Analysts' Interpretation and Investors' Valuation of Tax Carryforwards*

We examine how financial analysts and equity investors incorporate information on deferred taxes from carryforwards into earnings forecasts and share prices. We focus on carryforwards because, in providing this information each period, management must use their private information about the firm's profitability prospects. Thus, accounting measurement of tax carryforwards is another way of providing a management earnings forecast. In analyzing the role of carryforwards in valuation, we distinguish between two conflicting effects. First, deferred taxes from carryforwards represent future tax savings; hence, they should be valued positively as assets. In contrast, the existence of tax carryforwards may signal a higher likelihood of future losses, which would have a negative effect on expected earnings and share prices. We find that analysts consider earnings of firms with carryforwards to be less persistent because of the increased likelihood of future losses. We also find that analysts tend to be less precise and more optimistic (biased) in forecasting earnings of firms with carryforwards. This higher optimism and lower precision are more pronounced just after firms adopt Statement of Financial Accounting Standards (SPAS) 109 and are almost entirely corrected over time. An analysis of investors' valuation indicates a strong positive relation between deferred taxes from carryforwards and share prices, suggesting that these carryforwards are valued as assets. Also, earnings and book values of equity are valued less in firms that have carryforwards than in firms without carryforwards. Finally, the valuation allowance required under SFAS 109 assists equity investors in valuing a firm's earnings and net assets. The combined findings on analysts' interpretation and investors' valuation suggest that analysts fail to fully capture the implication of carryforwards on future earnings within their forecasting horizon.     

大股东控制、负债水平与企业投资

实证检验了我国国有上市公司中负债水平与投资支出之间的关系,结果表明,企业投资支出整体上同负债水平呈负相关关系,投资支出与负债水平的关系受大股东持股比例的影响,此外,本文还发现在成长性较低的企业中投资支出对负债水平的敏感性更低,这些结果均支持了过度投资假说。     

大股东控制与盈余管理行为研究:来自配股公司的证据

在上市公司配股融资过程中,大股东具有通过盈余管理来获得配股资格和提高股票价格的强烈动机。本文以1998—2002年间456家实施配股的上市公司为样本,基于行业横截面数据和修正的Jones模型研究了配股融资过程中盈余管理的分布特征,并分析了大股东控制对盈余管理行为的影响。研究结果表明：（1）上市公司在配股前3个年度和配股当年存在显著的盈余管理机会主义行为;（2）配股公司的盈余管理程度与第一大股东持股比例具有倒u型关系：当第一大股东持股比例低于53．20％时表现出正相关关系,而当第一大股东持股比例高于53．20％时则表现出负相关关系;（3）盈余管理程度与前2—10大股东持股集中度、负债比率和资本支出水平之间具有负相关关系．而与管理层持股比例和公司规模之间具有正相关关系。大股东通过盈余管理实现了对小股东财富的掠夺效应。造成了上市公司价值、声誉和后续融资能力的下降。     

Auditor Liability and Business Investment*

We model a firm's investment decision, an auditor's effort‐rendering behavior, audit fees, and prices of the firms under two auditor liability rules: strict liability and negligence liability. We show that an auditor's effort level is socially optimal under strict liability, while it is not generally so under negligence liability. Furthermore, both the firm owner's expected benefit and the audit fee are higher under strict liability than under negligence liability. We define the legal error under negligence liability as the difference between the assessed audit effort (that is, the estimate of audit effort made by the court) and the actual audit effort and prove that the greater the variance of the legal error, the more incentive an auditor has to exert effort under negligence liability compared with strict liability. Finally, the number of investments being undertaken could be higher under strict liability because more firm owners are willing to hire auditors to go public.     

A provincial view of consumption risk sharing in Korea:Asset classes as shock absorbers

Using a unique data set on provincial net factor income flows disaggregated across the three asset classes of debt, equity and Foreign Direct Investment reinvested earnings in Korea, we investigated how these asset channels impacted consumption risk sharing during the Global Financial Crisis and the European sovereign debt crisis. Adopting spatial panel methods, this study found in the main that net factor flows of debt, equity and Foreign Direct Investment retained earnings have all contributed favourably to consumption risk sharing during these episodes, with Foreign Direct Investment retained earnings robust in its positive contribution in buffering shocks to consumption. These results suggest that one of the alleged benefits of financial integration in terms of providing the insurance needed to cushion the economy against adverse shocks is tangible and real at least in the context of Korea. We also obtain evidence that apart from asset channels, the combination of the government's social transfer payments and a certain measure of labour mobility help to contribute in mitigating shocks to consumption.     

