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1 – 10 of over 32000C.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 the…
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.
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Julia Lane, Javier Miranda, James Spletzer and Simon Burgess
J.C.Y. How, C.S. Teo and H.Y. Izan
Since Ball and Brown's (1968) seminal paper on the association between unexpected changes in earnings and share prices, there have been an abundance of empirical studies that…
Abstract
Since Ball and Brown's (1968) seminal paper on the association between unexpected changes in earnings and share prices, there have been an abundance of empirical studies that suggest that announcements of earnings and dividends do indeed convey new and useful information to capital market participants. Most of these studies, however, have examined the information effects of only earnings OR dividend announcements. They did not examine whether the share market evaluates each announcement with respect to the information contained in the other.
Jitender Kumar, T.B. Kavya, Amit Bagga, S. Uma, M. Saiteja, Kashish Gupta, J.S. Harish Ganapathi and Ronit Roy
The purpose of this article is to revisit the mean reversion in profitability and earnings among Indian-listed firms, based on the idea that changes in profitability and earnings…
Abstract
Purpose
The purpose of this article is to revisit the mean reversion in profitability and earnings among Indian-listed firms, based on the idea that changes in profitability and earnings are somewhat predictable.
Design/methodology/approach
The study used a sample of 445 Bombay Stock Exchange (BSE)-listed companies and 309 companies from the manufacturing sector in India for the period from 2007 to 2020. The study employed cross-sectional regressions. Both linear and non-linear Partial Adjustment Models (PAM) were used to forecast profitability and earnings.
Findings
The study revealed that profitability and earnings mean revert for both the BSE-listed companies and the manufacturing sector companies from 2007 to 2012. However, for the years from 2013 to 2020, it was found that there is no significant evidence of mean reversion in both the BSE-listed companies or the manufacturing sector companies.
Practical implications
The findings have larger implications for security analysts who forecast future stabilisation or recovery of historically high or low growth rates. Investors and analysts would benefit from having a better understanding of how competitive attacks affect profitability as well as how the overall economic growth of a country affects earnings and valuations.
Originality/value
Most of the empirical research in India has focused on mean reversion in stock prices or stock returns. The present study looked at the mean reversion of profitability and earnings in Indian firms.
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Yunling Song, Shihong Li and Ling Zhou
The purpose of this paper is to investigate the spillover effects of a bright-line disclosure regulation that required Chinese listed firms to provide earnings forecasts if they…
Abstract
Purpose
The purpose of this paper is to investigate the spillover effects of a bright-line disclosure regulation that required Chinese listed firms to provide earnings forecasts if they anticipated specified, large earnings changes.
Design/methodology/approach
The paper examines the discontinuity of the earnings change distribution of firms listed on the Shenzhen Stock Market between 2010 and 2014. The paper finds that firms no longer subject to the bright-line test still exhibited discontinuity in earnings change distribution. The discontinuity lasted for at least three years with magnitude comparable to that of the firms still subject to the bright-line test. In addition, newly listed firms that had never experienced the bright-line test showed similar tendency to avoid the same threshold. There is some evidence that these firms’ avoidance of the −50 per cent changes was partly because of market pressure.
Research limitations/implications
Research on bright-line tests has to date focused on their immediate and direct effects on firms currently subject to such tests. This study finds that a bright-line disclosure regulation’s influence is not limited to the firms directly governed by the regulation. It could lead to widespread and long lasting distortions in financial reporting behaviors of firms not currently subject to such tests.
Practical implications
The paper has implications for regulators who study the economic consequences of bright-line regulations in general and analysts of the Chinese capital market in particular.
Originality/value
This is the first empirical report that bright-line disclosure regulations affected the financial reporting behavior of firms that were not directly subject to the bright-line tests.
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Pervaiz Alam and Anibal Báez‐Díaz
This study uses a simultaneous equations approach to examine the price‐earnings relationship of non‐U.S. firms that directly list their securities in U.S. capital markets or trade…
Abstract
This study uses a simultaneous equations approach to examine the price‐earnings relationship of non‐U.S. firms that directly list their securities in U.S. capital markets or trade as American Depository Receipts (ADRs). The Hausman test shows that price changes and earnings changes are endogenously determined, thus the simultaneous equations approach is used to estimate the earnings response coefficient (ERC) and the returns response coefficient (RRC). Under the ordinary least squares (OLS) estimation, the parameter estimates are biased downward because the OLS fails to correct for endogeneity. In general, our results show that the joint estimation procedure mitigates some of the single‐equation bias. The estimated ERC and the RRC are higher under the three stage least regression (3SLS) than under the OLS regression. In addition, the product of the ERC and the RRC coefficients approaches its theoretical value of one when using the 3SLS estimation. The evidence also shows that institutional factors affect the way the market value information for these firms. We find that the ERC and RRC are insignificant for the common law non‐ADR firms and significantly positive for common law ADR firms.
