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Article
Publication date: 1 February 2004

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…

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.

Details

Review of Accounting and Finance, vol. 3 no. 2
Type: Research Article
ISSN: 1475-7702

Book part
Publication date: 8 November 2021

Agustin Palupi

This study aims to obtain empirical evidence and analyzes factors that are affecting earnings response coefficient (ERC). Manufacturing companies are used in this…

Abstract

This study aims to obtain empirical evidence and analyzes factors that are affecting earnings response coefficient (ERC). Manufacturing companies are used in this research, which are listed on the Indonesian Stock Exchange from 2016 to 2018. This study used panel data consisting of 114 firm years data. This research is using multiple regression method to examine the effect of independent variable to the dependent variable ERC. The result of this study shows that income smoothing (IS) and systematic risk (SR) have an effect on ERC; while IS, SR, and Firm Growth have an effect on Earnings Announcement; meanwhile, earnings persistence, audit quality, firm size, and leverage have no effect on Earnings Announcement. Implication of the research indicates that investors assess earnings quality of the company for their investment decision. These findings contribute to market reaction on earnings announcement and market-based accounting researches.

Details

Environmental, Social, and Governance Perspectives on Economic Development in Asia
Type: Book
ISBN: 978-1-80117-594-4

Keywords

Article
Publication date: 3 January 2017

Wael Mostafa

This paper aims to examine the association between earnings management and the value relevance of earnings (the latter is operationalized by earnings response coefficient

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Abstract

Purpose

This paper aims to examine the association between earnings management and the value relevance of earnings (the latter is operationalized by earnings response coefficient). Specifically, this study examines whether opportunistic earnings management has a negative impact on the value relevance of earnings for a sample of firms listed on the Egyptian Stock Exchange.

Design/methodology/approach

Different from prior work and due to data limitations in the Egyptian market, this paper first examines for the existence of earnings management based on the whole operating performances of the firms by testing whether firms with low/poor operating performance are more likely to choose income-increasing actions (strategies) than firms with high operating performance. After confirming that low operating performance firms manage earnings upward, the authors then assess whether this opportunistic earnings management by these low operating performance firms reduces the value relevance of earnings. This is performed by estimating a model of the relationship between stock returns and accounting earnings with a dummy variable that allows parameter shifts for earnings of low operating performance firms.

Findings

The results show that discretionary accruals are positive and significantly higher for firms with low operating performance than those for firms with high operating performance. These results indicate that low operating performance firms increase the earnings management practices by probably increasing their reported earnings opportunistically to mask their low performance. Furthermore, the results show that the earnings response coefficient is significantly smaller for earnings of low operating performance firms than that for earnings of high operating performance firms. These results suggest that earnings of firms with low operating performance (that are engaged in opportunistic earnings management strategies) have less value relevance than earnings of firms with high operating performance, i.e. the informativeness of managed earnings is lower than that of non-managed earnings.

Practical implications

Based on these results, it is plausible that the presence of opportunistic earnings management adversely affects the value relevance of accounting earnings.

Originality/value

Consistent with previous results from developed countries, this study shows that earnings management is a significant factor that affects value relevance of earnings in Egypt.

Details

Managerial Auditing Journal, vol. 32 no. 1
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 1 June 2005

Jennifer Reynolds‐Moehrle

This study aims to examine how market participants changed the way they process earnings information after learning of the implementation of hedging activities.

2324

Abstract

Purpose

This study aims to examine how market participants changed the way they process earnings information after learning of the implementation of hedging activities.

Design/methodology/approach

Using a sample of derivative user and non‐user firms, this study empirically compares earnings predictability, forecast revision behavior, and the earnings response coefficients before and after the disclosure of sustained hedging activity.

Findings

The findings indicate that analysts’ forecast accuracy increased and that unexpected earnings were incorporated into subsequent earnings forecasts to a greater extent subsequent to disclosure of sustained hedging activity. Additionally, the findings indicate an increase in the earnings‐return relation in the hedging activity period.

Research limitations/implications

This evidence empirically supports the claim that, when a company communicates that hedging activities have been started, market participants are better able to forecast earnings and view subsequent earnings announcements as providing greater information about future earnings. The results may be understated due to the minimal disclosures required during the sample period. Future research could revisit these tests for the SFAS 133 time period as a way of evaluating the usefulness of more detailed disclosures.

Practical implications

The models used in the tests of forecast revisions and earnings response coefficients could easily be adapted to other settings where the research question compares different time periods.

