INFORMATION-CONTENT OF ACCOUNTING ANNOUNCEMENTS

The efficient market hypothesis (EMH) has spawned a large and impressi ve body of ''event studies.'' Conditional on the maintained hypothesis of market efficiency, these studies test the ''information content'' of events such as accounting earnings releases (Fama 1991). However, t he notion of ''information content'' of accounting earnings has not be en formally defined, except implicitly-via the way it is calibrated in event studies-as percent price change (risk and size adjusted) associ ated with earnings releases. In the assumption of belief homogeneity u nderlying the original formulation of EMH, where no competitive non-nu ll trading is expected in equilibrium, price changes will reflect full y the public announcement (see, e.g., Grossman and Stiglitz 1980). Hen ce, price changes will, conditional on the endowment and preferences c onfiguration and on prior homogeneously held beliefs, constitute a one -to-one mapping with the belief change induced by the earnings release , and could be adopted as an operational definition of information con tent (IC). However, admitting the possibility of belief-change heterog eneity into the analysis brings into question the theoretical validity and plausibility of this operational definition. Competitive trading that becomes possible as a result of disagreement would perturb the on e-to-one mapping between price change and belief change induced by the earnings release. In any case we no longer have a well-defined single construct reflecting heterogeneous belief changes. Under belief homog eneity the market acts as if it were a single decision-maker whose bel ief change theoretically reflects and calibrates the value or ''conten t'' of information.1 Once we allow for multiple decision-makers, or eq uivalently, for belief-heterogeneity, however, this simple definition of IC is no longer applicable. How is one to aggregate the belief chan ges of different traders, and what weights should be attached to such changes in the process of aggregation? Moreover, even if an appropriat e operational definition of IC were to be discovered under such circum stances, what would be the empirical manifestations? The derived ''inf ormation content'' measure includes volume reaction, price reaction, a nd the predisclosure expected belief dispersion. The results imply tha t neither price reaction nor volume reaction alone will provide a comp lete characterization of information content; both must be jointly obs erved along with some aspects of the existing information environment to gauge information content fully.