An Examination of the Naïve‐Investor Hypothesis in Accruals Mispricing in Tunisian Firms

This study extends previous studies on accrual anomaly to investigate the emerging market's mispricing of accruals. Using Mishkin (1983) test, hedge portfolio test and Fama and MacBeth (1973) regression, we test whether the Tunisian Stock Exchange price rationally reflects the 1‐year ahead earnings implications of its earnings components. We find that earnings and their cash flow and accrual components are not rationally priced by the market. Additionally, this paper examines the role of sophistication investors in the pricing of earnings and their components. Our results show that accruals for firms with higher level of institutional ownership are not mispriced, while accruals for firms with lower institutional ownership are overpriced significantly by the market.     

Foreign Equity Ownership and Information Asymmetry: Evidence from Japan

Using a large sample of Japanese firms, we investigate whether the level of foreign ownership in a firm is inversely related to information asymmetry between firm (managers) and market (outside investors). Since information asymmetry is not directly observable and, thus, is difficult to measure empirically, our analysis focuses on the link between foreign shareholding and a measurable consequence of information asymmetry; that is, the timing and magnitude of intertemporal return‐earnings associations. The empirical results support our hypothesis, and subsequent tests based on residual foreign ownership show that the relation between foreign ownership and information asymmetry is robust to the addition of various control variables such as market capitalization and cross‐corporate holdings. We also show that foreign investors tend to avoid stocks with high cross‐corporate holdings. Overall, our results suggest that foreign (institutional) investors are likely to be efficient processors of public information and are attracted to Japanese firms with low information asymmetry.     

An Investigation of Stock Price Declines Following Corporate Financing Events: Further Evidence

Prior research documents a large downward drift in stock prices following issuances of debt and equity by US firms. We conduct tests based on both stock price and trading volume to provide evidence on the reasons for this apparent market anomaly. We document evidence of earnings management through accruals prior to external financing and lower operating performance afterward that is associated with the amount of capital raised. The earnings management that precedes external financing and the amount of capital raised are associated with both the post-financing decline in stock price and trading volume around earnings announcements that follow for a period of three years. This evidence is consistent with the proposition that firms raise external capital prior to predictable declines in their operating performance and they release upward biased earnings before these events to manage investor expectations. The failure of many investors to incorporate this information into their trading decisions in a timely manner consistent with limited attention and over-confidence appears to drive stock mispricing. Our evidence does not support the conjecture that the financing anomaly is primarily a statistical artifact or that it is a manifestation of the accrual anomaly.     

Timeliness of Annual Report Releases and Market Reaction to Earnings Announcements in an Emerging Capital Market: The Case of China

This paper examines the relation between firm performance and the timing of annual report releases in an emerging capital market. Based on the population of listed Chinese firms with A-shares for 1994-1997, we find that good news firms release their annual reports earlier than bad news firms, and loss firms release their annual reports the latest. Moreover, consistent with Chambers and Penman (1984) and Begley and Fischer (1998), these firms unexpectedly accelerate the release of good news and delay the disclosure of bad news relative to their previous reporting pattern. We also observe a significant price reaction to the annual earnings announcements for both early (good news) and late (bad news) reporting firms. Similar results are found for those A-share firms which have also issued B- or H-shares to foreign investors. Our study documents a systematic timing pattern of annual report disclosures, which is useful for investors to predict future earnings, especially in anticipating bad news in China's emerging market where information about future earnings is very limited.     

The Information Content of Earnings Components: Evidence from the Chinese Stock Market

China's listed firms report substantial non-operating revenues and expenses. We argue that these non-core earnings should have different properties and different valuation implications than operating or core earnings. Furthermore, the different types of firm ownership may have differential impacts on the information content of earnings components. Based on data from 1996 to 2008, we find that core earnings are more persistent than non-core earnings. Because of this, core earnings have a greater association with contemporaneous stock returns. However, the stock market does not fully incorporate all the information in earnings; we find that core earnings are undervalued and non-core earnings are overvalued. This effect is much reduced for privately controlled listed firms. We develop an investment trading strategy to exploit these market inefficiencies.     

Why Does the Reduction of Greenhouse Gas Emissions Enhance Firm Value? The Case of Japanese Manufacturing Firms

This paper examines the influence of firms’ reductions of greenhouse gas (GHG) emissions on firm value, measured by Tobin's q. If the stockholders/investors regard the reduction of GHG emissions as a form of intangible value, the reduction of GHG emissions will enhance firm value. To prove this relation more precisely, this paper analyzes not only the effect of the reduction of GHG emissions on firm value but also that of the market discipline imposed by the stockholders/investors in terms of the reduction of GHG emissions. Using data on 641 Japanese manufacturing firms in the period 2006–2008, the random effect instrumental variable estimate supports the view that firms with strong market discipline imposed by stockholders/investors are more likely to reduce GHG emissions and, consequently, firms that reduce more GHG emissions are more likely to enhance firm value. Copyright © 2011 John Wiley & Sons, Ltd and ERP Environment.     

