The effects of the Asian crisis, corporate governance and accounting system on the valuation of book value and earnings

This paper examines the value relevance of earnings and book value in four Asian countries, Indonesia, South Korea, Malaysia and Thailand, in the period surrounding the Asian financial crisis. Specifically, we examine the impact of the economic environment on the value relevance of book value and earnings. We also examine the effects of corporate-governance mechanisms and the type of accounting system together with the economic environment on the value relevance of accounting numbers. Our results indicate that the value relevance of earnings in Indonesia and Thailand was significantly reduced during the Asian financial crisis while the value relevance of book value increased. In Malaysia, the value relevance of both earnings and book value decreased during the crisis. In Korea, neither book value nor earnings was significantly impacted by the crisis. Our results indicate that the level of corporate-governance mechanisms has an impact on the extent of changes in the value relevance of book values, but not earnings. Specifically, the value relevance of book value declines when corporate governance is weak. Finally, our results indicate that accounting systems (i.e., IAS or tax-based) also affect the extent of changes in the value relevance of book value resulting from the crisis.     

金融危机对公司现金股利政策的影响研究——基于股权结构的视角

论文分析了金融危机对上市公司现金股利政策的影响。研究发现,在金融危机期间,上市公司会降低现金股利支付水平,以应对未来的不确定性。但是,相比非流通股比率低的公司,非流通股比率高的公司在金融危机期间更有可能支付更多的现金股利,以满足非流通股股东对于现金的需求。研究还发现,如果公司在金融危机期间发放现金股利,则市场反应更积极,这说明公司通过股利政策向市场传递了积极的信号。但是,非流通股比率高的公司支付现金股利的市场反应要显著小于非流通股比率低的公司,这可能是市场担心非流通股股东利用现金股利侵害中小股东利益。本文研究结论为完善上市公司的现金股利政策和保护中小投资者利益提供了现实启示。     

Are Dividends Disappearing or Shrinking? Evidence from the Istanbul Stock Exchange

This paper examines the dividend payment decision of publicly owned firms listed on the Istanbul Stock Exchange (ISE) from 1991 through 2006. There is a decline in the percentage of net dividend payers, accompanied by a decline in the aggregate level of net real dividends paid. Contrary to the situation in developed markets, earnings and dividends concentration have declined over the sample period. The first mandatory dividend payment regulation pushed some firms to collect the distributed dividends back through rights issues and this resulted in low net dividend payments. One of the striking findings of this paper reveals that a majority of ISE firms prefer dividend omissions rather than dividend reductions. Once a firm keeps paying dividends, it puts much effort into increasing dividend payments rather than reducing them. Further, dividend payment and reduction decisions are affected by the current earnings of the firm and financial crisis significantly explains both the dividend payment and dividend reduction decisions.     

Earnings Response Coefficients and Dividend Policy Parameters

In a seminal paper. Ball and Brown (1968) documented a positive statistical association between earnings surprises and stock returns around an earnings announcement. They concluded that accounting earnings conveyed ‘useful’ information to the market. However, the question of how accounting earnings convey useful information is still being understood. Recent work on this topic has found that current accounting earnings aid investors and analysts in predicting future accounting earnings. Few studies, however, have examined the usefulness of current earnings for predicting other value-relevant attributes. A model by Ohlson (1989a) suggests that investors are also interested in the relationship between current earnings and future dividends. Ohlson's model is supported by empirical tests in this paper which show that the relationship between current earnings and future dividends is significant in explaining cross-sectional variation in earnings response coefficients (ERCs). A second result of interest is that information in dividends substitutes for that in accounting earnings. We find that dividend policy parameters reflect information contained in current earnings. These results add new insights on the information revealed through the analysis of ERCs. Consistent with logic presented here, a symmetrically opposite result is found with respect to dividend response coefficients. The informativeness of earnings (dividends) is found to be negatively (positively) related to the information content of dividends.     

Dividend policy and permanence of earnings

We examine managers’ adjustment of dividends to information about earnings. We base our analysis on a ‘permanent earnings’ model of dividend behavior, which implies that dividends are changed primarily in response to permanent changes in earnings; transitory earnings changes have little or no effect on dividends. Within the permanent earnings framework, the permanent component of earnings may be the predominant factor affecting dividend payouts, or it may be one of the important factors affecting dividends. In the former case earnings and dividends are co-integrated; in the latter they are not. Using a sample of 337 firms over the 40 year period from 1950–1989, we find the data to be strongly consistent with the permanent earnings model. We also find that the data are more consistent with a model that relates dividend and earnings changes rather than levels. Thus, we conclude that earnings and dividends are not co-integrated. This contrasts with the implicitly co-integrated (levels) dividend model of Lintner (1956), and indicates that factors other than the permanent component of earnings, such as tax policy, clientele effects, transaction costs, etc. may have a significant impact on the long-run behavior of dividends.     

