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The accounting literature has traditionally focused on firm-level studies to examine the capital market implications of earnings and other accounting variables. We first develop the arguments for studying capital market implications at the aggregate level as well. A central issue is that diversification makes equity investors at least partially and potentially almost completely immune to several firm-level properties of earnings by holding diversified portfolios. Diversification is particularly important when assessing the welfare consequences of random errors in accounting measurement (imperfect accruals) and, to the extent it is independent across firms, of deliberate manipulation (earnings management). Consequently, some firm-level metrics of association, timeliness, value relevance, conservatism and other earnings properties do not map easily into investor welfare. Similarly, earnings-related risk manifests itself to equity investors largely through systematic earnings risk (covariation with aggregate earnings and/or other macroeconomic indicators). We conclude that the design and evaluation of financial reporting must adopt at least in part an aggregate perspective. We then summarize the literature in accounting, economics and finance on aggregate earnings and stock prices. Our review highlights the importance of studying earnings at the aggregate level.

The purpose of this paper is to examine the relative predictive abilities of current earnings (and its components) and cash flows for next period cash flows in case of Shariah-compliant companies in India.

The study uses the list of CRISIL NSE Index (CNX) Nifty Shariah Index companies as its sample for a period of 10 years for conducting the analysis. The study utilizes the cash flow prediction models to examine the relative predictive abilities of current earnings (and its components) and cash flows for next period cash flows.

The study report that contrary to Financial Accounting Standard Board assertion, current cash flows have superior predictive ability of next period cash flows than current aggregate earnings in case of Shariah-compliant companies in India. The results further show that there are no gains from decomposing earnings into accruals and cash flows in predicting future cash flows. There is no increase in explanatory power (measured by adjusted R2) when aggregate earnings are disaggregated into accruals and cash flows to predict next period cash flows.

The empirical findings of the study will enable the Shariah compliant investors to understand the role of current earnings (and its components) and cash flows in predicting next period cash flows in case of Shariah-compliant companies in India.

To the best of author’s knowledge, this is the first study which examines the relative predictive abilities of current earnings (and its components) and cash flows for next period cash flows in case of Shariah-compliant companies in India.

Management has considerable discretion over how to present and announce earnings components that are either unusual or infrequent, but not both (hereafter referred to as special items). In this study, we study the independent and joint effects of the accounting presentation format of, and the level of announcement prominence given to income-decreasing special items on investors’ judgments about the persistence of declining earnings.

Our study uses a 3 (format) × 2 (prominence) between-subjects design. In the experiment, participants act as proxies for nonprofessional investors to assess the persistence of a hypothetical firm’s declining earnings and make investment decisions.

Our results suggest that investors’ judgments are influenced by accounting presentation format and the level of announcement prominence. With respect to format, both classification and disaggregation affect investors’ assessment of earnings persistence. In addition, the degree of prominence given to an income-decreasing special item, albeit self-serving and not audited, introduces additional influence beyond that of accounting presentation format. In particular, we find that announcement prominence has a greater effect when the special item is aggregated with other operating expenses than when the special item is presented under the two other alternatives.

Our study contributes to the literature by demonstrating that presentation format and announcement prominence both have significant impact on investors’ judgments and decisions, and that their effects are interactive. Our results also indicate that future research can possibly gain better insight if it considers the accounting attributes of the special items in addition to their economic attributes.

This paper investigates the impact of earnings management on value relevance of accounting information in the context of Japan. Researchers carrying out earnings management research usually rely on the Jones (1991) or the modified Jones model (1995) to disaggregate accruals into its discretionary and non‐discretionary components. However, because of criticisms leveled against extant models of discretionary accruals, this study instead uses earnings management measures constructed by Leuz et al. (2001) and Bhattacharya et al. (2001) and examines the relationship between these measures and their impact on the value‐relevance of accounting information. The latter is operationalized by the explanatory power of book values and earnings (combined model) and earnings alone (earnings model) for stock price. Results based on 5,318 consolidated firm‐year observations over 1992‐1999 show that, both earnings management measures and aggregate earnings management measures (combination of both earnings smoothing and earnings management measures) are significantly negatively associated with the combined value relevance of book values of equity and earnings (combined model) and value relevance of earnings (earnings model).

