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1 – 10 of over 8000Krishna Prasad and Nandan Prabhu
The purpose of this study is to investigate whether the earnings surprise influences decision to make earnings announcements during or after the trading hours is influenced by the…
Abstract
Purpose
The purpose of this study is to investigate whether the earnings surprise influences decision to make earnings announcements during or after the trading hours is influenced by the earnings surprise resulting from the difference between consensus earnings estimates and the actual reported earnings.
Design/methodology/approach
Event study methodology was employed to test the hypotheses relating to earnings surprise and timing of earnings announcements. Twelve quarterly earnings announcements of 30 companies, drawn from BSE SENSEX of India, were studied to test the hypothesized relationships.
Findings
The study has found statistically significant differences in the market responses to the earnings announcements made during and after the trading hours. The market demonstrated a negative response to the earnings announcements made after the trading hours. Further, the results of the logistic regression have shown that the presence of significant earnings surprises is likely to induce firms to make earnings announcements after the trading hours. The results indicate that those firms that intend to reduce the overreaction and underreaction to earnings surprises are likely to make earnings announcements after the trading hours.
Originality/value
This paper highlights the market response to the earnings announcement made during and after the regular trading hour. Further, the paper examines if the earnings surprise influences the decision to announce the results.
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Shreesh Deshpande and Marko Svetina
Recent research on local bias provides evidence that investors' portfolios include a non‐negligible allocation to stocks in firms that are geographically proximate to the…
Abstract
Purpose
Recent research on local bias provides evidence that investors' portfolios include a non‐negligible allocation to stocks in firms that are geographically proximate to the investors. The reasons postulated for local bias include familiarity with firms, “word‐of‐mouth” communication effects, and ability to exploit local news. The purpose of this paper is to investigate the value‐relevance of local news, specifically earnings announcement surprises, in the context of the well‐documented local bias in investors' portfolios.
Design/methodology/approach
Using a hand‐collected panel dataset spanning 15 years of quarterly earnings announcements of publicly traded firms, abnormal stock returns engendered by earnings surprises based on local newspaper announcements are compared to those from earnings surprises based on financial analysts' forecasts (I/B/E/S).
Findings
In contrast to the case, when both sources of earnings surprises are negative, the authors find a statistically significant differential stock price effect in a sample where local firms' earnings announcements in the local newspaper signal positive earnings surprises, but the earnings surprise based on financial analysts' forecasts is negative. This result remains after controlling for time‐ and firm‐fixed effects. In additional tests, the authors establish that the result is predicated on a local firm's earnings announcement being reported in the local newspaper.
Originality/value
The paper's findings suggest that the results of empirical research on the information content of earnings surprises based solely on analysts' forecasts should be interpreted with caution. It was found that the stock price impact of earnings surprises is also significantly influenced by local newspaper reports of the announced quarterly earnings of local firms.
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Li‐Chin Jennifer Ho, Chao‐Shin Liu and Thomas Schaefer
The purpose of this paper is to examine the relation between audit tenure and how clients manage the annual earnings surprise.
Abstract
Purpose
The purpose of this paper is to examine the relation between audit tenure and how clients manage the annual earnings surprise.
Design/methodology/approach
A sample of 5,029 firm‐year observations from 1996 to 2003 were employed to examine whether audit tenure is negatively related to the incidence of accrual‐based‐upward earnings management to avoid negative earnings surprises; and whether audit tenure is positively related to the incidence of downward forecast guidance to avoid negative earnings surprises.
Findings
Empirical results indicate a substitution of downward forecast guidance for upward earnings management as audit tenure lengthens.
Research limitations/implications
The paper provides evidence that, as the auditor‐client relationship lengthens over time, firms turn to downward forecast guidance as a substitute for upward earnings management. One possible limitation of the sample period involves the implementation of the Sarbanes‐Oxley Act (SOX) of 2002. Because of the increased financial reporting scrutiny on both management and auditors that accompanies SOX, it is likely that constraints on earnings misstatements increase after SOX. Any decrease in upward earnings management resulting from SOX would thus work against finding a relation between audit tenure and the substitution of downward forecast guidance to prevent negative earnings surprises.
Originality/value
This paper supports the notion that audit tenure affects firms' choices among various tactics in their attempts to avoid negative earnings surprises. The results also contribute to the ongoing debate on mandatory audit firm rotation by showing that audit quality increases with audit tenure.