Guojin Gong, Yue Li and Ling Zhou
It has been widely documented that investors and analysts underreact to information in past earnings changes, a fundamental performance indicator. The purpose of this paper is to…
Abstract
Purpose
It has been widely documented that investors and analysts underreact to information in past earnings changes, a fundamental performance indicator. The purpose of this paper is to examine whether managers’ voluntary disclosure efficiently incorporates information in past earnings changes, whether analysts recognize and fully anticipate the potential inefficiency in management forecasts and whether managers’ potential forecasting inefficiency entirely results from intentional disclosure strategies or at least partly reflects managers’ unintentional information processing biases.
Design/methodology/approach
Archival data were used to empirically test the relation between management earnings forecast errors and past earnings changes.
Findings
Results show that managers underreact to past earnings changes when projecting future earnings and analysts recognize, but fail to fully anticipate, the predictable bias associated with past earnings changes in management forecasts. Moreover, analysts appear to underreact more to past earnings changes when management forecasts exhibit greater underestimation of earnings change persistence. Further analyses suggest that the underestimation of earnings change persistence is at least partly attributable to managers’ unintentional information processing bias.
Originality/value
This study contributes to the voluntary disclosure literature by demonstrating the limitation in the informational value of management forecasts. The findings indicate that the effectiveness of voluntary disclosure in mitigating market mispricing is inherently limited by the inefficiency in management forecasts. This study can help market participants to better use management forecasts to form more accurate earnings expectations. Moreover, our evidence suggests a managerial information processing bias with respect to past earnings changes, which may affect managers' operational, investment or financing decisions.
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John Creedy and Keith Whitfield
Introduction The literature on earnings change has increasingly suggested that the key processes generating earnings inequality are those operating within the firm. However, there…
Abstract
Introduction The literature on earnings change has increasingly suggested that the key processes generating earnings inequality are those operating within the firm. However, there has been little empirical work on these phenomena, largely reflecting data deficiencies. Very few data‐sets on earnings contain information about internal processes and those which do often measure them narrowly. For example, most surveys of labour mobility define it either as movement between firms or as such movement plus major, once‐and‐for‐all changes of work type.
Christine C. Bauman and Mark P. Bauman
Extant research examining the determinants of deferred tax asset valuation allowances finds that the evidence provisions outlined in SFAS 109 explain a significant portion of both…
Abstract
Extant research examining the determinants of deferred tax asset valuation allowances finds that the evidence provisions outlined in SFAS 109 explain a significant portion of both levels of and changes in recorded valuation allowances. In addition, there is evidence of a stock price reaction around the time of announcements of valuation allowance information. The present study extends existing research in two ways. First, extant research on determinants of valuation allowance changes does not incorporate the asymmetry in the evidence provisions of SFAS 109. Accordingly, we separately examine the determinants of increases versus decreases in valuation allowances and find that the evidence provisions of SFAS 109 explain a much greater portion of valuation allowance increases than decreases. Second, we examine the association between annual stock returns and reported earnings resulting from valuation allowance changes. While the earnings effect of valuation allowance changes is found to be significant in the expected direction, the stock price reactions do not occur in the period the earnings effect is reported. This is consistent with low earnings “quality” under SFAS 109.
Ali M. Al-attar, Husni K. Al-Shattarat and Aziz N. Yusuf
– The purpose of this study is to examine if the cash flow and short-term accruals and long-term accruals together have a role to play in explaining the change in dividends.
Abstract
Purpose
The purpose of this study is to examine if the cash flow and short-term accruals and long-term accruals together have a role to play in explaining the change in dividends.
Design/methodology/approach
The authors’ mainly used the same models developed by Atieh and Hussain (2008) and expanded on this model by including contextual factors: firm growth, firm size, gearing and quality of earnings. Using 344 observations from Jordanian firms, the association of variables with dividend changes was analyzed using the generalized least square regression.
Findings
The results reveal consistency with previous studies that disaggregated earnings outperforms the cash flow model in explaining the changes in dividends. Also, the explanatory power of the Lintner (1956) model is improved by replacing earnings with cash flow and short-term and long-term accruals, which is in line with previous studies. Regarding the effect of contextual factors, the superiority of the accrual model is affected by the contextual factors proposed, except for geared firms. The accrual model is superior for high growth, large firms and poor quality of earnings.
Originality/value
The paper contributes to the existing literature that the Lintner (1956) model’s explanatory power can be improved by replacing earnings with its components mainly cash flows and short-term and long-term accruals. These results support the evidence related to developed markets. The paper also provides evidence of the importance of firm characteristics on the information content of the components of earnings.