Are Audited Annual Earnings Less Noisy than Interim Earnings?

Posted: 9 Jul 1998

See all articles by Robert Lipe

Robert Lipe

Price College of Business

Victor Bernard

University of Michigan at Ann Arbor

Date Written: February 1996

Abstract

Prior empirical research has typically found a difference between fourth-quarter and interim earnings, both in terms of the accuracy of earnings forecasts and the stock price response evoked. However, a differential stock price response to fourth-quarter earnings could be due to a variety of factors, such as interim errors being corrected during the annual audit, errors being introduced by fourth-quarter management manipulation, or transitory earnings shocks being more common in the fourth quarter. This study adopts a technique that can better distinguish between the competing hypotheses than prior work. Our evidence is consistent with prior findings that fourth-quarter earnings are somehow different. But the difference cannot be solely attributed to the annual audit correcting interim errors, which rejects one of the more popular conclusions in the prior literature. Instead, the results are most consistent with increased recognition of transitory earnings in the fourth-quarter.

JEL Classification: M4

Suggested Citation

Lipe, Robert C. and Bernard (deceased), Victor, Are Audited Annual Earnings Less Noisy than Interim Earnings? (February 1996). Available at SSRN: https://ssrn.com/abstract=2579

Robert C. Lipe (Contact Author)

Price College of Business ( email )

307 W Brooks
307 West Brooks, Room 200
Norman, OK 73019
United States
405-325-2401 (Phone)
405-325-7348 (Fax)

Victor Bernard (deceased)

University of Michigan at Ann Arbor

N/A

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