The market reaction to unexpected earnings for small vs. large firms based on whispers forecasts

What is it about?

Both univariate and multivariate regression analysis demonstrate that there is a size effect in the market reaction to unexpected earnings based on whispers. The results show that for both abnormal returns (ARs) and trading volume, the market reactions for small firms is significantly more compared to that of large firms. Given the higher cost of information dissemination for small firms, whispers can be used as a vehicle for management to disseminate information regarding firm’s anticipated earnings around the earnings release. By utilizing whispers to increase information production, dissemination and disclosure prior to earnings announcement dates, it may help reduce information asymmetry between small firms and investors.

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Why is it important?

Given that information for small firms is less available and transparent than for big firms, this paper provides useful evidence that whispers play a larger role in equity pricing for small firms.