An Evaluation of Alternative Proxies for the Market’s Assessment of Unexpected Earnings.pdfVIP

Journal of Accounting and Economics 9 (1987) 159-193. North-Holland AN EVALUATION OF ALTERNATIVE PROXIES FOR THE MARKET’S ASSESSMENT OF UNEXPECTED EARNINGS * Lawrence D. BROWN and Robert L. HAGERMAN State Universq of New York, Buffalo, NY 14260, USA Paul A. GRIFFIN Unwersity of California, Davis, CA 95616, USA Mark E. ZMIJEWSKI Unwersiry of Chicago, Chicago, IL 60637, USA Received October 1985, final version received April 1987 This study examines the association between abnormal returns and five alternative proxies for the market’s assessment of unexpected quarterly earnings. We examine the role that measurement error potentially has in multiple regression tests of abnormal returns (occurring around the time of earnings announcements) on an unexpected earnings proxy and other non-earnings variables. The results indicate a potential measurement error interpretation of such multiple regression tests. We examine three procedures which reduce, to an unknown degree, the measurement error problem. Our procedures appear to be more (less) effective at reducing measurement error for small (large) firms and recent (non-recent) forecasts. 1. Introduction Numerous studies have shown that stock market prices respond to the sign and magnitude of earnings that are u