Valuation Implications of Unconditional Accounting Conservatism: Evidence from Analysts' Target Prices

We examine whether financial analysts understand the valuation implications of unconditional accounting conservatism when forecasting target prices. While accounting conservatism affects reported earnings, conservatism per se does not have an effect on the present value of future cash flows. We examine whether analysts adjust for the effect of conservatism included in their earnings forecasts when using these forecasts to estimate target prices. We find that signed target price errors (actual minus forecast) have a significant positive association with the degree of conservatism in forward earnings, suggesting that target prices are biased due to accounting conservatism. Cross‐sectional analysis suggests that more sophisticated analysts and superior long‐term forecasters adjust for conservatism to a greater extent than other analysts. In additional analyses, we explore the mechanism through which conservatism leads to bias in target prices. We first show that analysts' earnings forecasts are negatively associated with the degree of conservatism; that is, analysts include the effect of unconditional conservatism in their earnings forecasts. Based on alternative earnings‐based valuation models that analysts may use, our evidence suggests that analysts fail to appropriately adjust their valuation multiple for the effect of conservatism included in their earnings forecasts when using these forecasts to derive target prices. As a consequence, we find that, for extreme changes in conservatism, the bias in analysts' target prices due to conservatism leads to a distortion of market prices. The evidence highlights the concern that analysts may not appreciate the valuation implications of conservative accounting which could inhibit price discovery.     

Accounting Conservatism and the Temporal Trends in Current Earnings’ Ability to Predict Future Cash Flows versus Future Earnings: Evidence on the Trade‐off between Relevance and Reliability*

This research reports that an increasing level of accounting conservatism over the 1973–2005 period is associated with: (1) an increase in the ability of current earnings to predict future cash flows and (2) a decrease in the ability of current earnings to predict future earnings. We also find that usefulness of earnings for explaining stock prices over book values is positively related to reliability but not to relevance. Our results hold for the constant and full samples in both in‐sample and out‐of‐sample analyses and are robust to the use of alternative measures for relevance, reliability, earnings usefulness, and conservatism. Our findings about the relations among conservatism, relevance, reliability, and usefulness suggest a trade‐off between relevance and reliability and seem to indicate that the adoption of an increasing number of conservative accounting standards has a possible adverse impact on earnings usefulness through a negative effect on reliability.     

The Effect of Short Selling on Market Reactions to Earnings Announcements*

This paper examines the effect of the inherent demand implied by short interest by studying how stock price reactions to earnings announcements depend on the level of short interest. We find that, for extreme good and bad news events, the inherent demand increases stock prices around the earnings announcement date, with the effect being stronger for good news relative to bad news. Specifically, the initial market reaction to an extreme positive earnings surprise is larger for firms with high levels of short interest. On the other hand, for an extreme negative earnings surprise event, the initial market reaction is less negative for heavily shorted firms. Furthermore, we find that the post‐earnings‐announcement drift is smaller (larger) in magnitude for extreme positive (negative) earnings surprises for the heavily shorted firms.     

Optimal Conservatism with Earnings Manipulation

This paper examines the role of conservatism when an agent can manipulate upcoming earnings before all uncertainty is resolved. An increase in conservatism, by reducing the likelihood of favorable earnings, requires steeper performance pay to maintain the same level of incentives, which in turn increases the equilibrium earnings manipulation. Trade‐offs between inducing effort and curbing manipulation predict an interior level of conservatism as optimal. The optimal level of conservatism is positively associated with enforcement, economic profitability and earnings quality, and negatively associated with agency frictions. In particular, we show that more economically profitable firms choose to be more conservative. We also establish that the association between performance pay and manipulation identifies whether conservatism is optimally chosen or exogenously imposed. In an application to debt contracting, we show that optimal conservatism is negatively associated with borrowers’ bargaining power.     

The Effect of Limited Liability on the Informativeness of Earnings: Evidence from the Stock and Bond Markets*

Previous empirical research on the informativeness of earnings has focused on stockholders, and has not examined differences in earnings' informativeness for stockholders and bondholders. Because stockholders are residual claimants and bondholders are fixed claimants, the informativeness of earnings should differ for these two types of investors. When a firm's default risk is low, changes in its financial condition should be of limited relevance to bondholders, but should be relevant to stockholders. In contrast, as the likelihood of financial distress increases, stockholders' limited liability allows them to abandon the firm to the bondholders (Fischer and Verrecchia 1997). Accordingly, as a firm's default risk increases, changes in its financial condition should be increasingly important to bondholders and less important to shareholders. Because earnings provide information on firm value, the stock return-earnings association should decrease as the firm's financial strength declines, while the bond return-earnings association should increase. We use two measures of a firm's financial strength: the firm's bond rating and its reporting of a loss. Consistent with our hypotheses, we find that the association between stock returns and changes in annual earnings decreases as bond ratings decline, while the association between bond returns and changes in annual earnings increases. These results suggest that as the company's financial condition deteriorates, earnings become less relevant for stock valuation and more relevant for bond valuation. When we partition firms based on their loss status, we find a stronger association between stock returns and annual earnings changes for firms with positive earnings (profit firms) than for firms with losses, consistent with earlier studies. In contrast, we find that the association between bond returns and earnings changes is greater for loss firms than for profit firms. These results suggest that losses reduce the informativeness of earnings for stockholders but increase informativeness for bondholders, suggesting that investors view losses as indicating increased credit risk.     

