The differential information hypothesis, firm size, and earnings information transfer - An empirical investigation

This study examines the effects of the sizes of the announcing and non-anno uncing firms on information transfers. Atiase's [Atiase RK. Predisclosure i nformation, firm capitalization and security price behavior around earnings announcements. J Account Res 1985;23:21-36 (Spring)] differential informat ion hypothesis suggests that, relative to small firms, more pre-announcemen t information is available on large firms. An implication of the differenti al information hypothesis is that abnormal returns of large firms around ea rnings disclosures are caused by new information regarding the economy and industry. Thus, earnings disclosures by large firms may contain information that is useful for other firms in the industry. Consistent with our predic tion, we find that information transfers within an industry are positively related to the announcing firm's size. The differential information hypothe sis also suggests that information transfer will be inversely related to th e non-announcing firm's size. However, our results support the null hypothe sis that information transfer is not a function of the non-announcing firm' s size. Possible explanations of this finding are discussed in the paper. ( C) 2001 Elsevier Science Inc. All rights reserved.