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Article
Publication date: 22 February 2013

C.S. Agnes Cheng, Joseph Johnston and Cathy Zishang Liu

In response to recent concerns on earnings quality and a firm's fundamental performance, the purpose of this paper is to re‐examine salient questions under accrual…

Abstract

Purpose

In response to recent concerns on earnings quality and a firm's fundamental performance, the purpose of this paper is to re‐examine salient questions under accrual accounting: how earnings quality affects the role of earnings and operating cash flows in a firm's valuation.

Design/methodology/approach

Using a large sample ranging from 1989 to 2008, the authors contrast the effects of three representative accrual‐based earnings quality measures on the association between earnings, operating cash flows and a firm's abnormal stock returns.

Findings

In the univariate analysis it was found that earnings explain returns similarly to operating cash flows. With control of earnings quality, the results indicate that earnings' role in explaining contemporaneous abnormal returns remains unchanged when earnings quality is better. Conversely, operating cash flows explain more contemporaneous abnormal returns when earnings quality is better. The findings could suggest that the market reacts to operating cash flows conditionally on earnings quality. Intriguingly, the results also indicate that the market perceives better earnings quality captures superior performance of operating cash flows rather than that of earnings. These findings are further fortified by additional analyses revealing that the earnings quality measure with control of operating cash flows affects the supplemental role of operating cash flows most.

Originality/value

The paper's findings provide insights on how the market processes firm value signals embedded in earnings quality, which have direct implications for regulators, standard setters, academics and practitioners.

Details

International Journal of Accounting & Information Management, vol. 21 no. 1
Type: Research Article
ISSN: 1834-7649

Keywords

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Article
Publication date: 1 October 1997

C.S. Agnes Cheng and Charles J.P. Chen

Previous research and logic indicate that capital markets generally value spending for advertising and promotion; however, empirical results from these studies are far…

Abstract

Previous research and logic indicate that capital markets generally value spending for advertising and promotion; however, empirical results from these studies are far from consistent. While most studies find a positive relationship between a firm's advertising spending and its market value (Hirschey, 1985; Jose, Nichols and Stevens, 1986; Lustgarten and Thomadakis, 1987;Morck, Shleifer and Vishny, 1988; and Morck and Yeung, 1991), others find a negative relationship when control variables are added to the empirical model (Erickson and Jacobson, 1992). Differences in model specification may explain these conflicting results. Previous studies have included a variety of control variables such as return on investment, market share, research and development (R&D) spending, and book value (Erickson and Jacobson, 1992; Chauvin and Hirschey, 1993; Hirschey, 1982) when testing the relationship between promotional expenses and market value. Different firm characteristics (e.g. sales, total assets, book value of equity and price) have been selected as scalers for empirical measures of both the dependent and independent variables. Although these studies investigated an essentially identical theoretical relationship, variation in model specifications renders interpretations different.

Details

Managerial Finance, vol. 23 no. 10
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 September 1995

C.S. Agnes Cheng, H.Y. Kathy Hsu and Thomas R. Noland

This paper extends previous research by reexamining the difference in cross‐sectional variability of Japanese and U.S. price‐to‐earnings (PE) ratios. A simple model is…

Abstract

This paper extends previous research by reexamining the difference in cross‐sectional variability of Japanese and U.S. price‐to‐earnings (PE) ratios. A simple model is developed to decompose the variance of the PE ratio into three components: the variance of the price‐to‐book (PB) ratio, the variance of the book‐to‐earnings (BE) ratio and the covariance of the PB and BE ratios. We analyze the behavior of the cross‐sectional variability of the PE ratio and its components and compare the behavior of these ratios across the U.S. and Japanese markets. We find that the cross‐sectional variability of the PE ratio in the Japanese market is consistently lower than that of the PB ratio and the converse is true for the U.S. market. The cross‐sectional variability of PE ratios in Japan is lower than that in the U.S. and the converse is true for the PB ratio. Our results are inconsistent with those reported by Bildersee et al. and indicate that the main factor causing the differences between the cross‐sectional variability of PE ratios and PB ratios is the high negative covariance of the PB and BE ratios.

Details

Managerial Finance, vol. 21 no. 9
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 July 1994

C.S. Agnes Cheng, D. Kite and R. Radtke

Capital budgeting plays an essential role in a firm's long‐term viability and survival. The capital budgeting process includes: identification of potential projects…

Abstract

Capital budgeting plays an essential role in a firm's long‐term viability and survival. The capital budgeting process includes: identification of potential projects, prediction of possible outcomes, project selection, financing and implementation of the chosen project, and monitoring project performance (Mukherjee and Henderson, 1987). Although economic considerations should govern the capital budgeting decision, individual opinions and preferences often become primary factors affecting project selection.