Determinants of the Time Series of Earnings and Implications for Earnings Quality*

This paper examines whether differences in accrual accounting methods across balance sheet accounts influence the time‐series process of earnings. We define earnings quality as the responsiveness of earnings to shifts in permanent earnings and predict that responsiveness will increase in a firm's use of variable rate debt, where accruals move directly with shifts in interest rates. We also predict that responsiveness will decrease in a firm's investment in property plant and equipment because depreciation is largely predetermined and does not respond to shifts in opportunity costs. </P><P>To test these hypotheses, we regress earnings on lagged earnings and a proxy for permanent earnings (that is, the implied dividend annuity in lagged equity value). Within the context of an adjustment cost model, this regression captures the responsiveness of earnings by the coefficient on lagged price and by one minus the coefficient on lagged earnings. Consistent with this framework, we find the unconstrained estimated coefficients on these two variables to be negatively correlated. Furthermore, consistent with our hypotheses, we find that the coefficient on lagged earnings (lagged price) is positively (negatively) associated with the relative magnitude and life of fixed assets on the balance sheet and negatively (positively) associated with the relative magnitude of variable rate debt on the balance sheet.</P>     

产品市场对寡头企业资本结构的影响——考虑破产成本的模型

从战略角度看,寡头企业的资本结构与产品市场密切相关,受到"有限责任效应"和破产成本效应的双重制约。企业对负债水平的选择实际是对这两种相互对立的制约因素的权衡。本文以一个典型的两阶段古诺博弈模型证明了,随着负债水平由低到高,企业的整体价值先升后降;在拐点处,企业实现了"最优资本结构"。     

Capital structure and short-term decisions

Share price pressure can lead to managerial myopia as managersface incentives to make short-run decisions. We show how long-rundebt can negate myopic behavior by serving as an incentive tohave high future earnings in order to avoid the risk of bankruptcy.We show how increases in leverage could have been a signal inresponse to growing share price pressure in the 1980s. We obtaina theory of capital structure whose predictions are in linewith recent empirically observed patterns. We demonstrate thebenefits of high bankruptcy penalties in inducing efficientdecision making, and show how debt may, ex post, lead to inefficientdecisions being taken in an effort to pay it off. This ex postconsequence of debt can potentially undermine its ex ante incentivebenefits.     

An Analysis of Historical and Future-Oriented Information in Accounting-Based Security Valuation Models*

The Ohlson (1995) and Feltham and Ohlson (1995) valuation model provides a rigorous framework for summarizing the information in expected future earnings and book values. However, the model provides little guidance on selecting an empirical proxy for expected future earnings. We examine whether and under what circumstances historical earnings and analyst earnings forecasts offer comparable explanation of security prices. This issue is of particular interest because analyst forecasts are less readily available than historical data. Under appropriate circumstances, historical data may allow wider use of the Feltham-Ohlson valuation model by researchers and investors. A related issue is the incremental explanatory power of historical earnings and realized future earnings (perfect-foresight forecasts) for security prices beyond analyst forecasts. If historical earnings are incrementally informative, that would suggest that analyst forecasts do not fully reflect price-relevant information in past earnings. If future earnings are incrementally informative, that would suggest that security prices reflect investors' implicit earnings forecasts beyond analyst forecasts. We examine these issues using a historical model (based on past earnings), a perfect-foresight model (based on realized future earnings), and a forecast model (based on Value Line earnings forecasts). All three models provide significant explanatory power for security prices, and each set of earnings data provides incremental explanatory power for prices when used with the other sets of earnings data. We estimate the models separately for firms with moderate and extreme earnings-to-price (E/P) ratios, a proxy for earnings permanence. For moderate-E/P firms, the historical model's explanatory power exceeds that of the perfect foresight model, and is indistinguishable from that of the analyst forecast model. In contrast, for extreme-E/P firms, the perfect-foresight model offers greater explanatory power than the historical model, but lower explanatory power than analyst forecasts. Our results suggest that financial analysts' forecasting efforts are best focused on firms whose earnings contain large temporary components (extreme E/P firms). However, in general, both historical data and analyst forecasts are complementary information sources for security valuation.     