A tool for scrutinizing bank bailouts based on multi-period peer benchmarking

In the wake of the recent global financial crisis central banks and regulators are concerned about re-direction of bailout funds into dividends. Yet, we do not know much about the extent banks follow dividend policies and funding decisions optimal to generating shareholders' wealth because banks have been mostly absent from an otherwise expansive literature on dividend policy. A relative, multi-period analysis of the troubled Japanese regional banks for the period 1998–2007 identifies inefficiencies in the levels of dividends, retained earnings, external funding and shareholder returns. The study unfolds further by investigating associations between inefficiencies and non-performing loans, followed by a comparison of efficient versus inefficient banks across good and bad economic times. The methodology captures linkages among yearly financial decisions over multiple periods, thus summarizing long-term performance. The new approach can guide continuous benchmarking of bank financial performance, as well as help policy-makers monitoring potential misappropriation of bailout funds during financial crises. The findings indicate a potential to adjust levels of debt and equity funding, and substantial room for improvement in shareholder returns. Associations between non-performing loans and technical inefficiencies are generally statistically significant.     

Value relevance of international accounting standards harmonization: Evidence from A- and B-share markets in China

Applying both the price-levels model and the lagged-price-deflated returns model, we investigated the incremental value relevance of the reconciliation of accounts from the Chinese Accounting Standards (CAS) to the International Accounting Standards (IAS) by those Chinese listed companies that have simultaneously issued A-shares and B-shares. In addition, we examined the usefulness of accounting numbers (earnings and book values) and their value relevance to the A- and B-share markets in China. The study finds that earnings and book values of owners’ equity determined under CAS are more relevant accounting information for the purpose of determining the prices of A- and B-shares. The CAS-based earnings changes were reflected in stock returns in the B-share market, while the CAS-based earnings were closely associated with stock returns in the A-share market. However, the study found that the reconciliation of earnings and book values from CAS to IAS basis is partially value-relevant, mainly to stock prices in the B-share market, while the earnings reconciliation is generally not value-added to stock returns in either the A- or the B-share market. The study results suggest that accounting numbers based on domestic accounting standards, in contrast to IAS, are more value-relevant in the Chinese stock market at present.     

Do Macro-economic Crises Determine Accounting Value Relevance?

Abstract

We investigate whether the value relevance of earnings and book values in Turkey significantly changed across periods of financial uncertainty. Our enquiry differs from the mainstream literature that posits a unidirectional association determined by the ‘quality’ of individual firm accounts towards price. We find divergence in accounting value relevance components across the 1997–2012 period. Dominant value relevance shifts from earnings and negative interest rates in hyper-inflation, to the balance sheet after IFRS in 2005. On the other hand, the global financial crisis (GFC) is associated with diminished accounting value relevance for all variables. Policy issues are raised about value relevance consistency, the use of negative (low) interest rates as fiscal policies and the asymmetric application of market based valuations in emerging economies.     

Dividends and share repurchases during the COVID-19 economic crisis

In this article, we examine dividends and share repurchases of S&P 1500 firms during the COVID-19 crisis characterized by the stock market crash and a relatively quick stock price recovery propelled by technology stocks. We find that the great majority of firms either maintain or increase the level of dividends during the crisis period. Yet, the relation between the dividend payout and reported earnings is negative and significant. This relation also holds for other types of payouts, including share repurchases and special dividends. Moreover, we find that both forecasted and realized earnings of up to 1 year into the future are negatively associated with current dividends, implying that existing payout policies are unsustainable in the longer term. Surprisingly, the difference-in-differences test shows that firms strongly affected by the COVID-19 crisis have higher dividend payouts (relative to net earnings) compared to unaffected firms. The same test indicates that strongly affected firms significantly reduce repurchases.     

Information dynamics, dividend displacement, conservatism, and earnings measurement: a development of the Ohlson (1995) valuation framework

This paper extends the Ohlson (Contemp Account Res 11, 661–687, 1995) equity valuation framework by demonstrating that dividend displacement continues to hold when dividends have a positive forecast coefficient in the linear abnormal earnings dynamic. The analysis demonstrates that such a predictive role for dividends implies a positive association between cum div book value of equity and the present value of expected abnormal earnings, consistent with both dividend displacement and accounting conservatism. While a signaling role for dividends is ruled out, a link between dividends, expected performance, and equity value is, however, demonstrated. The paper also considers a linear information model where an undefined variable replaces realized abnormal comprehensive earnings as an indicator of future performance. The role of this variable as a predictor of future abnormal comprehensive earnings is highlighted and the special case where it corresponds to recurring abnormal earnings is considered. This latter case provides useful implications for implementation of asset revaluations.     

