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1 – 10 of over 2000
Article
Publication date: 19 July 2011

Steve C. Lim and Taewoo Park

This paper aims to identify what drives the temporal reduction in the value relevance of earnings documented in the literature. Is it the increasing noise in stock returns…

Abstract

Purpose

This paper aims to identify what drives the temporal reduction in the value relevance of earnings documented in the literature. Is it the increasing noise in stock returns over time, noise in earnings, or both?

Design/methodology/approach

The authors develop hypotheses from the lead/lag structure between stock returns and accounting earnings and perform empirical tests using data from annual COMPUSTAT and monthly CRSP over the sample period of 39 years (1970‐2008).

Findings

The test results show that increasing noise in stock returns over time is primarily responsible for the temporal reduction of R2 in regressions of returns on earnings. Additional analysis shows weak evidence that both the noise in returns and the noise in earnings are responsible for the declining association between earnings and returns in a sub‐period (1970‐1982).

Research limitations/implications

The R2‐based methodology has limitations because, as Gu points out, regression R2s might be incomparable across samples. The findings suggest that future research should control for the effects of the temporal increase in market noise before making value relevance inferences from the declining association between earnings and returns.

Originality/value

The paper contributes to the limited body of research on noise in stock returns as the main driver for the temporal reduction in value relevance of earnings.

Details

Management Research Review, vol. 34 no. 8
Type: Research Article
ISSN: 2040-8269

Keywords

Article
Publication date: 1 May 1997

Rajiv D. Banker and Alex Thevaranjan

The impact of accounting earnings based compensation contracts an effort allocation is analyzed using an agency‐theoretic model. In this model, the CEO of a publicly…

Abstract

The impact of accounting earnings based compensation contracts an effort allocation is analyzed using an agency‐theoretic model. In this model, the CEO of a publicly traded firm expends effort on operational short‐run activities and strategic long‐run activities. The shareholders desire the CEO to expend more effort in the strategic long‐run activities because the return to shareholders depends more on long‐run than short‐run activities. More specifically, they desire the effort to be allocated between these two activities on the proportion of the sensitivity of stock returns to these two activities. Compensating the CEO based on the stock returns performance measure is shown to induce the CEO to exert the desired proportion of effort in the long‐run activities. Unlike stock returns, accounting earnings are believed to focus more on the short‐run performance of the firm and not reflect the full impact of a CEO's long‐run effort. Compensating the CEO based on accounting earnings, in addition to stock returns, is shown to induce the CEO to expend less than the desired proportion of effort in long‐run activities. As the emphasis placed on accounting earnings relative to stock returns increases, the CEO decreases the proportion of effort expended in long‐run activities. On the positive side, including accounting earnings in the contract increases the total effort that the CEO exerts in short‐run and long‐run activities. The benefit accruing from the increase in total effort more than offsets the dysfunctionality caused by the short‐run focus. More specifically, adding accounting earnings to the incentive contract is shown to increase the expected return to the shareholders. In summary, while accounting earnings cause the CEO to be short‐run focused, their use in the incentive contract improves the firm's performance by motivating the CEO to work harder overall.

Details

Managerial Finance, vol. 23 no. 5
Type: Research Article
ISSN: 0307-4358

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: 17 February 2022

Guoping Liu and Jerry Sun

The purpose of this study is to examine whether the COVID-19 pandemic has affected earnings management and the value relevance of earnings in the USA.

Abstract

Purpose

The purpose of this study is to examine whether the COVID-19 pandemic has affected earnings management and the value relevance of earnings in the USA.

Design/methodology/approach

Discretionary accruals, the explanatory power and slope coefficient of earnings are compared between 2019 (prepandemic year) and 2020 (pandemic year). Univariate and regression analyses are performed.

Findings

There was a significant decline in discretionary accruals from 2019 to 2020, suggesting that firms engaged in more income-decreasing earnings management to take a big bath in reporting earnings in the pandemic year. Meanwhile, the explanatory power and slope coefficient of earnings both were lower in 2020 than in 2019, consistent with the notion that the pandemic has impaired the value relevance of earnings.

Originality/value

This study explores the consequences of the pandemic from accounting perspective. It also enriches accounting research on economic crises.

Details

Managerial Auditing Journal, vol. 37 no. 7
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 15 March 2022

Rong Huang, Xiaojun Lin, Xunzhuo Xi and Desmond Chun Yip Yuen

This paper aims to explore how external creditors assess firms’ financial aggressiveness in China.

