Impact of economic policy uncertainty on disclosure and pricing of earnings news
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Impact of economic policy uncertainty on disclosure and pricing of earnings news Sharad Asthana1 · Rachana Kalelkar2
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract In this paper we examine the effect of economic policy uncertainty on reactions of capital market participants and actions of corporate managers. In particular, we investigate two issues: (1) whether the economic policy uncertainty has a short-term and long-term impact on the interpretation of earnings news and (2) whether the managers strategically time the release of good/bad news to the uncertainty in economic policies. We use a sample of 2973 unique firms from 1990 to 2016 and find that economic policy uncertainty lowers investors’ confidence in earnings, resulting in lower earnings response coefficient. Further test shows that the adverse effect of economic policy uncertainty on earnings informativeness is long-lasting and cannot be explained by the publicly available pre-disclosure information. We also find that firms are more likely to disclose bad news and losses when the economic policy uncertainty is high. These findings are not explained by earnings management and persist even after controlling for commonly used proxies of earnings management. Finally, we show that economic policy uncertainty is distinct from firm-specific uncertainty and that they both have incremental effects on the earnings response coefficient. Keywords Economic policy uncertainty · Earnings information · Timing of disclosure · Stock price reactions · Earnings response coefficient JEL Classification G14 · M41
* Sharad Asthana [email protected] Rachana Kalelkar [email protected] 1
Department of Accounting, College of Business, University of Texas at San Antonio, One UTSA Circle, San Antonio, TX 78249, USA
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Department of Accounting, School of Business Administration, University of Houston – Victoria, 3007 N. Ben Wilson St., Victoria, TX 77901, USA
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S. Asthana, R. Kalelkar
1 Introduction Economic policy refers to the government actions that are intended to influence the economy. Given their opaque, vague, and unpredictable nature, the economic policies issued by the government often create uncertainty among the investors. In fact, in recent years there has been a significant increase in the uncertainty in economics policies. In an article on CNBC.com, Fahey (2016) states a 60% increase in the average global economic uncertainty index in the past 5 years. The increase in economic policy uncertainty (EPU) is a topic of interest because the uncertainty of economic policies has a significant negative impact on both goods and capital market. For instance, a recent financial times report blamed the sluggish trade growth on the political uncertainty.1 Following the rise in the EPU, scholars have focused their attention on this topic. Such studies document a negative impact of EPU on the capital market. Gulen and Ion (2016) document a decrease in investments following an increase in EPU; Sum (2012) shows a ne
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