Firm size, capital structure and earnings announcement price response

Abstract

The existence of firm size effects is well documented in the accounting and finance literatures. One stream of this research inteiprets firm size as a proxy for the amount of information available about the firm. This paper extends prior work in this area and demonstrates that the significance of the size effect is increased substantially by considering information demands of both debt and equity investors. A size proxy that includes the book value of outstanding debt is more highly associated with returns surrounding annual and quarterly earnings announcements than a measure based solely on the market value of common equity.