Abstract

Purpose

This paper aims to explore how external creditors assess firms’ financial aggressiveness in China.

Design/methodology/approach

Using bank loan-specific data, the authors investigate whether firms exhibit greater costs of bank loans when they engage in earnings manipulation and whether this association changes when restrictions on lenders’ compensation are promulgated.

Findings

The authors find compelling evidence that bank executives charge higher premiums on firms with accrual earnings management to compensate for additional financial risk but do not charge extra loan prices for firms conducting real earnings management (REM). The authors also find that the enactment of Robust Bank Executive Compensation (REBC) enhances the vigilance of bank executives on the overall client firms’ earnings manipulation, with the exception of REM conducted by state-owned firms.

Originality/value

The authors extend the current literature on the cost of external loans by focusing on bank loans and the influence of REBC. This study offers implications for policymakers in China and other emerging economics to control loan default and financial risk.

Details

International Journal of Accounting & Information Management, vol. 30 no. 2
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 2 November 2015

Md Khokan Bepari

The purpose of this study is to examine the relative and the incremental value relevance of book value and earnings in the Australian market in the context of the…

Abstract

Purpose

The purpose of this study is to examine the relative and the incremental value relevance of book value and earnings in the Australian market in the context of the 2008-2009 global financial crisis (GFC) and the non-crisis period (NCP).

Design/methodology/approach

Least square regressions are used to examine the research questions. Changes in the coefficient estimates and the relative explanatory power (adjusted R2) of book value (BV) and earnings between the GFC and the NCP are examined.

Findings

The findings suggest that both BV and earnings are value relevant in the Australian market surrounding the GFC. There were structural breaks in the association of BV and earnings with firms’ market value. The value relevance of earnings has increased and that of BV has decreased during the GFC compared to the NCP. During the study period, the explanatory power of earnings was greater than that of the BV.

Research limitations/implications

The single country context examined limits the generalisability of the findings.

Practical implications

The importance of this study lies in its showing the sustained importance of earnings in security valuation even during a period of macroeconomic uncertainty. Australian accounting standards have been shaped by a balance sheet focus. The recent move towards the fair value-based International Financial Reporting Standards (IFRS) has further enhanced the focus on the balance sheet. Nevertheless, the evidence in the present study demonstrates that even for a country with a balance sheet focus, the value relevance of earnings increases during a GFC. Hence, it is the earnings number, rather than the balance sheet, which should receive greater attention from accounting regulators and auditors.

Originality/value

This is the first known study to examine the value relevance of fundamental accounting information, such as BV and earnings, in the context of the 2008-2009 GFC. It extends prior research in the context of the 1997 Asian financial crisis and provides evidence on the impact of a worldwide exogenous shock on the value relevance of BV and earnings from a relatively mature and developed country with different legal, institutional and enforcement backgrounds.

Details

International Journal of Commerce and Management, vol. 25 no. 4
Type: Research Article
ISSN: 1056-9219

Keywords

Article
Publication date: 10 August 2015

Sheraz Ahmed

Earlier studies have found that the country characteristics play important role in measuring the corporate transparency. The purpose of this paper is to examine whether…

Abstract

Purpose

Earlier studies have found that the country characteristics play important role in measuring the corporate transparency. The purpose of this paper is to examine whether the firm-level determinants play an important role in corporate transparency measured as the quality of disclosed earnings across transitional Europe and what role an overall transparency measured by the Corruption Perception Index plays in it. This paper further tests if the market reacts similarly to discretionary and non-discretionary components of earnings across different groups of countries with respect to transparency.

Design/methodology/approach

The financial and ownership data of listed companies in ten European countries is obtained from Amadeus. The transparency ratings are obtained from Transparency International. The sample consists of a panel of 2001 listed companies and modified Jones model of Dechow et al. (1995) is used to measure the quality of earnings.

Findings

This paper shows that the firm-level determinants (except firm size) of the quality of earnings are different among different groups made on the basis of transparency ratings. However, the determinants of the quality of earnings are not different within each group. The ownership structure of companies plays important role in determining the quality of earnings in most transparent countries whereas financial factors play significant role in least transparent countries. The markets respond positively to earnings quality in most transparent group of countries.

Research limitations/implications

The results of this study provide interesting basis for future research on economic and social integration of Europe. Although the policy makers are trying to integrate the countries through common Laws and decrees but examining the firm-level factors such as size, growth and ownership are still important. The regulators should address the issue of corporate transparency in Europe by looking at the importance of these factors with respect to overall transparency.

