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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 September 2022

Sanjay Gupta, Nidhi Walia, Simarjeet Singh and Swati Gupta

This comprehensive study aims to take a punctilious approach intended to present qualitative and quantitative knowledge on the emerging concept of noise trading and…

Abstract

Purpose

This comprehensive study aims to take a punctilious approach intended to present qualitative and quantitative knowledge on the emerging concept of noise trading and identify the emerging themes associated with noise trading.

Design/methodology/approach

This study combines bibliometric and content analysis to review 350 publications from top-ranked journals published from 1986 to 2020.

Findings

The bibliometric and content analysis identified three major themes: the impact of noise traders on the functioning of the stock market, traits of noise traders and different proxies used to measure the impact of noise trading.

Research limitations/implications

This study undertakes research papers related to the field of finance, published in peer-reviewed journals and that too in the English language.

Practical implications

This study shall accommodate rational traders, portfolio consultants and other investors to gain deeper insights into the functioning of noise traders. This will further help them to formulate their trading/investment strategies accordingly.

Originality/value

The successful combination of the bibliometric and content analysis revealed major gaps in the literature and provided future research directions.

Details

Qualitative Research in Financial Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1755-4179

Keywords

Article
Publication date: 8 August 2016

Ranjan Kumar Mitra

This paper aims to examine the association between earnings quality and firm-specific return volatility for a large sample of Japanese manufacturing firms.

1302

Abstract

Purpose

This paper aims to examine the association between earnings quality and firm-specific return volatility for a large sample of Japanese manufacturing firms.

Design/methodology/approach

This archival research uses idiosyncratic volatility and asynchronicity as two analogous proxies for firm-specific return volatility to investigate its association with earnings quality.

Findings

Using idiosyncratic volatility and asynchronicity as two comparable proxies for firm-specific return volatility, the author finds contradictory results. The author relates this contradiction to another debate in accounting and finance literature about whether firm-specific return volatility captures firm-specific information or noise. Initially, the author obtains conflicting results because the systematic risk, one of the components of asynchronicity, is highly correlated with earnings quality. After controlling for the systematic risk, the author finds that higher earnings quality is associated with lower firm-specific return volatility. This finding is consistent with the noise-based explanation of firm-specific return volatility. The author also separates earnings quality into an innate component driven by economic fundamentals and a discretionary component driven by managerial discretionary behavior and finds that both components have significant impact on firm-specific return volatility but the innate component has significantly stronger effect than the discretionary component.

Originality/value

This is the first research study presenting evidence on the association between earnings quality and firm-specific return volatility in the Japanese setting. The findings of this paper are likely to contribute to the resolution of a well-known debate on whether firm-specific return volatility captures more firm-specific information being impounded in stock prices or noise in stock prices.

Details

Review of Accounting and Finance, vol. 15 no. 3
Type: Research Article
ISSN: 1475-7702

Keywords

Book part
Publication date: 29 March 2006

Borus Jungbacker and Siem Jan Koopman

In this chapter, we aim to measure the actual volatility within a model-based framework using high-frequency data. In the empirical finance literature, it is widely…

Abstract

In this chapter, we aim to measure the actual volatility within a model-based framework using high-frequency data. In the empirical finance literature, it is widely discussed that tick-by-tick prices are subject to market micro-structure effects such as bid-ask bounces and trade information. These market micro-structure effects become more and more apparent as prices or returns are sampled at smaller and smaller time intervals. An increasingly popular measure for the variability of spot prices on a particular day is realised volatility that is typically defined as the sum of squared intra-daily log-returns. Recent theoretical results have shown that realised volatility is a consistent estimator of actual volatility, but when it is subject to micro-structure noise and the sampling frequency increases, the estimator diverges. Parametric and nonparametric methods can be adopted to account for the micro-structure bias. Here, we measure actual volatility using a model that takes account of micro-structure noise together with intra-daily volatility patterns and stochastic volatility. The coefficients of this model are estimated by maximum likelihood methods that are based on importance sampling techniques. It is shown that such Monte Carlo techniques can be employed successfully for our purposes in a feasible way. As far as we know, this is a first attempt to model the basic components of the mean and variance of high-frequency prices simultaneously. An illustration is given for three months of tick-by-tick transaction prices of the IBM stock traded at the New York Stock Exchange.

