We model the effect of information surprise on market uncertainty regarding firm value. Unlike traditional rational expectations models without parametric uncertainty, where information decreases uncertainty by a constant amount, we show that uncertainty regarding information precision results in a Vshaped relation between surprise and uncertainty about firm value. In this model, small absolute surprises decrease uncertainty, while large absolute surprises increase uncertainty. We test our theory by relating analysts' earnings forecast errors to changes in option implied volatilities around earnings announcements. Our empirical analysis yields evidence consistent with the proposed V-shaped relation. We also find support for a confirmation role of earnings, where uncertainty decreases despite a lack of new information conveyed by the earnings announcement. Our findings contribute to the rational expectations literature, the implied volatility literature, and the literature on the effects of accounting information on the second moment of investors' beliefs regarding firm value.
| Speaker: | Dr K R Subramanyam KPMG Foundation Professor of Accounting, University of Southern California (SMU, Cheng Tsang Man Chair Visiting Professor) |
| When: |
3.30 pm - 5.00 pm |
| Venue: | School of Accountancy [Map] Level 4, Meeting Room 4.1 |
| Contact: | Office of the Dean Email: SOAR@smu.edu.sg |