Institutional investors’ ownership stability and their investee firms’ equity mispricing

This study examines the impact of institutional investors' equity ownership stability and their investment horizon to determine the impact on their investee firms' equity mispricing. Mispricing represents the difference between a firm’s market and fundamental values. We treat institutional investors as a heterogenous group, i.e., dedicated, transient, or quasi-indexer as defined by Bushee, 1998, Bushee, 2001 since their categorization determines their trading strategy. Higher institutional ownership, higher stability in institutional investors' equity ownership, and institutional investors classified as long-term are all associated with lower equity mispricing at investee firms.     

Earnings Benchmarks and the Information Content of Quarterly Foreign Earnings of U.S. Multinational Companies

The meeting of earnings benchmarks is considered important for investors. The chief financial officers of U.S. companies state that the three most important earnings thresholds to meet are the earnings in the same quarter last year, the analysts' earnings forecast for the current quarter, and zero earnings. These earnings benchmarks have been defined in terms of total earnings. For U.S. multinational firms, total earnings consist primarily of domestic earnings and foreign earnings. We conduct an event study where we examine (1) the stock market reaction to meeting or beating quarterly domestic and foreign earnings benchmarks and (2) the market reaction to the changes in quarterly domestic and foreign earnings, while we control for meeting or beating the analysts' earnings forecast and the analysts' earnings forecast surprise. We find that the quarterly financial statement disclosure of domestic and foreign earnings under Statement of Financial Accounting Standards No. 131 supplies investors with valuable information that was not previously disseminated through financial analysts or other sources. The stock market reaction to meeting or beating foreign earnings from the same quarter in the prior year is stronger than the market reaction to meeting or beating domestic earnings from the same quarter in the prior year.     

Earnings Management and the Accrual Anomaly: Evidence from China

Using the unique Chinese setting in which the “delisting regulation” is based on accounting numbers, we separate earnings management into (1) earnings management responding to regulation and (2) earnings management prompted by market pressures and further document that earnings management responding to market pressures produces the accrual anomaly (Sloan, 1996) and earnings management responding to regulation does not. Initially unable to detect the accrual anomaly in China's stock market, we were reluctant to conclude that China's market is more efficient than that in the United States. After observing a disproportionate number of “big‐bath” loss firm‐years in the lowest decile of accruals for our sample, we estimated the apparent earnings distortion induced by the delisting regulation. When we excluded this distortion from our analysis, we documented the presence of the accrual anomaly in China's stock market. We conclude that the delisting regulation creates an artificial distribution of firm earnings in China that affects the market pricing of accruals and masks the accrual anomaly. The results have implications for policy makers and regulators in general, and those in emerging markets in particular.     

Valuation and Forecasting Roles of Dividends of Indonesian Listed Firms

We study the role of dividends in valuation and in forecasting future earnings in a low‐protection environment with highly concentrated ownership that is expected to yield low earnings quality. Using a sample of 372 distinct Indonesian firms listed on the IDX during the period 1995 to 2012 we show that dividends are reliably positively priced by the capital market, violating thus the dividend displacement theorem. This result persists even after controlling for some typical factors that affect firm value (capital structure, risk) and the effect of factors not separately identified, but priced by the Indonesian capital market (other information). Dividends replace accounting earnings entirely in valuation. Dividends are positively correlated to future earnings over and above current accounting earnings and other accounting and market variables. Both findings show that dividends play a central role on the Indonesian capital market. Finally, we show evidence consistent with the view that earnings management of Indonesian firms after 2002 is contractually efficient rather than opportunistic.     

Can Government Policies Induce Earnings Management Behavior? ‐Evidence from Chinese Public Listed Firms

Earnings management behavior is a concern of standard setters, regulators, and investors. This study predicts that government policies can induce earnings management behavior. Based on a sample of 8,765 firm years ranging from 2002 to 2009, this study uses two methods to detect the effect of government policies on managers' earnings management behavior. One is the earnings distribution method developed by Burgstahler and Dichev (1997), and the other is the modified Jones model proposed by DeFond and Jiambalvo (1994). We find that policies issued by the China Securities Regulatory Commission (CSRC) can induce managers of listed firms to engage in earnings management to either avoid negative consequences (e.g., delisting) or to meet requirements (e.g., refinancing). So, although the purpose of government is to protect investors as well as to promote the healthy development of the securities market, its policies are a double‐edged sword: if there is no strict and effective control mechanism, government policies can harm investors and disturb the normal order of the securities market.     