The purpose of this paper is to examine cash dividends and stock repurchases in Canada from 1988 to 2006 and their relationship with earnings.

The study uses logistic regressions to examine the likelihood of paying dividends and the timing of repurchases and OLS regressions to examine the level of payout.

The fraction of dividend‐paying firms declines from 1988 to 2001 and then slightly rebounds until the end of the sample period in 2006. Firm size, profitability, investment opportunities, and catering incentives explain the likelihood of paying dividends. Unlike US firms, Canadian repurchase‐only firms do not become important payers in terms of either the percentage of firms or the level of payout. Dividend‐only firms pay out significant amounts of cash. Firms with both regular dividends and regular repurchases pay out the largest amount. The payout of different groups of payers is determined by their earnings. Testing firms with both regular dividends and regular repurchases reveals that earnings, undervaluation, and availability of cash explains the timing of repurchases but earnings mainly explains the level of repurchases.

Canadian data are unavailable after 2006, which precludes investigating the potential implications of the financial crisis beginning in 2007.

This is the first paper to analyze the evolution of the relationship between payout and earnings in Canada.

The purpose of this study is to examine the effect of International Financial Reporting Standards (IFRS) on earnings quality in a continental European context (i.e. France) more than a decade after their mandatory adoption. Furthermore, the authors investigate whether the IFRS effect depends on firm-specific incentives.

The authors construct an aggregated measure that considers the main qualitative information characteristics: reliability and relevance. They identify accruals quality, earnings smoothing and the degree of conditional conservatism as attributes of reliability and use earnings persistence, predictability, value relevance and timeliness to measure earnings relevance. To test the hypotheses, the authors use a sample of French listed companies. The analyses are based on ordinary least squares (OLS) fixed effects, the Newey–West estimator and the difference-in-difference approach. The authors also use cluster analysis to identify firms with high incentives for earnings quality.

The results reveal a decrease in earnings quality that persisted for a decade after IFRS adoption. This decrease is mainly due to a decline in earnings relevance, suggesting that the fair value principle worsened earnings volatility. However, the results show that there is an improvement in earnings reliability after IFRS adoption, suggesting that the international standards were able to constrain managerial opportunism. Additionally, the findings reveal that firm-specific incentives can enhance the positive effect of IFRS, but the incentives are not able to substitute for such effect.

The IFRS effect depends on firm-specific incentives.

The authors prove that firm-specific incentives are important to accentuate the positive effect of IFRS on earnings reliability and to mitigate the impact of IFRS on earnings relevance.

This paper makes several contributions to the literature. First, it addresses the relative lack of attention to the main qualitative characteristics in measuring earnings quality, that is, earnings reliability and earning relevance, and uses an aggregate earnings quality measure. Second, this paper uses a cluster analysis to highlight the role of firm-specific incentives in shaping the effect of IFRS on earnings quality.

The purpose of this study is to analyze the predictability of firm level data for determining macroeconomic indicators such as unemployment.

This study uses quarterly GDP and unemployment data manually collected from the Statistical Center of Iran (SCI). Accounting numbers are also collected from the Tehran Stock Exchange library for the 2004-2015 period. Dispersion of earnings growth provides related data about labour reallocation, unemployment change and finally aggregate output. To summarize, this study attempts to examine the effect of these variables using classical and Bayesian approaches.

At a firm level, our results suggest that sectoral shift in previous years is likely to increase labour reallocation in subsequent years. At the macro level, the results reveal that dispersion of earnings growth and labour reallocation has a negative and positive impact on unemployment changes, respectively. However, the study suggests no significant relationship between stock return and unemployment changes. Consequently, we determine that the real estimates of macroeconomic indicators have predictive power because nominal estimates are not statistically associated with firm-level details. Finally, the results obtained from classical and Bayesian approaches suggest similar findings, thus confirming the robustness of our conclusions. Note that, based on Bayesian approach, the nominal reallocation has predictive power in unemployment rate.

