This dissertation examines the effect of income smoothing on information uncertainty, stock returns, and cost of equity. Following existing literature, I construct two income smoothing measures - capturing income smoothing through both total accruals and discretionary accruals. I show that income smoothing tends to reduce firms' information uncertainty, as measured by stock return volatility, analyst forecast dispersion, and analyst forecast error. Further, I provide evidence that market prices income smoothing and rewards income smoothing firms with a premium. Controlling for unexpected earnings shocks and other firm characteristics, income smoothing firms have significantly higher abnormal returns around earnings announcement. Finally, I show that income smoothing, particularly through discretionary accruals, reduces firms' implied cost of equity.

This dissertation examines the cost behavior model implicit in analysts' and investors' decisions. Even though a cost behavior model that recognizes fixed and variable costs and cost stickiness can provide more accurate earnings forecasts, analysts and investors cannot fully capture sticky cost information. Since analysts are not fully aware of the correct cost behavior model, earnings surprises can be largely explained by a cost model that recognizes sticky stickiness. Similarly, investors' under-reaction to sticky cost information relates to post-earnings announcement drifts. As a result, positive abnormal returns can be earned by a trading strategy that takes advantage of investors' lower awareness of sticky cost information. / Business Administration/Accounting

Using the sample of three largest stocks from seven main market sectors in the US, the thesis examines the effect of information content of earnings announce­ ments on market reaction across sectors. Our findings prove the asymmetry of market reaction to different earnings surprise categories with negative-surprise reaction being the most profound. The financial markets tend to be less ef­ ficient in response to negative earnings surprises. Leakage of information is not present suggesting that insider trading is well-mitigated on the US capital markets. Furthermore, we investigate the market reaction to earnings surprises in different sectors separately and find that Consumer Staples and IT sector tend to be the most sensitive, on the contrary Telecommunication and Energy sector tend to be the least sensitive. G14; G15; G30JEL Classification Keywords Earnings announcement; Market reaction; Mar­ ket efficiency; Cross-sector analysis; Corpo­ rate disclosure; Insider trading; Post-earnings- announcement drift A u th o r's e-m ail p a v e l.prucekSgm ail. com S u p erv iso r's e-m ail kocenda@f s v . c u n i. cz

När ett bolag redovisar ett resultat som inte är i linje med marknadens förväntningar tenderar bolaget att uppvisa en avvikelseavkastning en period efter att resultatet har publicerats. Denna studie undersöker om bolag som redovisar ett oförväntat resultat jämfört med analytikers förväntningar uppvisar en avvikelseavkastning under en period på 30 respektive 60 handelsdagar efter publiceringen av bolagets kvartalsrapport. Studien undersöker tidsperioden 2004-2010. Dessutom undersöker studien om avvikelseavkastningen perioden efter att resultatet publicerats tenderar att avvika under den finansiella marknadens nedgångsfas 2007- 2008 i jämförelse med 2004-2006 och 2009-2010. För att genomföra undersökningen används en eventstudie. Studiens resultat visar att under perioden 2004-2010 uppvisar endast den decil av bolag som redovisat störst negativt oförväntat resultat en statistiskt säkerställd underavkastning på -1,9 % 30 handelsdagar efter att kvartalsrapporten publicerats. Vidare visar resultatet, vid jämförelse mellan 2007-2008 och perioderna 2004-2006 samt 2009-2010, att differensen i den genomsnittliga kumulativa avvikelseavkastningen under handelsdag 2 till 60 efter att bolagets kvartalsrapport har publicerats skiljer sig för de bolag som uppvisar ett positivt oförväntat resultat.