审计质量对资本市场定价偏差抑制效应研究

以2007—2017年A股上市公司为样本,探讨审计质量与资本市场定价偏差的关系。研究发现：审计质量对资本市场定价偏差有显著的抑制作用,审计质量越高,资本市场定价偏差越小;其作用机制为降低盈余管理和增加投资者关注。进一步研究表明,该抑制效应主要体现在股票价格高估和流动性较差的公司中。研究结果从资本市场定价效率的角度丰富了审计质量价值的文献,并对资本市场监管具有一定的意义。     

The Effects of Conservative Reporting on Investor Disagreement

We examine whether the level of a firm's conditional conservatism affects investor disagreement around earnings announcement dates. Investor disagreement is relevant for its repercussions on stock market efficiency. However, the literature related to the effect of firms’ reporting policies on disagreement is scant. Prior research suggests that conservatism, by requiring higher verifiability of profits, constrains earnings overstatements and encourages more complete revelations of losses, thus improving the information environment. In this paper, we further hypothesize that these effects of conservatism enhance news credibility and decrease information asymmetry, particularly for bad news announcements. This results in a lower disagreement and improved interpretation of earnings news. We consistently find that conservatism measures are negatively associated with proxies of announcement-time investor disagreement and that this effect is stronger when the firm is reporting bad news. Additional analyses indicate that the impact of conservatism is stronger when market surprise to the announcement is greater, while it is weaker in the presence of frequent and precise voluntary disclosure that preempts the earnings announcement. Finally, we show that a higher percentage of institutional investors’ ownership and a higher level of commitment to conservatism reinforce the impact of the latter.     

Considering interrelationships in strategic decisions

Accounting-based valuation studies of US firms tend to support Ohlson's proposition that residual income and book value numbers have information content in explaining observed market values. But European evidence also suggests that the conservative/liberal orientation of accounting tradition can produce significant national differences in associations between accounting performance measures and stock prices - in earnings behaviour, coefficient values and parameter sensitivity. We address these issues from an equity valuation perspective using Swedish data to assess the additional information content of Ohlson's information dynamics and analysts' forecasts in relation to market valuations in a more conservative accounting environment than the US. The study compares the explanatory and predictive power of Ohlson's (1995) residual income model (RIV) with a linear information dynamics version (LIM) that specifies both residual income and non-accounting information as autoregressive processes. Both versions are applied with, and without, future performance expectations from non-accounting sources (analysts' forecasts). As with US evidence, we find that the inclusion of analysts' forecasts improves both (i) cross-sectional correlations with current prices for both RIV and LIM models and (ii) the predictive power of RIV models in relation to future annual cross-sectional stock returns. The contribution of linear information dynamics is significant but varies across approaches. We also find significant differences between Swedish and US firms in earnings behaviour and associations between accounting numbers and market equity prices.     

Financial analyst coverage for U.S. firms facing foreign competition: Evidence from trade liberalization

This study examines financial analyst coverage for U.S. firms following an increase in foreign product market competition. To capture exogenous shocks to domestic firms' competitive environments, we exploit a quasi‐natural experiment from large import tariff reductions over the 1984 to 2005 period in the manufacturing sector. Using data for the years before and after large tariff reductions, our difference‐in‐differences analysis shows evidence of a significant decrease in analyst coverage for incumbent U.S. firms when they face greater entry threat from foreign competitors. We also find that analysts with less firm‐specific experience and less accurate prior‐period forecasts are more likely to stop following the domestic firm when foreign competition intensifies. Overall, the findings suggest that foreign product market competition from global trade liberalization is an important determinant of financial analysts' coverage decisions.     

Ownership Structure and Accounting Information Content: Evidence from France

This paper investigates how family and bank ownership affect the accounting information content of French firms. In Continental Europe, the existence of block‐holders triggers specific corporate governance issues, including the transparency of financial reporting. Our test results for the clean surplus model show that book value carries a significantly greater weight for family‐controlled firms. This finding is attributed to their lack of incentive to report timely and relevant earnings to outside (minority) investors. In contrast, bank owners are under more market pressure to achieve earnings persistence through the use of accounting accruals. Bank ownership is also associated with higher levels of debt. These results are consistent with findings that in code law countries, insiders dominate as a source of finance, and financial reporting is aimed at creditor protection.     

