Sensitivity to returns due to uncertainty changes of earnings

The information content perspective stresses accounting’s role as a source of information. To provide information means it is possible to become better informed, to learn something we did not yet know. In turn, being able to become better informed means we were initially less informed, that uncertainty was present. Uncertainty is the opposite of certainty lack of complete foreknowledge, a setting in which there is ambiguity measure on the set of possible states. Probability means some states are more likely to occur than other states, just as others may be equally likely. Being serious about information is no easy task. Developing the skill to understand and be facile with information issues requires patience and effort. Increasing the probability and reaching certainty requires to have an adequate information content. The purpose of the present paper is to provide a formal definition of information using concepts from Shannon's influential paper and to develop a measure of the information content of a message. Throughout, we stress the difference between information and knowledge (i.e. all information is knowledge but not all knowledge is information). We then argue that the financial accounting process can really be formalized as a communication system where information can be determined as having been transmitted when uncertainty regarding a future probability state-space has changed. Furthermore, we demonstrate analytically a way in which Shannon's entropy measure can be used to determine the information content of an accounting report (e.g. financial statement). Finally, we explore the measure empirically to see what insights might be gained.
Research Hypothesis: We hypothesize that uncertainty rate of accounting earnings has a negative correlation with annual return of firms, and firms which have low uncertainty rate have a greater annual return and firms which have high uncertainty rate experience lower degree of annual return. This paper is trying to collect evidence to verify this fact.
The research method used in this article is multivariate regression analysis of the impact of annual return and uncertainty ratios. Based on the previous discussion and assuming q(t) adequately captures the strength of the information environment surrounding each company.
Results of statistic test of research hypothesis regarding the relationship between annual return and uncertainty ratios showed that this hypothesis was approved, in a way that it has been assessed to be negative.
Discussion and The findings of the hypothesis test confirm this hypothesis stipulating the existence of an association between annual return and uncertainty ratios, so this relationship is negative. Regarding the purpose of the research which is examining the relationship between annual return and uncertainty ratio, it is impossible to compare the results of this hypothesis with the results of other studies. In this hypothesis, the impact of controlled variables such as firm size, the ratio of market to book value were also tested. The results show a positive and an insignificant impact of firm size, while there is a positive and significant impact between the ratio of market to book value and annual return.