Timeliness of financial reporting, the firm size effect, and stock price reactions to annual earnings announcements*

Abstract. Disclosure timeliness is of concern because a report's usefulness may be inversely related to the reporting delay. Although longer delays increase the likelihood that some of the information contained in annual earnings disclosures will be preempted by information from more timely sources, previous research investigating the relation between earnings-disclosure timeliness and the intensity of the associated market reaction has reported mixed results. These inconclusive findings may be at least partially due to the effects of a potentially confounding variable — firm size — which may have offset the reporting delay effect. Large firms usually disclose earnings relatively early, but the associated market reaction tends to be small due to the size effect. Small firms disclose later, but their associated market reaction tends to be high due to the size effect. Consequently, this study employs a multivariate approach, which controls for firm size, in investigating the relationship between the timeliness of annual earnings disclosure and the associated security price reaction. The study's results support the hypothesis that after controlling for firm size, the length of the reporting delay is inversely related to the magnitude of report period price revaluations. That is, longer delays are associated with smaller market reactions, when firm size is held constant. There is some evidence that this relation may be stronger for earnings announcements which convey “bad news.” Resume. La publication rapide de l'information est un sujet de preoccupation, puisque l'utilite d'un rapport risque d'etre inversement proportionnelle au delai de publication. Bien que des delais plus longs augmentent la probabilite que certaines des informations contenues dans la publication annuelle des benefices aient deja ete obtenues de sources plus rapides, de precedents travaux de recherche analysant la relation entre la rapidite de la publication des benefices et l'intensite de la reaction du marche a l'information publiee ont abouti a des resultats mixtes. Ces resultats non concluants peuvent etre au moins en partie attribuables a l'incidence d'une variable pouvant porter a confusion — celle de la taille de l'entreprise — susceptible d'avoir compense l'incidence du delai de publication. Les entreprises de taille importante publient habituellement leurs benefices assez tot, mais la reaction du marche a cette information tend a etre mitigee, a cause de l'incidence de la taille. Les petites entreprises publient plus tard l'infonnation relative aux benefices, mais la reaction du marche a cette information a tendance a etre marquee, a cause de l'incidence de la taille. En consequence, les auteurs ont opte dans la presente etude pour une methode a plusieurs variables permettant de controler la taille de l'entreprise dans l'analyse de la relation entre la rapidite de la publication des benefices annuels et la reaction du prix de Taction a cette information. Les resultats de l'etude viennent confirmer l'hypothese selon laquelle, lorsque la taille de l'entreprise n'influe pas, la longueur du delai de publication est en relation inverse avec l'ampleur des reevaluations de prix correspondant a la periode de publication. En d'autres termes, des delais plus longs sont associes aux reactions plus mitigees du marche, la taille de l'entreprise etant constante. Certaines informations demontrent que cette relation peut etre plus marquee pour la publication de benefices qui vehiculent de « mauvaises nouvelles ».