Usefulness of Earnings Announcements and Other News: Evidence from the Impact of Peer Information on IPO Price Revision

We study the relative usefulness of earnings announcements for valuation from the perspective of information externalities–the use of peer information in IPO pricing. The relative usefulness of an information source for peer valuation is a function of both the amount and the per-unit usefulness of the information. While prior research suggests that a firm’s earnings announcements supply a modest amount of incremental information, we find the per-unit usefulness of peer earnings announcements to be higher than other news in IPO pricing. Specifically, using stock returns around (outside) earnings announcements to capture earnings (other) information (e.g., Ball and Shivakumar 2008), we find that a 1-percent change in peer valuation caused by earnings announcements results in approximately 60 percent larger IPO price revisions than a 1-percent change in peer valuation caused by other information. High accounting comparability and reporting quality of peer firms further improve the per-unit usefulness of peer earnings announcements. IPO issuers also avoid setting their offering dates to immediately precede peer earnings announcements, suggesting that these are important information events.