Timeliness of Reporting and Earnings Information Transfers

This study examines earnings timeliness and its effect on earnings information transfers. Empirical analyses focus on a sample of approximately fifteen hundred earnings reports and nearly four thousand information transfers. The principal findings are: (1) earlier earnings releases yield negative information transfers, (2) earnings releases yield negative (nominal) information transfers to firms that previously (subsequently) release their earnings reports, and (3) earlier earnings releases yield negative information transfers to firms that have not yet disclosed earnings. These findings show that the timing of earnings reports has significant and far-reaching economic consequences.     

A Wealth-Based Explanation for Earnings Conservatism

This study extends research on earnings conservatism – the degree to which the accounting system recognizes bad news regarding future cash flows in a more timely manner than good news – by arguing that heterogeneous executives' risk attitudes will influence the degree of conservatism. Prior research has demonstrated that differences in earnings conservatism are mainly the result of differences in institutional factors (Basu (1997) and Ball et al. (2000a)). We hypothesize that more risk-averse managers, who demand a risk premium that offsets the effects of the variance in their compensation, will report more conservative earnings. Earnings conservatism will temper expectations among stakeholders about the future cash flows to be distributed thereby diminishing the likelihood of disappointing outcomes and potential litigation or threats for executives of being fired. The more risk-averse manager would be more inclined to reduce such conflicts, since they will have a destabilizing effect on his future compensation. The empirical results for a sample of Dutch companies over the period of 1983 to 1995 confirm our hypothesis: more risk-averse managers report earnings more conservatively than do less risk-averse managers.     

Scale Effects in Capital Markets-Based Accounting Research

Abstract:  Based on data simulated using a modified Ohlson (1995) valuation model, we investigate effects on inferences of five potential scale-related effects: multiplicative and additive omitted scale factors, scale-varying coefficients, survivorship, and heteroscedasticity. We find that diagnostics identified in prior research are not successful in detecting or distinguishing these scale effects. Thus, we investigate the effectiveness at mitigating scale effects of six specifications of regressions of equity market value on equity book value and earnings: undeflated, share-deflated, equity book value-deflated, lagged price-deflated, returns, and equity market value-deflated. For each specification, we compare frequency of correct rejection that the coefficients equal zero, coefficient bias and absolute error, and regression explanatory power. We find that share-deflated and undeflated specifications generally perform the best, regardless of the type of scale effect.     

The Predictive Value of Expenses Excluded from Pro Forma Earnings

We investigate the informational properties of pro forma earnings. This increasingly popular measure of earnings excludes certain expenses that the company deems non-recurring, non-cash, or otherwise unimportant for understanding the future value of the firm. We find, however, that these expenses are far from unimportant. Higher levels of exclusions lead to predictably lower future cash flows. We also find that investors do not fully appreciate the lower cash flow implications at the time of the earnings announcement. A trading strategy based on the excluded expenses yields a large positive abnormal return in the years following the announcement, and persists after controlling for various risk factors and other anomalies.     

Security Market Effects Associated with SFAS No. 131: Reported Business Segments

In this study we examine the economic impact of the expected shift from the FASB's segment reporting requirements found in SFAS No. 14 to those found in SFAS No. 131. SFAS No. 131 was the joint effort of the United States' FASB and Canada's Accounting Standards Board (AcSB). It requires firms to report segments based on the firm's internal reporting and management arrangements (the management method) rather than on SFAS No. 14's line-of-business method. One alleged deficiency with the line-of-business method is its flexibility that allowed companies to combine segments. Analysts complained that companies abused this flexibility to conceal information. The management method allegedly is less flexible because companies must report segments externally the same way that they manage them internally. We examine the economic impact of the reporting standard shift by first developing company variables related to the alleged concealment of information under SFAS No. 14. These variables help us to explore why companies combine business segments under the line-of-business method and what costs companies are expected to incur when they are forced to implement the management method. Next we identify a series of dates that chronicle when the market received information about the content of SFAS No. 131. Results of the stock return tests suggest that SFAS No. 131 had a significant impact on firms that previously had the greatest incentives to conceal segment information, consistent with the conjecture that the standard imposed unanticipated costs on affected firms.     

Prior Wall Street Journal Announcements of Possible Bankruptcy Filings and Price Reactions to Subsequent Bankruptcy Filings

This study examines the relation between prior Wall Street Journal (WSJ) announcements of possible bankruptcy filings and price reactions to subsequent bankruptcy filings for 336 firms that filed for bankruptcy between 1980 and 1993. Extant research indicates that price reactions to announcements of economic events are inversely related to the amount of surprise in the announcements. Prior WSJ anouncements of possible bankruptcy filings increase the markets a priori assessment of firms' probability of bankruptcy, thereby potentially reducing the surprise in subsequent bankruptcy filings. We hypothesize smaller price reactions to bankruptcy filings for firms where the WSJ previously published an article indicating that the firm may file for bankruptcy. Our results are consistent with this hypothesis. Specifically, we find smaller price reactions to bankruptcy filings for firms with prior WSJ announcements of possible bankruptcy filings. Our results hold after controlling for firm size, probability of bankruptcy, exchange listing, leverage, and predisclosure information.     

