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1 – 10 of over 65000Afroditi Papadaki and Georgia Siougle
This paper seeks to deal with the problem of the anomalous negative price‐earnings relation for firms listed in the Athens Stock Exchange (ASE).
Abstract
Purpose
This paper seeks to deal with the problem of the anomalous negative price‐earnings relation for firms listed in the Athens Stock Exchange (ASE).
Design/methodology/approach
The simple earnings capitalization model is employed to investigate the association between price and earnings across profit and loss firms listed in the ASE.
Findings
This study verifies a negative price‐earnings relation for those firms that report losses (loss firms) and a positive price‐earnings relation for those firms that report profits (profit firms).
Practical implications
Regarding the usefulness of financial information to investors, the security price‐earnings relation is proved not to be homogeneous across firms that report losses and firms that report profits.
Originality value
The paper provides evidence on the value relevance of publicly available information in a developing stock exchange which finally achieved its entrance to the world's developed markets.
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Pooja Kumari and Chandra Sekhar Mishra
This study aims to investigate how the intangible intensive nature of firms affects the value relevance of earnings and the book value of equity between profit- and loss-reporting…
Abstract
Purpose
This study aims to investigate how the intangible intensive nature of firms affects the value relevance of earnings and the book value of equity between profit- and loss-reporting firms. The study also examines how firms’ intangible intensity affects the value relevance of R&D outlays between profit- and loss-reporting firms.
Design/methodology/approach
An empirical analysis based on Ohlson’s (1995) framework is used. A total of 54,421 firm-year observations of Indian listed firms from financial years 1992–2016 constitute the study sample.
Findings
The findings suggest that the difference in the value relevance of earnings and the book value of equity between profit- and loss-reporting firms is more significant in non-intangible intensive firms than in intangible firms. Specifically, earnings are more value relevant in profit-reporting and non-intangible intensive firms, whereas book value of equity is more value relevant in loss-reporting and intangible intensive firms. The results also suggest that the difference in the incremental value relevance of R&D information between profit- and loss-making firms is higher in intangible intensive firms than in non-intangible intensive firms.
Practical implications
The findings of this study can help managers, standard-setters and investors make effective decisions.
Originality/value
This study offers insights into the impact of intangible intensity on the value relevance of aggregated and disaggregated accounting information between profit- and loss-making firms in institutional settings where capitalization of R&D expenditures is allowed.
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Stoyu I. Ivanov and Matthew Faulkner
Small firms, which represent much of the Silicon Valley region, tend to experience losses due to their small scale, small customer base and lack of diversification. The authors…
Abstract
Purpose
Small firms, which represent much of the Silicon Valley region, tend to experience losses due to their small scale, small customer base and lack of diversification. The authors study the impact of accounting conservatism and losses on firm value and as such this study is an appropriate addition to this growing field of financial management.
Design/methodology/approach
The authors use methodology developed in prior literature to examine Silicon Valley and non-Silicon Valley firms' and their behavior when facing losses and the factors, which might play a role in their valuation. The authors focus particularly on earnings and accounting conservatism. Accounting conservatism captures how fast firms record losses relative to gains. The faster losses are recognized than gains the more accounting conservatism is exhibited. The authors examine the seemingly unrelated estimation of differences in means for our independent variables of interest across the two samples of Silicon Valley and non-Silicon Valley firms, both earnings and accounting conservatism. The authors use matched sample analysis of these firms based on four digit SIC code, size and date. In robustness, the authors run a more in-depth propensity score matched sample analysis.
Findings
The authors document that market values of Silicon Valley firms with accounting losses are affected less by negative earnings than other firms with accounting losses in the United States outside of the Silicon Valley region, noting the “lose big, win bigger” sentiment of Silicon Valley. Additionally, the authors document that accounting conservatism does play a role in influencing valuations of companies with accounting losses both in Silicon Valley and the rest of the United States, marginally more for Silicon Valley firms.
Originality/value
This study would be of interest to fund managers who need to consider smaller firms for inclusion in their portfolios. A lot of small firms have experienced losses ever since going public, especially Silicon Valley start-up firms.