Originality/value

This study extends the knowledge, not only for academicians and investors but for policy makers as well. This study re-emphasizes the role of country-level transparency and firm-level determinants of the corporate transparency within Europe.

Details

Journal of Accounting in Emerging Economies, vol. 5 no. 3
Type: Research Article
ISSN: 2042-1168

Keywords

Article
Publication date: 2 December 2019

Paul Ordyna

The purpose of this paper is to examine how a firm’s mergers and acquisitions (M&A) goals influence its voluntary disclosure policy. Specifically, this paper examines how…

Abstract

Purpose

The purpose of this paper is to examine how a firm’s mergers and acquisitions (M&A) goals influence its voluntary disclosure policy. Specifically, this paper examines how a firm’s M&A financing intentions influence the degree of aggregation in management guidance prior to and after the M&A transaction.

Design/methodology/approach

Using a logistic model, this study tests the relation between M&A financing and the decision to issue disaggregate earnings guidance for 3,929 acquiring firms from 2007 to 2011.

Findings

The logistic regression results show that firms are more likely to provide disaggregate earnings guidance when using mostly stock to finance M&A and that the incentives to disaggregate guidance vary throughout the M&A transactional window. Alternatively, because the value of cash is independent of the true value of the acquirer, the results show that firms offering mostly cash to finance M&A are less likely to issue disaggregate earnings forecasts. Additional analysis reveals that the decision to issue disaggregate earnings guidance also influences post-merger outcomes such as CEO turnover.

Research limitations/implications

The choice to disaggregate earnings guidance and the choice to use stock as a means to finance an acquisition is made by management, thus are endogenous which could introduce bias.

Originality/value

This study provides insights into management’s incentives and attitudes toward the use of management forecasts to effect a potential merger and acquisition. Given the flexibility management has in issuing voluntary forecasts, management can tailor a financial message toward investors and potential targets in attempt to facilitate a merger and acquisition and to further the firm’s goals.

Details

Asian Review of Accounting, vol. 28 no. 2
Type: Research Article
ISSN: 1321-7348

Keywords

Article
Publication date: 14 August 2017

Erick Rading Outa, Peterson Ozili and Paul Eisenberg

The purpose of this paper is to examine the relative value relevance of accounting information arising from the adoption of converged and revised International Accounting…

1140

Abstract

Purpose

The purpose of this paper is to examine the relative value relevance of accounting information arising from the adoption of converged and revised International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) in East Africa.

Design/methodology/approach

The research applies “same firm year” design for identification of the effects of changes in accounting standards. A model similar to Ohlson’s price model and random-effects GLS are used to estimate R2 of the regressions of share prices on book values and earnings.

Findings

The results show that accounting information prepared from revised and converged IAS/IFRS display higher value relevance and also increased following the revision and convergence of IAS/IFRS. The cross-product term is more significant in the post-revision/convergence period thus providing further evidence for increased value relevance after the revision of IAS/IFRS. The results are robust to various models and show that value relevance in East Africa is relatively lower than that of the developed markets.

Originality/value

The current study provides empirical evidence that value relevance increases with converged/revised IAS/IFRS based on quasi natural experimental setting in East Africa. The authors also extend the debate on whether value relevance is relevant in emerging markets, which are regarded as imperfect markets with few regulations, weak enforcement and limited sources of information. The results may be useful to accounting preparers, regulators, investors, standard setters and countries seeking to adopt IAS/IFRS in developing countries.

Details

Journal of Accounting in Emerging Economies, vol. 7 no. 3
Type: Research Article
ISSN: 2042-1168

Keywords

Article
Publication date: 27 February 2015

George W. Ruch and Gary Taylor

We review and analyze the accounting literature that examines the effects of accounting conservatism on financial statements and financial statement users. We begin by…

Abstract

We review and analyze the accounting literature that examines the effects of accounting conservatism on financial statements and financial statement users. We begin by analyzing how conservatism affects the reported numbers on the financial statements. These studies primarily evaluate how conservatism affects earnings quality, including earnings persistence and the presence of earnings management. Next, we assess the effect of accounting conservatism on the users of the financial statements. We identify three primary users of the financial statements: (1) equity market users (2) debt market users and (3) corporate governance users. Within each of these categories, we analyze the findings of prior research and explore unanswered research questions. By analyzing the effects of accounting conservatism from a diverse range of research topics, we inform the discussion on the costs and benefits of accounting conservatism.

Details

Journal of Accounting Literature, vol. 34 no. 1
Type: Research Article
ISSN: 0737-4607

Keywords

1 – 10 of over 2000