Impact of economic policy uncertainty on disclosure and pricing of earnings news

Sharad Asthana () and Rachana Kalelkar ()
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Sharad Asthana: University of Texas at San Antonio
Rachana Kalelkar: University of Houston – Victoria

Review of Quantitative Finance and Accounting, 2020, vol. 55, issue 4, No 11, 1512 pages

Abstract: Abstract In this paper we examine the effect of economic policy uncertainty on reactions of capital market participants and actions of corporate managers. In particular, we investigate two issues: (1) whether the economic policy uncertainty has a short-term and long-term impact on the interpretation of earnings news and (2) whether the managers strategically time the release of good/bad news to the uncertainty in economic policies. We use a sample of 2973 unique firms from 1990 to 2016 and find that economic policy uncertainty lowers investors’ confidence in earnings, resulting in lower earnings response coefficient. Further test shows that the adverse effect of economic policy uncertainty on earnings informativeness is long-lasting and cannot be explained by the publicly available pre-disclosure information. We also find that firms are more likely to disclose bad news and losses when the economic policy uncertainty is high. These findings are not explained by earnings management and persist even after controlling for commonly used proxies of earnings management. Finally, we show that economic policy uncertainty is distinct from firm-specific uncertainty and that they both have incremental effects on the earnings response coefficient.

Keywords: Economic policy uncertainty; Earnings information; Timing of disclosure; Stock price reactions; Earnings response coefficient (search for similar items in EconPapers)
JEL-codes: G14 M41 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11156-020-00881-1

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