Linear Information Dynamics,Dividend Irrelevance,Corporate Valuation and the Clean Surplus Relationship

This paper adopts the linear information dynamics framework pioneered in Ohlson (1979) and Garman and Ohlson (1980) (and subsequently used in, in particular, Ohlson, 1989, 1995 and Feltham and Ohlson, 1995) for thinking about desirable properties of earnings numbers in the context of the market valuation of firms, where such valuations are fundamentally based on expected future dividends. The first purpose of this paper is to consider the valuation-relevance of clean surplus earnings when there are two distinct components of clean surplus earnings whose evolutions are governed, along with book value and dividends, by a system of linear information dynamics, and dividend irrelevancy holds. The system of linear information dynamics assumed ensures that corporate value is a linear combination of the two components of clean surplus earnings, book value and dividends. One question becomes—under what circumstances are clean surplus earnings (combined with book value and dividends) sufficient for corporate valuation without a knowledge of the breakdown of clean surplus earnings into its separate components? This paper develops the conditions defining these circumstances. At the other extreme, another question can be asked—under what circumstances is one component of clean surplus earnings irrelevant to corporate valuation? This paper identifies some conditions that identify these latter circumstances. The second purpose of the paper is to identify implications of these results for both the traditional arguments about the desirability of measuring earnings on a clean surplus basis and also the more contemporary issues surrounding FRS3. A third purpose is to discuss the implications of the overall analysis for the empirical testing of the relationship between market prices and earnings numbers, and for empirically-justified definitions of maintainable earnings.     

Blockholder leverage and payout policy: Evidence from French holding companies

This paper focuses on dominant owners’ use of leverage to finance their blockholdings and its relationship to dividend policy. We postulate that blockholder leverage may impact payout policy, in particular when earnings are hit by a negative shock. We use panel data for France where blockholders have tax incentives to structure their leverage in pyramidal holding companies and study the effect of the financial crisis in 2008/2009. We find no difference in payout policy and financial behavior during the 1999 to 2008 period between firms with levered owners and other firms. However, in the years 2009 to 2011 following the crisis, dividend payouts increase in proportion to pyramidal debt of dominant owners. We inspect pyramidal entities individually and find that on average only 60% of dividends are passed through to the ultimate owners, with the rest predominantly used to meet debt service obligations of the pyramidal entities.     

An International Analysis of Historical and Forecast Earnings in Accounting-Based Valuation Models

Abstract:  In this paper we examine whether the valuation properties of historical accounting amounts, namely earnings and equity book value, differ from those of forecasted earnings for firms in 17 developed countries classified into six accounting regimes. We compare the performance of a historical model and a residual-income forecast model for explaining security prices. The historical model uses the book value of equities and actual historical earnings and the forecast model uses the book value of equities and analysts' forecasts of earnings in the residual income for estimating the intrinsic value of the firm. The results suggest that book values, historical earnings or forecasted earnings are value relevant in most regimes and countries examined. The forecast model offers significantly greater explanatory power for security prices than the historical model in the Anglo-Saxon and North American countries, Japan, Germany, and three Nordic countries. The explanatory power of the historical model is similar to that of the forecast model in the Latin countries, two Nordic countries, and Switzerland. We find that the forecast model performs similarly to the historical model where financial analysts' forecasts are noisy and analysts are less active. Further results indicate that the forecasted earnings are more value-relevant than the historical earnings in countries with stronger investor protection laws, less conservative GAAP, greater income conservatism, and more transparent accounting systems.     

Taming polysemous signals: The role of marketing intensity on the relationship between financial leverage and firm performance

This study traces the degree of integration and volatility spillover effect between the Pakistani and leading foreign stock markets by analyzing the Meteor shower hypothesis. Daily data are used from nine worldly equity markets (KSE 100, NIKKEI 225, HIS, S&P 500, NASDAQ 100, DOW JONES, GADXI, FTSE 350 and DFMGI) for the period of 2005 to 2014. First, we used the whole data set and after that we split data set into two subsets, First subset of data contains the era of global financial crisis of 2008 from 2005 to 2009 and Second subset is after global financial crisis time period from 2010 to 2014 (The global crisis prevailed till end of 2009). By following the Hamao et al. (1990) technique the univariate GARCH type models are employed to explore the dynamic linkages between Pakistani and leading foreign stock markets. The results from whole data set illustrate that there is mixed co‐movements between leading foreign stock markets and Pakistani stock market. The results from both subsets provide an evidence that there is a unidirectional mean and volatility spillover effect from S&P 500, NASDAQ 100, DJI and DFMGI to KSE 100. Also we found bidirectional spillover effect between DFMGI and KSE 100 from both subsets of data. We concluded that there is only one indirect linkage through which may the information transmitted to KSE 100. This linkage is developed due to the co‐movement among KSE 100, DFMGI and NASDAQ 100 in crisis period. This integration between these markets may provide a sign of indirect linkage. It also exhibits the volatility in Pakistan stock market returns is instigated through direct effects as well as indirect effects. Our study brings important conclusions for financial institutions, portfolio managers, market players and academician to diagnose the nature and level of linkages between the financial markets.     

