Voluntary Accounting Changes and Post-Earnings Announcement Drift

Abstract

Purpose-This study investigates the relation between voluntary accounting changes (VACs) and post-earnings announcement drift. In addition, we examine how accounting choice heterogeneity moderates such association. Design/methodology/approach-We collect VAC firms in the U.S. in the period from 1994 to 2008 and identify the heterogeneity of accounting choices between VAC and non-VAC firms. To test our hypotheses, we consider a 10-Q filing window and a post-filing drift window. The 10-Q filing window begins from one trading day before and ends on one trading day after the quarterly report filing date. The post-filing drift window begins from two trading days after the filing date and ends on sixty trading days with respect to the earnings announcement date. Findings-Our results demonstrate that, overall, VAC does not affect the three-day market reactions to 10-Q filings. However, after taking into account the accounting choice heterogeneity, we observe that VAC is positively related to the market reactions to surprises and negatively associated with the post-filing period drift. Originality/value-Our paper contributes to the literature by showing that voluntary accounting changes affect the market’s responses to 10-Q filings only when such change results in different accounting practices compared to the VAC firm’s major competitors. Furthermore, given the change with heterogeneity requires more time to process, VACs are related to post-filing announcement drift.