16 Journal of Economic Literature,Vol.XXXV (March 1997) of effects)of the event under study.Ad- is Datastream,and the source of the ac- ditional analysis may be included to dis- tual earnings is Compustat. tinguish between competing explana- If earnings announcements convey in- tions.Concluding comments complete formation to investors,one would expect the study. the announcement impact on the mar- ket's valuation of the firm's equity to de- 3.An Example of an Event Study pend on the magnitude of the unex- pected component of the announcement. The Financial Accounting Standards Thus a measure of the deviation of the Board (FASB)and the Securities Ex- actual announced earnings from the mar- change Commission strive to set report- ket's prior expectation is required.For ing regulations so that financial state- constructing such a measure,the mean ments and related information releases quarterly earnings forecast reported by are informative about the value of the the Institutional Brokers Estimate Sys- firm.In setting standards,the informa- tem (I/B/E/S)is used to proxy for the tion content of the financial disclosures market's expectation of earnings.I/B/E/S is of interest.Event studies provide an compiles forecasts from analysts for a ideal tool for examining the information large number of companies and reports content of the disclosures. summary statistics each month.The In this section the description of an mean forecast is taken from the last example selected to illustrate event month of the quarter.For example,the study methodology is presented.One mean third quarter forecast from Sep- particular type of disclosure-quarterly tember 1990 is used as the measure of earnings announcements-is considered. expected earnings for the third quarter The objective is to investigate the infor- of1990. mation content of these announce- To facilitate the examination of the ments.In other words,the goal is to see impact of the earnings announcement on if the release of accounting information the value of the firm's equity,it is essen- provides information to the marketplace. tial to posit the relation between the in- If so there should be a correlation be- formation release and the change in tween the observed change of the mar- value of the equity.In this example the ket value of the company and the infor- task is straightforward.If the earnings mation. disclosures have information content, The example will focus on the quar- higher than expected earnings should be terly earnings announcements for the 30 associated with increases in value of the firms in the Dow Jones Industrial Index equity and lower than expected earnings over the five-year period from January with decreases.To capture this associa- 1989 to December 1993.These an- tion,each announcement is assigned to nouncements correspond to the quar- one of three categories:good news,no terly earnings for the last quarter of 1988 news,or bad news.Each announcement through the third quarter of 1993.The is categorized using the deviation of the five years of data for 30 firms provide a actual earnings from the expected earn- total sample of 600 announcements.For ings.If the actual exceeds expected by each firm and quarter,three pieces of in- more than 2.5 percent the announce- formation are compiled:the date of the ment is designated as good news,and if announcement,the actual earnings,and the actual is more than 2.5 percent less a measure of the expected earnings.The than expected the announcement is des- source of the date of the announcement ignated as bad news.Those announce-