The informativeness of earnings announcements during times of global uncertainty: Evidence from the Covid‐19 pandemic

• Published date: 01 September 2023
• Author: Michele Fabrizi,Elisabetta Ipino,Federico Longhin,Antonio Parbonetti
• Date: 01 September 2023
• DOI: http://doi.org/10.1111/corg.12552

ORIGINAL ARTICLE

The informativeness of earnings announcements during times

of global uncertainty: Evidence from the Covid-19 pandemic

Michele Fabrizi

1

| Elisabetta Ipino

2

| Federico Longhin

1

| Antonio Parbonetti

1

1

Department of Economics and Management,

University of Padova, Padova, Italy

2

Department of Accounting, Albers School of

Business and Economics, Seattle University,

Seattle, Washington, USA

Correspondence

Federico Longhin, Department of Economics

and Management, University of Padova, Via

del Santo 33, 35123 Padova, Italy.

Email: federico.longhin.2@phd.unipd.it

Abstract

Research Question/Issue: This study shows how investors assessed the informative-

ness of earnings announcements during the Covid-19 pandemic. Prior studies sug-

gest that earnings announcements are more likely to provide value to investors

during periods of heightened uncertainty. However, the massive regulatory interven-

tion that took place during the pandemic is likely to have led investors to seek alter-

native sources of information and to have reduced their reliance on earnings to price

stocks. Moreover, the uncertainty brought by Covid-19 directly challenged firms'

value drivers and business models, potentially inhibiting the ability to map earnings

onto stock prices.

Research Findings/Insights: The empirical findings show that earnings announce-

ments lost part of their information content during the Covid-19 crisis. Cross-

sectional tests document that geographic dispersion of operations and the degree of

institutional ownership significantly affected the relationship under study. We also

find that the loss of earnings announcements' informativeness was driven by expo-

sure to the pandemic.

Theoretical/Academic Implications: The recent accounting literature investigates the

role of accounting information in supporting public policy during systemic crises. Our

results highlight the firm-specific attributes that affect investors' perceptions of the

informativeness of earnings announcements by showing how geographic dispersion

and ownership structure affect it in periods of uncertainty.

Practitioner/Policy Implications: In a context in which earnings announcements'

informativeness decreases, regulators and standard-setters should consider taking

corrective action to restore its informativeness, such as by strengthening disclosure

requirements. The documented decrease in the informativeness of earnings

announcements could be partially offset by heightening disclosure requirements to

complement financial statements.

KEYWORDS

corporate governance, Covid-19, earnings informativeness, geographic dispersion, institutional

ownership

Received: 31 July 2021 Revised: 19 June 2023 Accepted: 5 July 2023

DOI: 10.1111/corg.12552

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium,

provided the original work is properly cited.

© 2023 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

Corp Govern Int Rev. 2023;31:795–813. wileyonlinelibrary.com/journal/corg 795

1|INTRODUCTION

In this study, we investigate how investors assessed the informative-

ness of earnings announcements during the Covid-19 pandemic and

highlight the firm-specific attributes that affect such perceptions dur-

ing periods of uncertainty.

While the accounting literature suggests that the earnings num-

ber may not provide new information in many instances (e.g., Bamber

et al., 2000; Lev & Zarowin, 1999), research shows that earnings

announcements become particularly informative to investors during

periods of heightened uncertainty (Christensen, 2002). Specifically,

when uncertainty about a firm's fundamental value increases, inves-

tors anchor their valuations more closely to observable signals like

realized earnings (Barron & Stuerke, 1998; Bepari et al., 2013;

Christensen, 2002; Collins & DeAngelo, 1990). Despite this evidence,

our current understanding regarding the specific conditions that con-

tribute to an increase in the informativeness of earnings announce-

ments during periods of heightened uncertainty is still limited.

Our paper aims at filling this gap by using the Covid-19 pandemic

as a research setting. The pandemic provides a large-scale sample of

firms that were exposed to heightened uncertainty but are heteroge-

neous in terms of ownership structures and in their levels of uncer-

tainty because of their geographic dispersion. Using these two distinct

characteristics, we aim to gain a deeper understanding on how earn-

ings map onto stock prices in times of uncertainty.

To address our research question, we use a comprehensive sam-

ple of listed nonfinancial firms in the United States for the periods

February–May 2019 and February–May 2020 and analyze the extent

to which the informativeness of earnings announcements changed

during the Covid-19 crisis compared with before the crisis.

