We analyze the contribution of returns around earnings announcements to typical estimates of the “prices lead earnings” relation. We find that prior returns’ ability to explain earnings is concentrated disproportionally in returns on earnings announcement dates, suggesting that a substantial portion of the estimated timeliness of returns in previous studies is empirically indistinguishable from the information content of earnings. Nevertheless, realized returns around earnings announcements are more informative than inter-announcement returns even after controlling for the information content of earnings. We investigate two explanations for these results that are suggested by the prior literature; delayed price responses to prior earnings news and market responses to information asymmetry around anticipated firm disclosures. We find little support for the first explanation and strong support for the second one. The results suggest that some evidence previously construed as support for the information content of earnings may be a reflection how information asymmetry alters price discovery around earnings announcements.
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