The speed of security market reaction and the level of uncertainty associated with annual earnings information: Analysis and evidence

In this study, a model is introduced to explain the relation between the speed of market reaction to accounting earnings information and the precision of an individual's expectations prior to the earnings announcement. The model predicts that the relationship is negative. A method of estimating the duration period of the market reaction is developed, and forecasts from the Lynch, Jones and Ryan Institutional Brokers Estimate System (IBES) are used to proxy the individual's expectations. A parametric test is designed to examine the hypothesis. When the hypothesis is analyzed along with firm size, a consistent result is observed. That is, the prior precision for a larger firm tends to be greater than that for a smaller one, causing less need for information processing activity about the larger firm. Consequently, the market reacts more slowly to the release of the larger firm's annual earnings. By incorporating the individual's expectations into the model, it is believed that the research proposed herein will increase our understanding about one particular causal link between accounting information and market behavior.