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Tony Kang, Mark Kohlbeck and Yong Yoo
The purpose of this paper is to investigate international variability in the pricing of accounting information using ex ante cost of equity capital estimates. Prior literature…
Abstract
Purpose
The purpose of this paper is to investigate international variability in the pricing of accounting information using ex ante cost of equity capital estimates. Prior literature shows that financial statement amounts are relevant for investor decisions only when there is appropriate economic and legal infrastructure (Ball, 2001).
Design/methodology/approach
Accrual quality and accounting loss are focussed upon as indicators of firm risk in financial statements.
Findings
The evidence suggests that accounting information is factored into ex ante cost of equity capital in countries with strong economic and legal infrastructures but not in those with weak infrastructures. Findings support Ball’s notion that the role financial reporting plays in a capital market depends on the strength of economic and legal infrastructure.
Originality/value
Findings support Ball’s notion that the role financial reporting plays in a capital market depends on the strength of economic and legal infrastructure.
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Refers to previous research on the accuracy of financial analysts’ earnings forecasts and explores the differences in accuracy for loss making and non‐loss making firms using…
Abstract
Refers to previous research on the accuracy of financial analysts’ earnings forecasts and explores the differences in accuracy for loss making and non‐loss making firms using 1985‐1993 US data. Finds an optimistic bias for both types of firms (smaller for more recent forecasts); which is greater for loss making firms even after controlling for forecast horizon, year of forecast and industry. Considers possible explanations for this finding and consistency with other research.
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The purpose of this paper is to study the relationship between reporting a loss and changes in board quality. Low quality corporate governance is associated with adverse…
Abstract
Purpose
The purpose of this paper is to study the relationship between reporting a loss and changes in board quality. Low quality corporate governance is associated with adverse accounting outcomes and is characterised by the lack of non-executive and independent directors on the board. Changes in these board quality indicators in response to the reporting of a loss and conditioned by the severity of the loss are examined.
Design/methodology/approach
This study uses four years of board information spanning the report of an initial loss for companies listed on the UK stock exchange. An industry and size matched control sample is used in a difference-in-difference analysis to isolate the impact of the loss from underlying changes in board quality.
Findings
Overall the results indicate that more severe initial loss events precipitate improvements in board quality over and above the control sample as well as less severe loss events.
Research limitations/implications
Although unambiguous, the reporting of a loss is only one measure of underperformance. Also the board quality indicators used in this study are two from several individual corporate governance variables and amalgamations used in the extent literature.
Practical implications
The findings demonstrate that the relationship between corporate governance and performance is endogenous and that the majority of any improvement in board quality actually anticipates the reporting of the loss. Any celebration of improvements in governance need to be tempered by an understanding of the precariousness of the firms at which these improvements are made.
Originality/value
This study contributes to a research stream that examines negative shocks, and losses in particular, as an event likely to precipitate firm-level changes in board quality, i.e. firms tend not to make improvements to board quality without the impetus to do so.
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Notes that although previous research has found capital expenditure to be value relevant, there has been no direct evidence that it has a positive linear association with future…
Abstract
Notes that although previous research has found capital expenditure to be value relevant, there has been no direct evidence that it has a positive linear association with future earnings. Uses 1976‐1989 data from a sample of US manufacturing firms to examine this link and finds that firms do not systematically invest in earnings increasing projects. Shows that firms without future losses (“winners”) had a positive association between capital expenditure and future earnings but those with losses (“losers”) had a negative one; and that if losses are excluded, capital expenditure generally gives positive information about future earnings. Considers consistency with other research, the limitations of the study and avenues for further research.
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B. Brian Lee, Haeyoung Shin, William Vetter and Dong Wuk Kim
Charting the earnings numbers reported by Korean firms produces a bell curve, but for a sharp discontinuity in the area surrounding zero. The purpose of this paper is to…
Abstract
Purpose
Charting the earnings numbers reported by Korean firms produces a bell curve, but for a sharp discontinuity in the area surrounding zero. The purpose of this paper is to investigate if and how a large segment of Korean managers might manage accounting numbers to produce the observed result.