The Impact of Dividends, Debt and Investment on Valuation Models

The reliability of a basic earnings and equity model of value is tested using 8,287 cases drawn from UK industrial and commercial firms reporting during 1987–1995. A respecification of this model is used to investigate the value relevance of dividends, capital structure and capital expenditure. Both the dividend and capital expenditure signals appear to be significant and the impact of the former is surprisingly strong. There is no convincing evidence that equity value is affected by the level of debt. Further investigation of dividends confirms that they are less influential in large firms or in firms with high return on equity.     

The dynamics of dividends,earnings and prices: evidence and implications for dividend smoothing and signaling

This paper examines the dynamic relations among corporate dividends, earnings and prices, and the implications of these relations for dividend signaling and smoothing. A multiple hypotheses testing method is employed to identify causal relations among the three financial variables and to test the empirical implications of dividend smoothing and signaling models. The results show that dynamic relations exist among dividends, earnings and prices. Empirical evidence is consistent with the contention that dividend changes are often driven by both signaling and smoothing motives. Additional tests are developed to differentiate between the dividend signaling and smoothing models. These tests impose restrictions on the dynamics of the financial variables and information signaling. It is found that dividend changes frequently provide information about unexpected changes in future earnings for a little more than a year.     

The Effect of Past Earnings and Dividend Patterns on the Information Content of Dividends When Earnings Are Reduced

This study pursues two objectives: first, to provide evidence on the information content of dividend policy, conditional on past earnings and dividend patterns prior to an annual earnings decline; second, to examine the effect of the magnitude of low earnings realizations on dividend policy when firms have more‐or‐less established dividend payouts. The information content of dividend policy for firms that incur earnings reductions following long patterns of positive earnings and dividends has been examined ( DeAngelo et al., 1992, 1996 ; Charitou, 2000 ). No research has examined the association between the informativeness of dividend policy changes in the event of an earnings drop, relative to varying patterns of past earnings and dividends. Our dataset consists of 4,873 U.S. firm‐year observations over the period 1986–2005. Our evidence supports the hypotheses that, among earnings‐reducing or loss firms, longer patterns of past earnings and dividends: (a) strengthen the information conveyed by dividends regarding future earnings, and (b) enhance the role of the magnitude of low earnings realizations in explaining dividend policy decisions, in that earnings hold more information content that explains the likelihood of dividend cuts the longer the past earnings and dividend patterns. Both results stem from the stylized facts that managers aim to maintain consistency with respect to historic payout policy, being reluctant to proceed with dividend reductions, and that this reluctance is higher the more established is the historic payout policy.     

Dividend Irrelevance and Accounting Models of Value

In accounting models of value, dividends typically appear to have a strong positive relationship with value despite theoretical reasons to expect dividend displacement. We show that this result is driven by the relationship between dividends and both core earnings and other information derived from the valuation error in the prior year. Where core earnings can be effectively modelled in a specification including other information, dividend displacement is no longer rejected. Under these circumstances dividends exhibit weak incremental predictive power for earnings and earnings expectations and hence have little impact on value. We show that valuation models are sensitive to model specification and should be used with caution when testing the value impact of firm characteristics or accounting numbers.     

Elective stock and scrip dividends

We investigate firms' decisions to pay elective stock dividends, known in the UK as scrip dividends. Scrip dividends give investors the choice between receiving new shares or the equivalent value as a cash dividend. UK firms paying scrip dividends are more likely to be financially constrained, and scrip dividends are used more when access to external financing is costly. Our results are robust to using the 2008 financial crisis as an exogenous shock to credit supply. Cash preservation is the most important corporate incentive to use scrip dividends as they tend to be distributed in combination with dividend cuts and with major corporate investments such as debt-financed mergers and acquisitions. Analysis of US dividend reinvestment plans by which investors purchase new shares confirms firms' cash-preservation motives.     

Dividend payout and executive compensation: theory and evidence from New Zealand

Using a model based on Bhattacharyya (2007), we predict a positive (negative) relationship between the earnings retention ratio (dividend payout ratio) and managerial compensation. We use tobit regression to analyse data for New Zealand firms' dividend payouts over the period 1997–2015 and find results consistent with Bhattacharyya (2007). These results hold when the definition of payout is modified to incorporate both common dividends and common share repurchases. Our results indicate that corporate dividend policy among New Zealand firms is perhaps best understood by considering the dividend payout ratio, rather than the level of, or changes in, cash dividends alone.