WSJ reporting of price-to-earnings ratios and attention to earnings

Abstract

Our goal is to understand the effects of the initial reporting of price-to-earnings (PE) ratios in The Wall Street Journal’s stock exchange tables. We find a significantly negative (positive) stock-price reaction for high (low) PE firms. After this event, a greater percentage of high PE firms report earnings increases. Increases in abnormal accruals are positively associated with firms’ PE rankings. These results indicate that media’s dissemination of PE ratios reduces investors’ information processing costs for inter-company comparison, fostering short-termism, as evidenced by an increased attention to earnings from both investors and managers. Our findings have implications for policy makers in developing rules to enhance inter-company comparison of financial information.