Persistence of the Complementary Relation between Earnings and Private Information

This paper examines whether, for some firms, the complementary relation between earnings information and private information is persistent. First, consistent with earnings information being a complement to the private information held by some investors, we show that more precise earnings are associated with a larger increase in information asymmetry at the time of the earnings announcement. Second, consistent with the complementary nature of earnings leading to persistent differences in information asymmetry for some firms, we find more precise earnings are associated with higher levels of information asymmetry over the subsequent year. As a result, for these firms, we show that when equity markets are imperfect, earnings information reduces expected returns by reducing market risk, but increases expected returns incremental to market risk by increasing information asymmetry.