THE DIFFERENTIAL INFORMATION CONTENTS OF UNEXPECTED PERMANENT AND TEMPORARY EARNINGS

The present research empirically demonstrates that unexpected permanent earnings exhibit a stronger relationship with stock returns at the time of earnings announcement than do temporary unexpected earnings. The disaggregation of unexpected earnings into permanent and temporary components is based on the information contained in the most recent financial analysts' current year and next year forecasts revisions prior to earnings announcement. The results also indicate that at the time of earnings announcements, the stock market reaction to the temporary component for managers-controlled firms is lower than that for the temporary component of owners-controlled firms. Similar results are observed for high versus low bonus managers-controlled firms.