Operating Earnings Disaggregation and Abnormal Investor Disagreement around Earnings Announcements

While prior research documents significant benefits to increased earnings disaggregation within earnings announcements, a fundamental presumption in this research is that increased disaggregation helps to segregate items with different characteristics. In this study, we explore the market consequences of disaggregation of components with similar characteristics. Specifically, we examine the relation between the level of operating earnings disaggregation and the magnitude and duration of abnormal investor disagreement around earnings announcements. We find significantly greater abnormal investor disagreement at the time of the earnings announcement for firms with greater operating earnings disaggregation. We also find that this effect is more pronounced for firms with low investor sophistication compared to those with high investor sophistication. We also find that abnormal investor disagreement persists for a longer period when operating earnings are more disaggregated relative to when they are less disaggregated in the earnings announcement. Finally, we examine investor disagreement around the subsequent regulatory filing and show that the relation reverses around the filing (i.e., firms with more disaggregated operating earnings in the earnings announcement have less abnormal investor disagreement around the subsequent filing). However, we find net greater abnormal investor disagreement during the combined earnings announcement and filing period for firms with high levels of operating earnings disaggregation. Collectively, our results demonstrate adverse market consequences associated with disaggregation of elements with similar characteristics.

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