A Reexamination of Ball and Brown

In 1968, Ball and Brown produced a ground-breaking study that illustrated that there is valuable information content in financial statements. This paper reexamines the influential work of Ball and Brown, discusses the research developments that made the work of Ball and Brown (1968) such an impactful step in accounting, finance, and capital markets research, and examines studies since Ball and Brown (1968) that have attempted to provide further insight into the key findings of that study. This paper then proposes a methodology that could be used to test the findings of Ball and Brown (1968) in today’s market environment; lastly, this paper reports the results of a study using that methodology. The results of the study in this paper do not reaffirm the original results of Ball and Brown in 1968; however, the results of this study combined with an analysis of the optimal methodology provides insight into how Ball and Brown reached their conclusions in 1968 and how future studies could successfully produce the same results. Based on the analysis in this paper, in order for future studies to successfully replicate the results of Ball and Brown (1968), these studies should consider the effect that company size has on the value of information content in financial statements, consider the effect that a high degree of analyst coverage has on the value of information content in financial statements, and understand the unstable correlation between earnings surprises and price reactions.