Design/methodology/approach
This study adopts an empirical research method using Korean listed firms as a sample. The primary focus of investigation is on major income statement variables that might produce the observed results in earnings from operations and net income.
Findings
Managers of Korean firms opportunistically use almost all income statement variables to influence earnings numbers. They manage revenues and selling, general & administrative expenses to report small positive earnings from operations, but manage non-operating gains (losses) to report small positive net income.
Research limitations/implications
This paper does not answer several questions related to loss avoidance. First, the paper did not examine which actions, such as discretionary accruals, opportunistic business decisions, or bogus transactions, were employed to affect line items on the income statement. Second, the paper did not investigate what specific incentives trigger Korean managers to report small positive earnings. Korean firms have traditionally raised capital by borrowing funds from creditors and governmental agencies. Thus, they may be concerned that reporting losses would reduce their borrowing capacity. Finally, corporate governance, such as CEO tenure and option grants may influence the extent of earnings management to avoid losses, but most corporate governance data for Korean companies must be manually collected. Accordingly, these subjects are left for future studies as well.
Originality/value
This study contributes to accounting literature by reporting how managers of Korean firms artificially coordinate major income statement variables and report small positive earnings figures, noting the differences between earnings management investigating methodology and ones used in previous studies.
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Hong Kim Duong, Michael Schuldt and Giorgio Gotti
The purpose of this paper is to investigate the impact of investor sentiment on timely loss recognition by examining a sample of firms for the period 1988-2015.
Abstract
Purpose
The purpose of this paper is to investigate the impact of investor sentiment on timely loss recognition by examining a sample of firms for the period 1988-2015.
Design/methodology/approach
The authors use the accruals-based model of Ball and Shivakumar (2005) and a sentiment measure in their primary analysis. Supporting analyses include an extension of Simpson (2013) using an abnormal accruals analysis with subsamples of firms with bad news, the use of a Khan and Watts (2009) quarter firm-level measure of conservatism and an investigation of the monitoring role played by financial analysts.
Findings
The study finds that managers strategically report more losses in high sentiment periods than in low sentiment periods. This loss timing behavior results in an average 37.8 per cent increase in the acceleration of loss recognition. This study additionally finds a negative correlation between investor sentiment and abnormal accruals when managers are reporting bad news, and that a greater number of financial analysts following a firm curtails managers’ acceleration of loss recognition in high sentiment periods.
Originality/value
This study contributes to the corporate disclosure literature by showing that managers strategically recognize losses, and such behavior is more prevalent in high sentiment periods. Managers take advantage of prevailing investor sentiment to accelerate losses in high sentiment periods to mitigate market penalties from reporting bad news.
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This paper aims to study the impact of a significant negative shock (the reporting of an initial loss) on the stickiness of corporate governance. This paper examines whether…
Abstract
Purpose
This paper aims to study the impact of a significant negative shock (the reporting of an initial loss) on the stickiness of corporate governance. This paper examines whether corporate governance changes in response to the reporting of an initial loss and also whether ex ante corporate governance weakness impacts on the propensity for change.
Design/methodology/approach
The study uses three years of corporate governance information spanning the report of an initial loss for companies listed on the UK Stock Exchange. An industry- and size-matched control sample is used in a difference-in-difference analysis to isolate the impact of the loss from underlying changes in governance.
Findings
The results indicate that an initial loss precipitates an improvement in corporate governance and that this improvement is significantly more pronounced in those companies which displayed either weak or extreme governance before the loss. There is also evidence that the improvement in corporate governance begins before the loss is actually reported.
Research limitations/implications
This study focuses on a three-year period in the UK only and so is a limitation of the research. Future research could be based on the findings from other jurisdictions or from using other conditioning variables.
Originality/value
This study contributes to the stream of research that examines negative shocks, and losses in particular, as an event likely to precipitate firm-level changes in corporate governance and offers insights into the reasons for firm-level corporate governance improvements. It demonstrates that, notwithstanding the recommendations of the Combined Code, firms tend to not make improvements without the impetus and need to do so, i.e. corporate governance is sticky.
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