Information Leakage and Informed Trading Around Unscheduled Earnings Annoucnements

While there has been much judicial discussion regarding the competency of Australia’s continuous disclosure regime with reference to contemporaneous international standards, there has to date been limited empirical analysis of the Australian system’s effectiveness in preventing selective disclosure and information leakage. This paper presents an empirical study of information content and trading behaviour around unscheduled earnings announcements – comprising of profit upgrades, profit warnings and neutral trading statements – made by ASX-listed companies during 2004. The contention is that informed trading impacts on the stock returns and trading volumes of listed entities, and hence abnormal returns or trading volumes observed prior to an announcement provide evidence of information leakage. The paper models a range of factors that potentially influence firm disclosure practices and contribute to the level information asymmetry in the market during the pre-announcement period. Previous research has investigated the influence of firm size and information content in contributing to information leakage. This study further considers the variables of firm growth, capital structure and industry group.