Details

Econometric Analysis of Financial and Economic Time Series
Type: Book
ISBN: 978-0-76231-274-0

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

Book part
Publication date: 30 March 2017

John S. Howe and Scott O’Brien

We examine the use of relative performance evaluation (RPE), asymmetry in pay for skill/luck, and compensation benchmarking for a sample of firms involved in a spinoff…

Abstract

We examine the use of relative performance evaluation (RPE), asymmetry in pay for skill/luck, and compensation benchmarking for a sample of firms involved in a spinoff. The spinoff affects firm characteristics that influence the use of the identified compensation practices. We test for differences in the compensation practices for the pre- and post-spinoff firms. We find that RPE is used for post-spinoff CEOs, but not pre-spinoff CEOs. Post-spinoff CEOs are also paid asymmetrically for luck where they are rewarded for good luck but not punished for bad luck. Both pre- and post-spinoff CEOs receive similar levels of compensation benchmarking. The study provides additional evidence on factors that influence compensation practices. Our spinoff sample allows us to examine how compensation practices are affected by changes in firm characteristics while keeping other determinants of compensation constant (i.e., the board and, in many cases, the CEO). Our findings contribute to the understanding of how the identified compensation practices are used.

Details

Global Corporate Governance
Type: Book
ISBN: 978-1-78635-165-4

Keywords

Article
Publication date: 12 September 2016

Heba Abdelmotaal and Magdy Abdel-Kader

The purpose of this paper is to examine which firm characteristics affect the usage of sustainability incentives in executive remuneration contracts, and whether these…

1829

Abstract

Purpose

The purpose of this paper is to examine which firm characteristics affect the usage of sustainability incentives in executive remuneration contracts, and whether these sustainability incentives have an impact on shareholders’ return.

Design/methodology/approach

The analysis is based on a sample of 212 firms from the FTSE 350 firms over the period of 2009-2011.

Findings

The results indicate that there is a significant relationship between the adoption of sustainability incentives in executive remuneration and firm size, compensation committee independence, the corporate social responsibility (CSR) sustainability committee, CSR sustainability index, and resource efficiency policy variables. Further, there is evidence to support a positive impact on the shareholders’ return.

Research limitations/implications

The results of this study should be interpreted within two limitations. First, the limited numbers of the sample years due to the limited number of firms used sustainability incentives. Second, the use of a dummy variable in the measurement of the adoption of sustainability incentives in the analysis.

Practical implications

The paper includes implications for the development of sustainability incentives within the performance measurement system and compensation contracts that could be a solution for the agency problem.

Originality/value

This study provides empirical evidence on an increased use of sustainability incentives in UK firms, and identifies firm’s characteristics that explain such increase in the sustainability incentives, finally its positive impact on the shareholders’ return.

Details

Journal of Applied Accounting Research, vol. 17 no. 3
Type: Research Article
ISSN: 0967-5426

Keywords

Article
Publication date: 1 September 2021

Rodrigue Majoie Abo

Studies on transfers to a more regulated section show an increase in information disclosure and stocks’ liquidity levels. Classical theories suggest that volatility should…

Abstract

Purpose

Studies on transfers to a more regulated section show an increase in information disclosure and stocks’ liquidity levels. Classical theories suggest that volatility should also be reduced. This study aims to analyse the long-term effects of a section transfer to a more regulated section (TSE 1/TSE 2) on stock return volatility.

Design/methodology/approach

This study uses an empirical framework relying on two-sample t-tests and panel regressions. These use robust standard errors and control for fixed effects, day effects and macroeconomic factors. The return variance of comparable stocks’ benchmark sample, instead of market variance, is used as a control variable. Comparable stocks operate within the same industry and do not transfer during the sample period. The authors test our results’ robustness using generalized autoregressive conditional heteroskedasticity estimates.

Findings

The study’s main findings show that pre-transferred stocks are more volatile than the stocks’ benchmark sample. The transfer to a more regulated section leads to a gradual decrease in the total daily stock return volatility, intraday return volatility and overnight return volatility.