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The purpose of this paper is to investigate the association between gross profit percentage, abnormal market returns, revenue surprises and earnings surprises. Gross margin is…
Abstract
Purpose
The purpose of this paper is to investigate the association between gross profit percentage, abnormal market returns, revenue surprises and earnings surprises. Gross margin is relied upon by various market participants, as its predictive power is incremental and distinct from revenue and earnings signals; however, gross margin has received little researcher attention.
Design/methodology/approach
General regression specifications found in the prior literature are extended to assess the informational content of changes in gross margin percentage. In addition, various portfolios are created based around the nature of the signals (positive or negative), provided by each income statement metrics (revenue, gross margin and earnings). A sample of 5,582 quarterly observations of S & P 500 firms is compiled. The main regressions are exposed to three robustness tests that focus on industry sub-groupings, institutional ownership and fourth-quarter observations.
Findings
The main findings reveal that gross margin percentage changes and earnings surprises are significantly related to abnormal market returns in the short window around the earnings announcement date and persist into a wider window measured as the quarter after the earnings announcement date. The relationship between gross margin percentage changes and abnormal returns is more pronounced when positive (negative) changes in gross margin percentage are accompanied by positive (negative) revenue and earnings surprises.
Research limitations/implications
This study relies upon S & P 500 firms which are all relatively large firms. Therefore, the results may not be generalizable to smaller firms. In addition, the gross margin change is measured as the quarter-over-quarter percentage change because there is no analyst expectation for gross margin.
Originality/value
This paper extends the prior literature by developing three testable hypotheses that investigate the linkages between abnormal market returns, gross margin and revenue and earnings surprises. This is the first known study to investigate the informational content of changes in gross margin percentage.
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This paper aims to investigate the informational content of earnings surprises and accounting information in credit default swap (CDS) markets.
Abstract
Purpose
This paper aims to investigate the informational content of earnings surprises and accounting information in credit default swap (CDS) markets.
Design/methodology/approach
This paper analyzes a sample of 444 US firms and 6,907 earnings announcements. By means of parametric and non-parametric event study analysis, the paper assesses the informational value and the timeliness in the assimilation of earnings surprises by CDS rates.
Findings
This paper shows that earnings surprises contain material information and that CDS rates are affected by the disclosure of obligors’ financial statements. There is also supporting evidence that positive and negative surprises induce asymmetric reactions on CDS rates, especially after accounting for the credit risk of the obligor and the liquidity of the CDS contract. Finally, and perhaps the most interesting conclusion of the study, there is evidence that earnings disclosed during unstable periods lack informational value, in opposition to normal periods.
Originality/value
As compared with similar studies, this paper presents three novel contributions. The first concerns the use of non-parametric analysis in parallel with parametric tests to achieve robust conclusions. The second novel contribution resides in assessing whether the liquidity of the CDS contracts affects the information value of earnings surprises or the timeliness at which the information is assimilated into CDS rates. Finally, this paper also contributes to improve our understanding on the relationship between the business cycle and the informativeness of accounting information.
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Shreesh Deshpande and Marko Svetina
In a setting with local bias in investors’ portfolios, the purpose of this paper is to study the stockholder wealth impact of negative earnings surprises for local firms as…
Abstract
Purpose
In a setting with local bias in investors’ portfolios, the purpose of this paper is to study the stockholder wealth impact of negative earnings surprises for local firms as reported in a local newspaper.
Design/methodology/approach
In the sample of earnings announcements, the authors observe that the stock price impact is statistically significantly more (less) negative in the case where the absolute difference between announced earnings and the consensus analysts’ forecast is greater (smaller) than the absolute difference between the announced earnings and last-year-same-quarter earnings.
Findings
The differential effect is only observed when the stock market uncertainty (VIX) is high. In the empirical analysis, the paper finds that investors’ reactions to negative earnings surprises appear to be influenced by the level of historical, publicly available last-year-same-quarter earnings.
Originality/value
When stock market uncertainty is high, the result suggests that the stock market may not be semi-strong efficient and/or that there is a behavioral response to negative earnings surprises in a setting where investors have portfolios over-weighted with local firm stocks.