Analysts' Forecasts in Asian-Pacific Markets: The Relationship among Macroeconomic Factors, Accounting Systems, Bias and Accuracy

In this study, we describe determinants of accuracy/bias of analysts' forecasts in 13 economies of the Asian‐Pacific region. Examination of the accuracy of analysts' earnings forecasts allows us to judge how accounting systems and macroeconomic distinctions in this region affect earnings predictability. As many investors rely on analysts' earnings forecasts instead of producing their own, the growth of international investment means forecasts in non‐US markets will become increasingly important to investors worldwide. Using a sample of firms with data available on Global Vantage and I/B/E/S International, we find that the analysts on average have a pessimistic bias in Asian‐Pacific markets. We examine whether macroeconomic factors explain part of the difference in the size of analyst forecast errors, using the global competitiveness rankings of the World Economic Forum (WEF). We expect that those nations which are more open to foreign trade and investment and are ranked more highly by the WEF in its Global Competitiveness Index will also have more accurate analyst forecasts, as increased global competitiveness demands greater integration into the world economy, and such integration should lead to more transparent financial statements and more accurate earnings forecasts. Our findings are consistent with this prediction. We also find that countries with low book‐tax conformity have more accurate earnings forecasts.     

The glass ceiling in context: the influence of CEO gender,recruitment practices and firm internationalisation on the representation of women in management

This study examines macro‐level organisational determinants of women in management. Specifically, we examined organisational characteristics and strategies, including firm levels of internationalisation, firm foreign ownership, chief executive officer gender and the active recruitment of women, as predictors of an organisation's level of representation of women in management. Results from a survey of 278 firms indicated that the presence of a female chief executive officer and an organisation's active recruitment of women are positively associated with a firm's percentage of women in management while firm internationalisation and firm foreign ownership are negatively associated with the representation of women in management. Overall, these findings suggest that although firms exercise discretion with respect to hiring and promoting women, they are also constrained by the external environment and organisational characteristics. For example, firms with higher levels of firm internationalisation and that are foreign‐owned may limit their efforts and investment in the advancement of women into management.     

The Information Content of Concurrently Announced Earnings, Cash Dividends, and Stock Dividends: An Investigation of the Chinese Stock Market

The firms listed on China's stock market are less than ten years old and to date there has been relatively little research on the usefulness of their accounting disclosures for investors. This study focuses on the information content of annual earnings and dividend announcements made by listed Chinese companies. Earnings, cash dividends, and stock dividends are announced concurrently in China and so this allows for tests of their information usefulness and of the interactions between the three signals. Based on a data set of up to 1,232 announcements, we find that unexpected earnings, proxied by earnings changes, are positively related to abnormal returns. Thus, earnings are used by investors in setting market prices. Stock dividends corroborate or attenuate the earnings signal. If the sign of the unexpected stock dividend (increase, decrease) is the same as the sign of the unexpected earnings, then the earnings signal is stronger. If the signs are opposite, the earnings signal is weaker. Unexpected cash dividends have little impact on the earnings signal. Stock dividends per se have a small association with stock returns. In contrast, cash dividends have no discernible association with stock returns and this is consistent with dividend irrelevance arguments. Our results are robust across a number of sensitivity tests.     

Market Implications of the Audit Quality and Auditor Switches: Evidence from China

Independent audits enhance the credibility of corporate financial reports and assist investors to make rational decisions in the capital market. Nonetheless, the utility of the auditing function depends upon the quality of audits, which is determined by the independence and expertise of auditors. Hence, auditor choice and switch will not only affect an audit's quality, but will also influence decisions made by investors and other market participants. The purpose of this paper is to investigate how investors respond to the quality of audits and auditor switches in the Chinese context. Empirical results show that the quality of an audit and switching to a larger auditor have a positive (negative) impact on earnings response coefficients (ERCs) for firms with positive (negative) abnormal earnings. In contrast, switching to a smaller auditor has a negative (positive) impact on ERCs for firms with positive (negative) abnormal earnings. These results suggest that large auditing firms (Top 10) in China are perceived as more effective for curbing income-increased earnings management, which leads to higher (lower) ERCs for clients with positive (negative) abnormal earnings. Firms' switching to a larger auditor may signal high-quality earnings. Therefore, investors more often increase stock prices when firms have positive abnormal earnings and less often depreciate prices for negative abnormal earnings. Similarly, switching to a smaller auditor may signal lower earning quality, resulting in opposite market responses. In general, the empirical evidence suggests that audit information is valued by the capital market in China. Large auditing firms have been able to product-differentiate themselves within the Chinese stock market.