Conference calls around merger and acquisition announcements: Do they reduce information asymmetry? UK Evidence

This paper examines conference call meetings held around merger and acquisition (M&A) announcements in the UK market. Our main findings indicate that conference calls not only facilitate the smoother transmission of M&A-related information in the stock market and smooth the rate of the information flow to the market, but also they reduce informed trading through option markets before M&A events. We also find that there is an inverse relation of analysts’ forecast error and conference call probability, that firms initiate conference calls during M&As when their transactions are large and are facing liquidity constraints, and that the probability of a firm holding a conference call around an M&A is strongly and inversely related to the existence of traded equity options on its stock.     

Relation Between Predisclosure Information Asymmetry and Trading Volume Reaction Around Quarterly Earnings Announcements

This study investigates the effects of differences in predisclosure information asymmetry on trading volume reaction during quarterly earnings announcements. The analyses show that trading volume reaction to quarterly earnings announcements is positively related to the level of predisclosure information asymmetry and to the magnitude of the price reaction to the announcements. These results are consistent with Kim and Verrecchia's (1991a) theoretical trading volume proposition, and with Atiase and Bamber's (1994) tests of the proposition based on annual earnings announcements. This study also provides evidence on the relation of predisclosure information asymmetry and trading volume before and after quarterly earnings announcements.     

Can Information Transparency Improve Earnings Quality Attributes? Evidence from an Enhanced Disclosure Regime in Taiwan

Investors demand timely and accurate corporate disclosures in order to comprehend the governance and performance of a firm; they also rely on quality earnings information to assess the intrinsic value of a company. This study links the two using a Taiwan sample because the government of Taiwan has just performed a market-wide corporate-transparency rating. We find significant improvement on four accounting-based earnings-quality attributes, including accrual quality, earnings persistence, predictability, and smoothness. Further, there is a statistically reliable association between the level of information transparency and each of these earnings attributes, implying that a disclosure mechanism design can enhance management accountability in financial reporting.     

Information and the Cost of Capital in a Mean‐Variance Efficient Market

Before information ? arrives, market observers must be uncertain whether the stock price conditioned on ? will be higher or lower than the current price. Otherwise there is an obvious arbitrage opportunity. By assuming this minimal condition of efficient markets, it is shown under the mean‐variance CAPM that information that leaves the future value of a firm more certain, in the sense that its perceived covariance with the market is reduced towards zero, can lead to a higher expected return on that asset. A further result is that it is theoretically possible that the required return on the stock will necessarily fall after observing signal ?, or (in other circumstances) that it will necessarily rise. In general, information that allows better discrimination between firms leads some firms to have higher costs of capital and other firms to have lower costs of capital. Less obviously, better discrimination between firms can induce a higher average cost of capital across the market.     

Industry Information Transfers: The Effect of Information Environment

This study extends the information environment theory of Atiase (1985) that suggests an inverse relation between the information available about a firm and the security price reaction to its release of earnings. Non-announcing firms' security price responses are found to be inversely related to their market value but directly related to the number of peer firm articles appearing in the Wall Street Journal and the historical earnings correlations within their industry. The results suggest that information environment affects the security price relevance of a firm's own and its peer firms' earnings.     

m-Double Poisson Lévy markets

We develop novel mispricing of markets under asymmetric information and jumps for informed and uninformed investors, called m-Double Poisson markets, driven by independent Double Poisson processes. In the special case m?=?1, called the Double Poisson pure-jump Lévy market, both types of investors hold the same optimal portfolio and expected utility, and hence, the informed investor has no utility advantage over the uninformed. For the general market, instantaneous centralized moments of returns are used to compute optimal portfolios and utilities. The mean, variance, skewness and kurtosis of instantaneous returns are reported using jump amplitudes and frequencies.     

Asymmetric timeliness tests of accounting conservatism

Recent accounting research employs an asymmetric timeliness measure to test the hypothesis that reported accounting earnings are “conservative.” This research design regresses earnings on stock returns to examine whether “bad” news is incorporated into earnings on a more timely basis than “good” news. We identify properties of the asymmetric timeliness estimation procedure that will result in biases in the test statistics except under very restrictive conditions that are rarely met in typical empirical settings. Using data series that are devoid of asymmetric timeliness in reported earnings, we show how these biases result in evidence consistent with conservatism. We conclude that the biased test statistics inherent in the asymmetric timeliness research design preclude using this method to measure conservatism; that these biases are irresolvable as they originate in the test’s specification; and that studies employing asymmetric timeliness tests cannot be interpreted as providing evidence of conservatism.

How important are semi-annual earnings announcements? An information event perspective

Using a method that avoids the need to specify earnings expectations, we demonstrate that the period surrounding the semi-annual announcement of Australian firms' earnings is, on average, an important source of information. Although there is substantial year-to-year variation, we observe no evidence of any significant time trend, and also conclude that a shift from Australian domestic generally accepted accounting principle to International Financial Reporting Standards did not impact the association between earnings announcement windows and stock returns. We also find no evidence that the informativeness of earnings announcements varies systematically with firm size, analyst following or economic news (i.e., positive vs. negative stock returns, profits vs. losses), although we do observe significant variation across industries. Our conclusion is further supported by contrasting the earnings release date with the days immediately prior to release, or high information days other than earnings announcement windows. Using a more precise event window relative to prior studies (i.e., 3 h vs. 3 days), we confirm that earnings announcements contain significant new information about fundamentals.