Income Smoothing and the Usefulness of Earnings for Monitoring in Debt Contracting

We investigate whether income smoothing affects the usefulness of earnings for contracting through the monitoring role of earnings-based debt covenants. First, we examine initial contract design and predict that income smoothing will increase (decrease) the use of earnings-based covenants if income smoothing improves (reduces) the usefulness of earnings to monitor borrowers. We find that private debt contracts to borrowers with greater income smoothing are more likely to include earnings-based covenants. A structural model that explores the cause of this relationship provides evidence that smoothing improves the ability of earnings to reflect credit risk. Second, we examine technical default following contract inception. We find that income smoothing is associated with a lower likelihood of spurious technical default (when the borrower's economic performance has not declined but the loan nevertheless enters technical default). In contrast, we find no association between income smoothing and performance technical default (when the borrower's economic performance has declined). Collectively, this evidence is consistent with income smoothing improving the effectiveness of earnings-based information in monitoring borrowers.     

上市公司利润操控与内部公司治理关系研究——基于我国制造业的分析

公司治理结构对管理者通过会计政策选择操纵应计利润产生影响.文章通过研究内部公司治理因素与利润操纵的关系,发现这样一些问题:操纵利润和公司治理因素存在显著的相关性;上市公司的规模、负债、上年非标准审计意见及上年净资产收益率,对利润操纵均有影响,国有控股、第一大股东持股比例与操纵性应计利润负相关.     

Why Do Large Firms' Prices Anticipate Earnings Earlier than Small Firms' Prices?*

This paper presents evidence that the positive association between firm size and price leads of earnings is not solely a function of private search incentives for firm‐specific information. Specifically, we find that small‐firm prices also lag large‐firm prices with respect to industry‐wide information. Our empirical analysis extends Collins, Kothari, and Rayburn 1987 and Freeman 1987, who document that security‐price leads of earnings are positively associated with market capitalization. In particular, we examine the association between firm size and the timing of security returns for two components of annual earnings changes: the average change for a firm's industry and the firm's idiosyncratic change. We find that large firms' prices have a longer lead than small firms' prices with respect to both components. Large firms' early lead on industry‐wide earnings suggests that returns of large firms predict returns of same‐industry small firms. To test this implication, we construct a portfolio of long (short) positions in small firms when the prior month's returns of large firms in their industry are above (below) average for large firms in other industries. This zero investment portfolio earns 4.5 percent over 12 months.     

Institutional Ownership and the Extent to which Stock Prices Reflect Future Earnings*

Articles in the financial press suggest that institutional investors are overly focused on current profitability, which suggests that as institutional ownership increases, stock prices reflect less current period information that is predictive of future period earnings. On the other hand, institutional investors are often characterized in academic research as sophisticated investors and sophisticated investors should be better able to use current‐period information to predict future earnings compared with other owners. According to this characterization, as institutional ownership increases, stock prices should reflect more current‐period information that is predictive of future period earnings. Consistent with this latter view, we find that the extent to which stock prices lead earnings is positively related to the percentage of institutional ownership. This result holds after controlling for various factors that affect the relation between price and earnings. It also holds when we control for endogenous portfolio choices of institutions (e.g., institutional investors may be attracted to firms in richer information environments where stock prices tend to lead earnings). Further, a regression of stock returns on order backlog, conditional on the percentage of institutional ownership, indicates that institutional owners place more weight on order backlog compared with other owners. This result is consistent with institutional owners using non‐earnings information to predict future earnings. It also explains, in part, why prices lead earnings to a greater extent when there is a higher concentration of institutional owners.     

The next plan after Brady?

Experience suggests that schemes for dealing with sovereign, less developed country debt to the commercial banks have a limited life span. This article looks at a number of modifications to the Brady proposals that might render them appropriate for dealing with the next stage. It is suggested (1) that a five-year target for getting rid of the debt overhang should be accepted for reforming LDC economies; (2) that debt servicing costs should be limited to a realistic proportion of the debtor's foreign exchange earnings; and (3) that competitive sovereign debt tendering (CSDT) provides the most efficient method of extinguishing the debt overhang.     

JIT Adoption: The Effects of LIFO Reserves and Financial Reporting and Tax Incentives*

Using matched samples of JIT adopters and nonadopters, we examine the association of JIT adoption with firms' financial reporting and tax incentives, earnings‐management histories, and LIFO reserve levels. We find evidence that adoption decisions are influenced by the interaction of firms' LIFO reserves with their income smoothing, debt covenant, and tax incentives. We also find that adoption is less likely for firms historically engaging in high degrees of earnings management, particularly when such firms have no substantial LIFO reserves. Our study extends earlier research demonstrating a relation between inventory valuation method and year‐end inventory transactions, and documents a relation between earnings‐management incentives and a fundamental supply‐chain design choice.