Originality/value

To the best of my knowledge, this study is the first to empirically address the volatility change caused by the stocks’ transfer to a more regulated section. This study highlights the benefits of choosing section transfers to reduce volatility.

Details

Studies in Economics and Finance, vol. 39 no. 1
Type: Research Article
ISSN: 1086-7376

Keywords

Article
Publication date: 15 March 2022

Vanita Tripathi and Aakanksha Sethi

The purpose of this study is to ascertain how foreign and domestic Exchange Traded Funds (ETFs) investing in Indian equities affect their return volatility and pricing…

Abstract

Purpose

The purpose of this study is to ascertain how foreign and domestic Exchange Traded Funds (ETFs) investing in Indian equities affect their return volatility and pricing efficiency. Further, we investigate how the difference in market timings affect the impact of ETFs on their constituents. Lastly, we examine how these effects vary during tranquil and turmoil periods in the ETF markets.

Design/methodology/approach

The study is based on quarterly data for stocks comprising the CNX Nifty 50 Index from 2009Q1 to 2019Q3. The data on holdings of 45 domestic and 196 foreign ETFs in the sample stocks were obtained from Thomson Reuters' Eikon. The paper employs a panel-regression methodology with stock and time fixed effects and robust standard errors.

Findings

Foreign ETFs from North America and the Asia Pacific largely have an adverse impact on stocks' return volatility. In times of turmoil, stocks with higher coverage of European, North American and Domestic funds are susceptible to volatility shocks emanating from these regions. European and Asia Pacific ETFs are associated with improved price discovery while North American funds impound a mean-reverting component in stock prices. However, in turbulent markets, both positive and negative impacts of ETFs on pricing efficiency coexist.

Originality/value

To the best of the authors' knowledge, this is the first study that examines the impact of domestic as well as foreign ETFs on the equities of an emerging market. Furthermore, the study is unique as we investigate how the effects of ETFs vary in turbulent and tranquil markets. Moreover, the paper examines the role of asynchronous market timings in determining the ETF impact. The paper adds to the growing literature on the unintended consequences of index-linked products.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 23 November 2021

Ruopiao Zhang, Teresa Chu, Carlos Noronha and Jieqi Guan

This study introduces Social Contribution Value per Share (SCVPS), an indicator devised by the Shanghai Stock Exchange (SSE), as an easy-to-interpret Measurement of…

Abstract

Purpose

This study introduces Social Contribution Value per Share (SCVPS), an indicator devised by the Shanghai Stock Exchange (SSE), as an easy-to-interpret Measurement of Corporate Social Performance (MCSP) to the international research arena. The authors first explore the informativeness role of voluntary disclosure of SCVPS in the stock market. The authors then go one step further to demonstrate the relationship between corporate value creation quantified by SCVPS and firm value.

Design/methodology/approach

The study takes a new perspective – a quasi-natural experiment of SCVPS disclosure in 2008 and uses a Propensity Score Matched Difference in Difference model (PSM-DiD) to investigate the impact of SCVPS disclosure policy on stock price synchronization and firm value. Through manually recalculating all the values of SCVPS and its components, this study enables us to further investigate the relationship between corporate value creation for various stakeholders and firm value.

Findings

This study reveals that voluntary disclosure of SCVPS can signal firm-specific information to the market and reduce noise in returns, thus affecting stock price synchronization. The findings further demonstrate that such firm-specific information has value relevance to firm performance. Moreover, the authors demonstrate that corporate value creation for different stakeholders measured by SCVPS can significantly affect firm value. The moderating effects of ownership structures and industry types are also investigated, and an endogeneity test confirms the robustness of the findings.

Practical implications

This study argues that SCVPS offers an economically viable way for firms, including small-and-medium-sized enterprises, in emerging economies to disclose corporate value creation and provide the public with a direct understanding and appreciation of the values created by corporations for stakeholders.

Originality/value

The result makes contributions to the MCSP literature and explores the informativeness of SCVPS disclosure. Besides, this paper demonstrates that SCVPS offers a good setting to explore the effect of corporate value creation on firm performance in an emerging market.

Details

Journal of Accounting in Emerging Economies, vol. 12 no. 3
Type: Research Article
ISSN: 2042-1168

Keywords

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