Details

Managerial Finance, vol. 20 no. 7
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 21 October 2013

C.S. Agnes Cheng, Bong-Soo Lee and Simon Yang

Prior studies provide mixed propositions on whether earnings levels or earnings changes provide the better explanatory power for variations of stock returns and whether…

Abstract

Purpose

Prior studies provide mixed propositions on whether earnings levels or earnings changes provide the better explanatory power for variations of stock returns and whether the time-series behavior of earnings affects the value relevance of both earnings variables. This paper aims to compare the value relevance of earnings levels with that of earnings changes in the return-earnings relations.

Design/methodology/approach

The unobservable components model is used to estimate permanent and transitory components of earnings.

Findings

The finding shows that the proxy ability of earnings changes for unexpected earnings is sensitive to a firm's time-series earnings permanence property and is unstable and noisy when earnings contain predominantly transitory components, but that of earnings levels is not. The results support earnings levels are a stable and better value relevant proxy in the return-earnings relations.

Research limitations/implications

The findings imply that the valuation role of earnings levels is important in the research relating to earnings components, earnings innovations, and equity valuation, especially when earnings permanence is of interest.

Practical implications

The results provide a new understanding on the role of earnings levels in many business decisions such as executive compensations, institutional investment and conservative accounting where they often involve the choice of using levels and/or changes of earnings variables in making decisions.

Originality/value

The paper contributes to the accounting literature by providing a new insight into the valuation role of earnings levels in the return-earnings relations. The stable value relevance of earnings levels also has important implications, especially for studies that use only earnings levels to assess earnings quality and earnings attributes.

Details

International Journal of Accounting and Information Management, vol. 21 no. 4
Type: Research Article
ISSN: 1834-7649

Keywords

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Article
Publication date: 6 November 2007

C.S. Agnes Cheng, Su‐Jane Hsieh and Yewmun Yip

The purpose of this paper is to examine whether the choice of accounting treatment of transition obligation under SFAS 106 affects the value of firms, and also whether the…

Abstract

Purpose

The purpose of this paper is to examine whether the choice of accounting treatment of transition obligation under SFAS 106 affects the value of firms, and also whether the quality of earnings is improved after the implementation of SFAS 106.

Design/methodology/approach

Different regression models were employed on a sample of 50 immediate recognition firms and 50 matched prospective recognition firms. Chow test is also used to investigate the quality of earnings before and after the implementation of SFAS 106.

Findings

In spite of the significant difference in impact on earnings from the choice of treatment of transition obligation, the accounting choice has no significant impact on the total value relevance of earnings and book value. When immediate recognition method is applied, investors ignore the one‐time charge of transition obligation, and rely more on book value in the valuation of a firm. However, when prospective recognition method is applied, both earnings and book value are value‐relevant in the adoption year and also in the subsequent year. In addition, the paper finds that the implementation of SFAS 106 improves the value relevance of earnings.

Research limitations/implications

Results are limited by the accuracy of the models used to measure value relevance of earnings and book value of equity.

Practical implications

Results may have implications for managers' choice of accounting treatment, and the evidence seems to support accrual basis over cash basis on earnings measurement.

Originality/value

The paper uses the value relevance approach to analyze the impact of SFAS 106 on the quality of earnings and book value of equity.

Details

Review of Accounting and Finance, vol. 6 no. 4
Type: Research Article
ISSN: 1475-7702

Keywords

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Article
Publication date: 23 March 2010

Sudheer Chava, C.S. Agnes Cheng, Henry Huang and Gerald J. Lobo

The purpose of this paper is to investigate the effects of class action litigation on firms' cost of equity capital.

Abstract

Purpose

The purpose of this paper is to investigate the effects of class action litigation on firms' cost of equity capital.

Design/methodology/approach

The paper uses three different models to estimate the cost of equity capital. To separate the impact of lawsuit filings on the cost of equity capital from that of the revelation event, a sample of lawsuits with a long lag between the disclosure events and filing dates was analyzed. Also, a comparison group study was conducted to illustrate the distinct impact of a lawsuit filing on the defendant firm's cost of equity capital. Finally, a multivariate analysis was used to examine the factors that affect the magnitude of such impact.

