Contingent Information Content of Order Backlog and the Direction of Sales Change

Abstract

We examine the contingent information content of order backlog and the direction of sales change. The more significant the order backlog, the less likely it is for future sales and thus earnings to decrease. As a result, an additional unit of order backlog predicts a more significant increase in future earnings and stock price when the firm also reports a sales decrease. The contingency of the information content is so significant that a sales decrease is no longer bad news when a firm reports above the top fiftieth percentile of order backlog relative to average assets. Our results support a contextual fundamental analysis theory in which the implication of an accounting measure can depend on other accounting information, and the impact of the context can be strong enough to overturn the qualitative interpretation.