In doing so, we build on Imhoff and Lobo's (1992) research and

isolate uncertainty about firms' fundamentals from uncertainty that is

due to noise in the earnings signal. We show that the magnitude of

price reactions to earnings releases significantly decreased during the

Covid-19 crisis, suggesting that investors perceived these numbers as

being less informative during the Covid-19 period than they were

before the crisis. This result, which contrasts in part with prior

research, can be explained as a result of governments' putting in place

a number of relief mechanisms designed to safeguard corporations

when the crisis hit and regulatory bodies' intervening with fiscal, mon-

etary, and prudential policies that conveyed information to investors,

thus reducing the value of earnings announcements in forming stock

prices (Hong & Lucas, 2023; Kirti et al., 2022). Moreover, as the

Covid-19 pandemic unfolded, it was difficult to predict how firms

would be affected and to what extent they would be exposed to the

emerging risks. Along this line, Brennan et al. (2022) show that profit

warnings were uninformative and disclosures were of poor quality,

with many companies regressing to silence.

More important is the cross-sectional variation in our results in

terms of firms' geographic dispersion and ownership structures.

Changes in usefulness of accounting information are expected in

periods of heightened uncertainty depending on the extent to which a

firm has been exposed to the economic consequences of the

uncertainty, but whether a geographically dispersed configuration

made firms more or less exposed to Covid-19's risks remains unclear

(e.g., Miroudot, 2020; Sharma & Sha, 2020; Yong & Laing, 2021). We

document that the perceived usefulness of geographically dispersed

firms' earnings announcements decreased more during the pandemic

than those of their domestic counterparts did. This result is consistent

with Ding et al.'s (2021) claims that geographically dispersed firms

tended to be more exposed during the Covid-19 pandemic because of

their international supply chains and customers. This stronger expo-

sure to the pandemic caused investors to decrease the extent to

which they relied on earnings announcements to form stock prices.

We also investigate whether a firm's level of institutional ownership

plays a role in determining the extent to which investors incorporated

the numbers from earnings announcements into forming stock prices

during heightened uncertainty. We drill down to show that institu-

tional owners relied less on earnings announcements during the

Covid-19 crisis than non-institutional owners, suggesting that sophis-

ticated investors understood that earnings released during the pan-

demic might be less useful in predicting a firm's future cash flows or

that they relied more heavily on other sources of information that

emerged during that period, primarily from concurrent public inter-

ventions. We also show that passive investors anchored their valua-

tions more closely to earnings during the pandemic than active

investors did.

This study makes several contributions to the literature. First, it

contributes to the literature on accounting's informativeness during

periods of heightened uncertainty (Anthony & Petroni, 1997;

Christensen, 2002; Imhoff & Lobo, 1992) by analyzing the circum-

stances under which the informativeness of earnings announcements

is expected to change when uncertainty hits. Second, we contribute

to the emerging stream of research on the firm-level economic conse-

quences of the Covid-19 pandemic. Multiple studies investigate the

underlying characteristics of firms that mitigated or exacerbated the

pandemic's disruptive economic effects (Goldstein et al., 2021), focus-

ing on the related negative stock market consequences. In particular,

studies find that equities with shorter durations (Dechow et al., 2021)

or higher leverage (Ramelli & Wagner, 2020) suffered greater declines

in value and higher risk during the pandemic-related market crash

than equities with longer durations or lower leverage did. On the

opposite side, firms with greater financial flexibility (Fahlenbrach

et al., 2021), better environmental and social ratings (Albuquerque

et al., 2020), or better resilience to social distancing measures (Pagano

et al., 2020) were less affected by the Covid-19 shock, as they earned

higher returns during the first quarter of 2020 than their counterparts.

However, studies do not investigate whether the pandemic altered

the extent to which accounting information maps onto stock prices.

Third, this study contributes to the literature by investigating the eco-

nomic effects of firms' geographic dispersion. In normal situations,

geographic dispersion is an element of complexity and uncertainty

(e.g., Bushman et al., 2004; Chi & Shanthikumar, 2017; Coval &

Moskowitz, 1999; Duru & Reeb, 2002; Fabrizi et al., 2023; Jennings

et al., 2014; Platikanova & Mattei, 2014; Shi et al., 2015), and recent

work suggests that it played a peculiar role in the pandemic-affected

796 FABRIZI ET AL.