FACTORS INFLUENCING THE LEVEL OF DIFFERENTIAL INTERPRETATION SURROUNDING FIRMS’ EARNINGS ANNOUNCEMENTS

Abstract

Differential interpretation of common information is prevalent in our daily lives. Past financial research on this topic has been focused on the effects of differential interpretation. In this study, I hypothesize that certain groups of variables may have a distinctive impact on the level of disagreement and ran a regression to test this hypothesis. I relied on earnings forecasts issued by equity research analysts as a proxy to find out the level of differential interpretation that exist among investors surrounding a particular earning’s announcement. Variables which show a significant relationship with the level of differential interpretation includes the presence of periods of crises, the level of expenses incurred by firms relating to their selling, general and administrative activities, the size of a firm, the level of R&D expenditure, the negativity of a firm’s earnings, the magnitude of surprise brought along with the earning’s announcement and the amount of analysts following a particular firm. In addition, I tested for the possibility of the level of differential interpretation being capable of predicting the accuracy of analysts’ forecasts of firms’ earnings. The result of this test was negative.