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Accruals Quality, Shocks to Macro-uncertainty, and Investor Response to Earnings News

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  • Carlo D’Augusta
  • Annalisa Prencipe

Abstract

Research shows that a firm’s prior accrual quality affects the market reaction to earnings news, as it allows investors to gauge the level of noise in the news. Investor response to earnings news tends to be weaker (stronger) when a firm’s accrual quality is lower (higher). We aim to examine how macroeconomic shocks affect investor reactions. Drawing on ambiguity aversion literature, we argue that if macroeconomic uncertainty spikes before the earnings announcement, investors will favor a ‘better safe than sorry’ attitude; that is, they will tend to react strongly (weakly) to all bad (good) news, taking less into account differences in accrual quality. We consistently find that macro-uncertainty shocks cause (i) a stronger reaction to bad news for low-quality (but not high-quality) firms and (ii) a weaker reaction to good news for high-quality (but not low-quality) firms. The results are robust to alternative model specifications and sensitivity tests. Additionally, we show that if macro-uncertainty resolves in the post-announcement weeks, investors correct their underreaction to high-quality good news, especially if the shock is not extreme.

Suggested Citation

  • Carlo D’Augusta & Annalisa Prencipe, 2024. "Accruals Quality, Shocks to Macro-uncertainty, and Investor Response to Earnings News," European Accounting Review, Taylor & Francis Journals, vol. 33(3), pages 1051-1074, May.
    • Handle: RePEc:taf:euract:v:33:y:2024:i:3:p:1051-1074
    DOI: 10.1080/09638180.2022.2141288
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