Findings

The paper finds that filing of a class action lawsuit results in a significant increase in the defendant firm's cost of equity capital incremental to the effect of the disclosure event. Additionally, increases in the cost of equity capital after the lawsuit filings are higher when the lawsuits involve generally accepted accounting principle (GAAP) violation and have high merit, and when the defendant firms are small and have high leverage.

Practical implications

Findings in this paper suggest that the filing of a lawsuit brings new information to the market and is likely to increase the defendant firm's cost of equity capital by increasing the perceived risk in corporate governance, information asymmetry and operation.

Originality/value

This paper reveals securities class actions increase the defendant firms' cost of equity capital.

Details

International Journal of Law and Management, vol. 52 no. 2
Type: Research Article
ISSN: 1754-243X

Keywords

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Article
Publication date: 26 June 2009

C.S. Agnes Cheng and Austin Reitenga

The purpose of this paper is to examine the differential effects of institutional non‐blockholders (NONB) and active institutional blockholders (ACTB) on earnings…

Abstract

Purpose

The purpose of this paper is to examine the differential effects of institutional non‐blockholders (NONB) and active institutional blockholders (ACTB) on earnings management behavior, as measured by discretionary accruals.

Design/methodology/approach

This paper also proposes that the hypothesized influence of NONB and ACTB on earnings management behavior is affected by earnings pressure (EP) (i.e. the gap between target earnings and pre‐managed earnings). In particular, it believes that the stimulating effect of NONB on earnings management may not manifest when the stimulating effect of EPs is already strong and the mitigating effect of ACTB may manifest only when the stimulating effect of EP is there. The sample into three EP conditions: pressure to increase earnings, neutral pressure and pressure to decrease earnings is grouped. Consistent with the expectations, the paper finds that NONB stimulates earnings management, but only when EP is not strong and that ACTB mitigates earnings management, but only when there is pressure to increase earnings.

Findings

This paper also predicts that ACTB will need to exercise their monitoring power only when EP is strong. The results confirm this prediction, but only when there is strong pressure to increase earnings. When there is strong pressure to decrease earnings, inconclusive evidence regarding the effect of ACTB is found. This may imply that ACTB are conservative since they appear to be more likely to limit income‐increasing accruals than they are to limit income‐decreasing accruals.

Originality/value

This paper's contributions to the literature are twofold: the paper shows that the characteristics of institutional investors (INSTs) should be considered when examining the relationship between INSTs and earnings management; the paper shows that the direction and level of EP should be considered when evaluating the relationship between INSTs and earnings management.

Details

International Journal of Accounting & Information Management, vol. 17 no. 1
Type: Research Article
ISSN: 1834-7649

Keywords

Content available
Book part
Publication date: 4 May 2018

Muhammad Haykal

Purpose – Previous studies distinguish revenue management based on discretionary accruals; the research of studies is to investigate the factors that affect the finance…

Abstract

Purpose – Previous studies distinguish revenue management based on discretionary accruals; the research of studies is to investigate the factors that affect the finance manager at the discretionary accrual in General financial information statement.

Design/Methodology/Approach – Literature review models used in research aimed at detecting any company that performs the company’s discretion to fulfill the accrual of interests internally. This research study also discusses the relationship between earnings and discretionary manager behavior.

Findings – The researcher wants to re-examine the hypothesis of market efficiency on Indonesia’s capital market. The current company information technology uses greatly influences worldwide investor interest to invest on Indonesian’s capital market. Emerging Indonesia Capital market status becomes very interesting to be studied.

Originality/Value – It also presented the shortcomings of current research and the trends for future study in capital market.

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Article
Publication date: 23 October 2009

C.S. Agnes Cheng and Stephen W.J. Lin

The purpose of this paper is to investigate the timing of upward asset revaluations using large UK data.

Abstract

Purpose

The purpose of this paper is to investigate the timing of upward asset revaluations using large UK data.

Design/methodology/approach

A standard logistic model is used to examine the timing of upward asset revaluations. The result is further confirmed by using the ordinary least squares regression.

Findings

UK firms with higher industrial leverage and share performance two years before the revaluation year are inclined to write up their assets, suggesting that firms choose not to recognise good news unless it has been supported by their superior market performance and industry norm. This finding differs from the leverage reduction as well as the signalling objective suggested by previous literature.

Originality/value

This paper provides the first UK evidence on the timing of upward asset revaluation, which further enhance the understanding of the economic determinants of upward asset revaluations.

Details

International Journal of Accounting & Information Management, vol. 17 no. 2
Type: Research Article
ISSN: 1834-7649

Keywords

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