Post earnings announcement drift (PEAD) is defined as the drift that occurs in a company’s share priceafter their earnings announcement. A company that reports earnings above (below) the analysts’expectations should, according to previous studies of PEAD, continue to drift upwards (downwards)after the announcement. (Ball & Brown, 1968) The thesis purpose is to investigate if PEAD existed onthe Swedish market between 2006-2010. We test PEAD’s existences through; (i) creating portfolios inwhich companies’ abnormal return (AR) we expect to decline or increase, (ii) doing a multiple regressionanalysis to test if the drift is statistically significant. From the results of our study, we can neither acceptnor reject the hypothesis that PEAD existed on the Swedish market, although the multiple regressionanalysis prove a statistically significant result for companies’ AR that we expect to decline have drifted3,11% in a negative direction compared to our total sample.

The post earnings announcement drift is a market anomaly causing a firms cumulative abnormal returns to drift in the direction of an earnings surprise. By measuring quarterly earnings surprises using two measures. The first based upon a times series prediction and the other based upon on analyst forecast errors. This study finds evidence that the drift ex-ists in Sweden and that investor’s systematically underreacts towards positive earnings sur-prises. Further this study shows that the cumulative average abnormal returns is larger for surprises caused by analyst forecast errors. While previous studies have tried to explain the drift by taking on additional risk or illiquidity in the stocks. This study provides evidence supporting that investors limitations in weighting new information causes an underreaction, hence a drift in the stock prices.

This dissertation is divided into an introductory chapter and four essays. Chapter one discusses the importance of the study and describes the development and growth of the market as well. The first part (Chapters 2 & 3) examines stock returns behaviour and trading activity around earnings announcements. The second part (Chapters 4 & 5) examines price impact asymmetry and the price effects of block trades in the market microstructure context. Each essay addresses some aspects of market microstructure and stock returns behaviour in order to aid researchers, investors and regulators to understand a market which lacks research coverage. The research provides empirical evidence on issues such as the efficiency of the market, information asymmetry, liquidity and price impact of block trades. In first part of the thesis, event study and regression analysis were used to measure the price reaction around earnings announcements and to examine trading activity, information asymmetry and liquidity. In second part the determinants of the price impact of block trades were examined with regard to trade size, market condition and time of the day effects using transaction data. Liquidity and information asymmetry issues of block trades were also studied in this part.

abstract: I examine the degree to which stockholders' aggregate gain/loss frame of reference in the equity of a given firm affects their response to the firm's quarterly earnings announcements. Contrary to predictions from rational expectations models of trade (Shackelford and Verrecchia 2002), I find that abnormal trading volume around earnings announcements is larger (smaller) when stockholders are in an aggregate unrealized capital gain (loss) position. This relation is stronger among seller-initiated trades and weaker in December, consistent with the cognitive bias referred to as the disposition effect (Shefrin and Statman 1985). Sensitivity analysis reveals that the relation is stronger among less sophisticated investors and for firms with weaker information environments, consistent with the behavioral explanation. I also present evidence on the consequences of this disposition effect. First, stockholders' aggregate unrealized capital gain position moderates the degree to which information-related determinants of trade (e.g. unexpected earnings, firm size, and forecast dispersion) affect abnormal announcement-window trading volume. Second, stockholders' aggregate unrealized capital gains position is associated with announcement-window abnormal returns, consistent with the disposition effect reducing the market's ability to efficiently incorporate earnings news into price. / Dissertation/Thesis / Ph.D. Accountancy 2012

This study examines the post-earnings announcement drift (PEAD) anomaly on the Swedish stock market. By constructing a corporate governance index based on share structure, board independence and board gender diversity, we test how the quality of firms’ corporate governance affects the drift – a link which is previously unexplored. We find no evidence of PEAD for firms with good corporate governance, while firms with bad corporate governance do experience a drift. Furthermore, a PEAD trading strategy based on bad governance firms yields significantly larger abnormal returns compared to the corresponding trading strategy for good governance firms. Our results are robust to controlling for the risk factors of the Fama-French 3-factor model. The findings support that investors tend to underreact to extreme earnings surprises reported by bad governance firms due to a higher degree of information uncertainty, while the stock price reactions are more complete for good governance firms.

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