Originality/value

This study adds to the empirical evidence regarding the effects of hedging activity by providing direct evidence of analysts’ use of and investors’ reactions to earnings surprises following the disclosure of the implementation of hedging activities.

Details

International Journal of Managerial Finance, vol. 1 no. 2
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 1 July 2005

Peta Stevenson‐Clarke and Allan Hodgson

This paper estimates the value added by Big 8/6/5 auditors after controlling for the permanent and non‐permanent impact of earnings and cash flows using linear and…

Abstract

This paper estimates the value added by Big 8/6/5 auditors after controlling for the permanent and non‐permanent impact of earnings and cash flows using linear and nonlinear (arctan) regression models. The linear model shows significant value added for industrial firms that utilise Big 8/6/5 auditors; while an arctan model shows that large auditors value‐add by attesting to the permanence of earnings for large firms. We demonstrate that refinements to the audit research can be made by using response coefficients to filter out the different timing components inherent in earnings and cash flows.

Details

Accounting Research Journal, vol. 18 no. 1
Type: Research Article
ISSN: 1030-9616

Keywords

Article
Publication date: 1 March 2005

Pamela S. Stuerke

To examine whether both the value relevance of accounting information, and the quality of earnings affect financial analysts' revisions of forecast annual earnings per…

3605

Abstract

Purpose

To examine whether both the value relevance of accounting information, and the quality of earnings affect financial analysts' revisions of forecast annual earnings per share soon after an earnings release.

Design/methodology/approach

For firms whose accounting earnings provide either a basis for firm valuation or new information, analysts are predicted to revise earnings forecasts in response to the magnitude of surprise in the earnings release. Using publicly available data, regression analysis explores the influence of earnings response coefficients (ERCs), unexpected earnings, and interactions between ERCs, the association between earnings and returns, and unexpected earnings on forecast revisions after earnings announcements.

Findings

Empirical tests demonstrate a positive relation between the percentage of analysts revising forecasts soon after interim earnings announcements and firm‐specific ERCs, the interaction between the magnitude of earnings surprises, ERCs, and earnings‐returns associations, and pre‐announcement dispersion in forecasts. The results suggest that usefulness of earnings releases is related to the magnitude of new information in the release, the persistence of earnings innovations, the firm‐specific mapping between earnings and returns, and prior uncertainty about earnings.

Research limitations/implications

This paper examines forecast revisions only soon after earnings announcements. Future research should examine more general determinants of analysts' forecast revision activity.

Originality/value

This paper provides evidence about determinants of forecast revision frequency, a measure of how actively financial analysts provide information, an extension of prior research that focuses on analyst following as a measure of information environments.

Details

International Journal of Managerial Finance, vol. 1 no. 1
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 9 June 2020

Afsheena P. and Shijin Santhakumar

The asymmetric effect of conservatism on earnings and its other components serves as a contrivance to incorporate transparency and timeliness in financial reporting. This…

Abstract

Purpose

The asymmetric effect of conservatism on earnings and its other components serves as a contrivance to incorporate transparency and timeliness in financial reporting. This study aims to explore cash flow-return association, which provides insight into the accruals’ contribution that traverses through conservatism-earnings persistence liaison and its associated effects on stock returns.

Design/methodology/approach

The study used asymmetric timeliness (AT) model and two firm-year measures, namely, C-Score and conservatism ratio, to capture conservatism. The firm-year measures of conservatism, in addition to the AT measure, facilitate a better understanding of the persistence of reported earnings that branch out the study from the existing literature. Further, the study used panel regression analysis to evaluate the timeliness and persistence of earnings under the conservative approach with a sample of Indian corporate data from 2000 to 2017.

Findings

The findings of the study reveal that conservative earnings are less persistent and the accruals recognize bad news timelier than good news. The unfavorable change in earnings shows a lower earnings response coefficient in contrast to favorable earnings variations. However, the appropriate loss recognition nature of conservative reporting has little or no influence on stock returns in an emerging market such as India.

Research limitations/implications

Accounting conservatism is a captivating feature accounting information, especially pertinent to many decision-makers. Thus, the study has implications for the investors while evaluating the adverse and positive changes in accounting earnings; also, the results are helpful for the standard setters in ongoing debate related to accounting conservatism vs fair evaluation. The present study focuses exclusively on ex-post conservatism, while the ex post and ex ante conservatism are having a significant role in accounting practices. Future research on the differential effects of ex post and ex ante conservatism on accounting information in an emerging market, is worth promising.

