use
of earnings and sales news. It adopts an event-study methodology to analyze whether
sales news moderates the stock market response to annual earnings announcements.
Findings: The results show that investors do not fully trust earnings news if earnings
beat analyst expectations and the firm has a reputation for low accrual quality.
In this case, positive sales data alleviate investors’ skepticism of earnings news and,
thus, make them react more favorably. In contrast, sales data do not affect the market
response if the earnings news is negative, or the firm accrual quality is high. These
results are robust to different model specifications and explanations.
Originality/value: The findings shed new light on how investors use sales data
to complement earnings news and our understanding of the consequences of accruals
quality on investor information processing.
Keywords: accrual quality, sales news, revenue reaction, earnings response
D’Augusta C. (2023). Accrual quality, investor reaction to earnings, and the confirmatory role of sales news, Financial Reporting, 2, 97-121. Doi: 10.3280/FR2023-002004