The study is the first conducted in a developing country and the results provide important insight into current line of accounting literature.

We investigate the relative roles of key components of earnings change in explaining the value relevance of earnings across different life‐cycle stages of the firm. We hypothesize that firms in different life‐cycle stages take different strategic actions: change in sales is emphasized in the growth and mature stages, while in later stages, profitability is emphasized. Because payoffs to such strategies vary across the life‐cycle, the stock market reaction to the success firms have in employing these strategic actions is likely to vary across the life‐cycle. To test our hypotheses, we disaggregate changes in earnings into three key components: earnings change from change in sales, earnings change from change in profitability, and an interaction term comprising both sales change and profitability change. Our findings are consistent with our hypotheses: when firms are in the growth stage, the value‐relevance of change in sales is relatively greater than that of change in profitability. In the mature stage, the value relevance of change in profitability increases, relative to that of change in sales. When firms are in stagnant stage, the value‐relevance of changes in profitability are relatively greater than that of change in sales. Collectively, the results demonstrate a shift in the value relevance of earnings components from a growth emphasis early in the life‐cycle to a profitability emphasis later in the life‐cycle.

This paper seeks to investigate whether disaggregated bank earnings better predict next period earnings than contemporaneous aggregated earnings.

Fairfield et al.'s (1996) regression approach is used for predicting next period's return of equity (ROE) and stock prices using disaggregated earnings data.

The results show that the mean adjusted R‐square significantly increases with the progressive disaggregation of earnings. The results also demonstrate that disaggregated components are better able to predict next period earnings and stock prices than aggregated earnings.

The findings support the US Financial Accounting Standard Board's contention that disaggregated information may be more useful than aggregated information for investment, credit, and financing decisions.

Investors and analysts should use disaggregated income statement information in predicting next period earnings and stock prices for the banking industry.

The main contribution of this paper is to demonstrate how fully disaggregated earnings explain ROE, stock prices, and analysts forecast error in the banking industry.

This paper aims to examine the extent to which real earnings management (REM) is used in Jordan to meet zero or previous year's earnings, and how this impacts the subsequent operating performance of Jordanian firms.

The study used a sample of 98 Jordanian listed firms over the 2010–2018 period. To test the research hypotheses, which are formulated in accordance with both, agency theory and signalling theory, multivariate regression is performed using a pooled OLS estimation. Additionally, a two-step dynamic generalised method of moment (GMM) model has been estimated to address any concerns regarding the potential occurrence of endogeneity issues.

The results show that Jordanian firms that meet zero or last year's earnings tend to exhibit evidence of real activities manipulations. More specifically, suspect firms show unusually low abnormal discretionary expenses and unusually high abnormal production costs. Further, consistent with the signalling earnings management argument, the authors find that abnormal real-based activities intended to meet zero earnings or previous year's earnings potentially improve the subsequent operating performance of Jordanian firms. This implies that REM is not totally opportunistic, but it can be used to enhance the subsequent operating performance of Jordanian firms. Our findings are robust to alternative proxies and endogeneity concerns.

The findings have several implications for policymakers, regulators, audit professionals and investors in their attempts to constrain REM practices to enhance financial reporting quality in Jordan. Managing earnings by reducing discretionary expenses appeared to be the most convenient way to manipulate earnings in Jordan. It provides flexibility in terms of time and the amount of spending. The empirical evidence, therefore, reiterates the crucial necessity to refocus the efforts of internal and external auditors on limiting this type of manipulation to reduce the occurrence of REM activities and enhance the subsequent operating performance of listed firms in Jordan. Drawing on Al-Haddad and Whittington (2019), the evidence also urges regulators and standards setters to develop a more effective enforcement mechanism for corporate governance provisions in Jordan to minimise the likelihood of REM incidence.

This study contributes to the body of the accounting literature by providing the first empirical evidence in the Middle East region overall on the use of REM to meet zero or previous year earnings by Jordanian firms. Moreover, the study is the first to empirically examine the relationship between REM and Jordanian firms' future operating performance.