Originality/value

The study reveals the first Indian evidence on accounting conservatism and earnings persistence relationship, which would bring a different dimension to investors’ perception in evaluating the characteristic variations of reported earnings. The findings add value to the accounting standard setters concerning the asymmetric verification as Indian Accounting standards are on the verge of convergence with International Financial Reporting Standards (IFRS).

Details

Journal of Financial Reporting and Accounting, vol. 18 no. 3
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 19 June 2018

Jay Junghun Lee

Prior literature suggests that stock prices lead earnings in reflecting value-relevant information because accounting income incorporates information discretely to satisfy…

Abstract

Purpose

Prior literature suggests that stock prices lead earnings in reflecting value-relevant information because accounting income incorporates information discretely to satisfy recognition principles while stock prices incorporate it continuously. The purpose of this paper is to derive an analytical model that relates the time lag of earnings to the incremental informativeness of future anticipated earnings in equity prices after controlling for current realized earnings.

Design/methodology/approach

This study models the extent to which forward-looking information about future earnings is capitalized into current stock returns. Specifically, this study derives an analytical future earnings response coefficient (FERC) model that regresses current stock returns on both current and future earnings surprises, and examines the properties of the regression coefficients on current earnings (i.e. current earnings response coefficient, CERC) and future earnings (i.e. FERC).

Findings

The analytical FERC model shows that the pricing coefficient on future earnings (FERC) is positive in the presence of stock prices leading earnings. More importantly, the pricing coefficient on future earnings (FERC) increases with the recognition lag, but the pricing coefficient on current earnings (CERC) decreases with the lag. The results suggest that recognition principles that intend to enhance the reliability of earnings inadvertently lower the timeliness of earnings and, thus, shift the investors’ demand for value-relevant information from current realized earnings to future anticipated earnings.

Originality/value

This study makes two major contributions. First, it fills the gap between the lack of an analytical model and the abundance of empirical findings in previous FERC studies. As the recognition lag of earnings increases, stock investors shift the pricing weight on value-relevant information from current realized earnings to future anticipated earnings. Second, it provides support for the validity of the FERC model as an empirical model that examines the lack of earnings timeliness. As the timeliness of earnings relative to stock prices declines, the FERC increases but the CERC decreases.

Article
Publication date: 15 September 2020

Tingli Liu, Ying Jiang and Lizhong Hao

Although short selling has been legalized in China for nearly 10 years, due to the existence of short-sale constraints, its impact on corporate governance of listed…

Abstract

Purpose

Although short selling has been legalized in China for nearly 10 years, due to the existence of short-sale constraints, its impact on corporate governance of listed companies remains unclear. This paper aims to examine the impact of short-sale refinancing on earnings quality after the short-selling constraints have been released. The authors further explore whether this impact is subject to the nature of property rights and shareholding structures.

Design/methodology/approach

This study is based on a sample of A-share firms in China for the period 2014–2016. The authors use earnings response coefficients (ERC) as a proxy for earnings quality. To empirically examine this issue, a matching sample is generated by using propensity score matching method (PSM) to reduce sample selection bias.

Findings

This study provides evidence that deregulation of short selling has positive external effect on corporate governance. The results indicate that the potential short-selling opportunities can effectively suppress earnings manipulation and improve earnings quality. However, the impact of short selling on earnings quality varies for companies with different nature of property rights and shareholding structure.

Originality/value

To the best of the authors’ knowledge, this is the first study to investigate the relationship between short selling and earnings quality in the unique setting of short-sale refinancing. This study provides new evidence on the impact of short selling at the micro level and calls for further deregulation of short selling. In addition, this study contributes to existing studies on short-sale refinancing by examining an emerging market.

Details

International Journal of Accounting & Information Management, vol. 29 no. 1
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 1 March 2002

Ahmed Riahi‐Belkaoui

Refers to previous research on the firm characteristics which affect the relationship between unexpected returns and unexpected earnings to suggest that multinationality…

383

Abstract

Refers to previous research on the firm characteristics which affect the relationship between unexpected returns and unexpected earnings to suggest that multinationality may proxy for all of them. Develops mathematical models to investigate the effect of multinationality and applies them to 1995‐1999 US data on multinational firms. Describes the methodology and presents the results, which suggest that firms with relatively more multinationality have smaller, less significant earnings response coefficients and vice versa. Concludes that multinationality is a good proxy for firm size, quality of preannouncement information, earnings predictability etc.

Details

Managerial Finance, vol. 28 no. 3
Type: Research Article
ISSN: 0307-4358

Keywords

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