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Shengnian Wang, Liang Han and Weiting Gao
This paper aims to make a comparison, different from existing literature solely focusing on voluntary earnings forecasts and ex post earnings surprise, between the effects of…
Abstract
Purpose
This paper aims to make a comparison, different from existing literature solely focusing on voluntary earnings forecasts and ex post earnings surprise, between the effects of mandatory earnings surprise warnings and voluntary information disclosure issued by management teams on financial analysts in terms of the number of followings and the accuracy of earnings forecasts.
Design/methodology/approach
This paper uses panel data analysis with fixed effects on data collected from Chinese public firms between 2006 and 2010. It uses an exogenous regulation enforcement to minimise the endogeneity problem.
Findings
This paper finds that financial analysts are less likely to follow firms which mandatorily issue earnings surprise warnings ex ante than those voluntarily issue earnings forecasts. Moreover, ex post, they issue less accurate and more dispersed forecasts on former firms. The results support Brown et al.’s (2009) finding in the USA and suggest that the earnings surprise warnings affect information asymmetries.
Practical implications
This paper justifies the mandatory earnings surprise warnings policy issued by Chinese Securities Regulatory Commission in 2006.
Originality/value
Mandatory earnings surprise is a unique practical regulation for publicly listed firms in China. This paper, for the first time, provides empirical evaluation on the effectiveness of a mandatory information disclosure policy in China. Consistent with existing literature on information disclosure by public firms in other countries, this paper finds that, in China, voluntary information disclosure captures more private information than mandatory information disclosure on corporate earnings ability.
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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…
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.
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Li‐Chin Jennifer Ho, Chao‐Shin Liu and Bo Ouyang
Barton and Simko argue that the balance sheet information would serve as a constraint on accrual‐based earnings management. This paper aims to extend their argument by examining…
Abstract
Purpose
Barton and Simko argue that the balance sheet information would serve as a constraint on accrual‐based earnings management. This paper aims to extend their argument by examining whether the balance sheet constraint increases managers' propensity to use either downward forecast guidance or real earnings management as a substitute mechanism to avoid earnings surprises.
Design/methodology/approach
Following Barton and Simko, the paper uses the beginning balance of net operating assets relative to sales as a proxy for the balance sheet constraint. The argument is that because of the articulation between the income statement and the balance sheet, previous accounting choices that increase earnings will also increase net assets and therefore the level of net assets reflects the extent of previous accrual management. Models from Matsumoto and Bartov et al. are used to measure forecast guidance. Following Rochowdhury and Cohen et al., a firm's abnormal level of production costs and discretionary expenditures are used as proxies of real earnings management. The empirical analysis is conducted based on the 1996‐2006 annual data for a sample of nonfinancial, nonregulated firms.
Findings
The paper finds that firms with higher level of beginning net operating assets relative to sales are more likely to guide analysts' earnings forecasts downward, and more likely to engage in real earnings management in terms of abnormal increases in production costs and abnormal reductions in discretionary expenditures.
Research limitations/implications
Overall, the paper's evidence suggests that managers turn to real earnings management or downward forecast guidance as a substitute mechanism to avoid negative earnings surprises when their ability to manipulate accruals upward is constrained by the extent to which net assets are already overstated in the balance sheet.
Originality/value
This study adds to prior literature that examines how managers trade off different mechanisms used to meet or beat analysts' earnings expectations. It also contributes to the extant literature by providing further insights on the role of balance sheet information in the process of managing earnings and/or earnings surprises.
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This study examines the impact of annual report disclosures on analysis' forecasts for a sample of firms listed on the Stock Exchange of Singapore (SES). We examine the relation…
Abstract
This study examines the impact of annual report disclosures on analysis' forecasts for a sample of firms listed on the Stock Exchange of Singapore (SES). We examine the relation between the level of corporate disclosure and accuracy of analysts' earnings forecasts, dispersion in analysts' earnings forecasts, and the size of analyst following. The results reveal that the level of annual report disclosures is positively related to the accuracy of earnings forecasts by analysts, provided there is no big earnings surprise, and is also positively related to analyst following. We also find that the level of corporate disclosure is negatively related to dispersion in analysts' earnings forecasts provided there is no big earnings surprise. Tints, this study shows that more corporate disclosures by Singapore firms lead to more accuracy and less dispersion in the earnings forecasts among analysts. Furthermore, greater corporate disclosure can also lead to greater analyst interest in the firm.