Conservatism and Cross-Sectional Variation in the Post–Earnings Announcement Drift

Accounting conservatism allows me to identify a previously undocumented source of predictable cross‐sectional variation in Standardized Unexpected Earnings' autocorrelations viz. the sign of the most recent earnings realization and present evidence that the market ignores this variation (“loss effect”). It is possible to earn returns higher than from the Bernard and Thomas (1990) strategy by incorporating this feature. Additionally, the paper shows that the “loss effect” is different from the “cross quarter” effect shown by Rangan and Sloan (1998) and it is possible to combine the two effects to earn returns higher than either strategy alone. Thus, the paper corroborates the Bernard and Thomas finding that stock prices fail to reflect the extent to which quarterly earnings series differ from a seasonal random walk and extends it by showing that the market systematically underestimates time‐series properties resulting from accounting conservatism.     

Volume, Opinion Divergence, and Returns: A Study of Post–Earnings Announcement Drift

This paper examines the relationship between post–earnings announcement returns and different measures of volume at the earnings date. We find that post‐event returns are strictly increasing in the component of volume that is unexplained by prior trading activity. We interpret unexplained volume as an indicator of opinion divergence among investors and conclude that post‐event returns are increasing in ex ante opinion divergence. Our evidence is consistent with Varian [1985] , who suggests that opinion divergence may be treated as an additional risk factor affecting asset prices.     

Earnings Management and the Post‐earnings Announcement Drift

We posit that the post‐earnings announcement drift (PEAD) is related to earnings management. Accordingly, we find that firms with large negative (positive) changes in operating cash flows manage accruals upward (downward). Most importantly, we find that PEAD is concentrated largely among those firms that are most likely to have smoothed their reported earnings and is generally associated with discretionary accruals as opposed to nondiscretionary accruals. There is no evidence of a positive (negative) PEAD for those firms with large positive (negative) earnings changes that are least likely to have managed earnings downward (upward).     

Earnings Volatility,Post–Earnings Announcement Drift,and Trading Frictions

We find that lower ex ante earnings volatility leads to higher Post–Earnings Announcement Drift (PEAD). PEAD is a function of both the magnitude of an earnings surprise and its persistence. While prior research has largely investigated market reactions to the magnitude of the earnings surprise, in this study we show that the persistence of the earnings surprise is equally important. A unique feature of the anomalous PEAD returns documented here concerns the association between abnormal returns and trading frictions. Besides demonstrating that firms with lower earnings volatility have higher abnormal returns, we also find that lower earnings volatility firms have lower trading frictions. Taken together, these findings imply that higher abnormal returns are associated with lower trading frictions. We exploit this implication to empirically demonstrate that PEAD returns due to earnings volatility are not concentrated in the firms with the largest trading frictions, which is in contrast to the findings in prior anomaly studies.     

Asymmetric Trading Costs Prior to Earnings Announcements: Implications for Price Discovery and Returns

We show that the cost of trading on negative news, relative to positive news, increases before earnings announcements. Our evidence suggests that this asymmetry is due to financial intermediaries reducing their exposure to announcement risks by providing liquidity asymmetrically. This asymmetry creates a predictable upward bias in prices that increases preannouncement, and subsequently reverses, confounding short‐window announcement returns as measures of earnings news and risk premia. These findings provide an alternative explanation for asymmetric return reactions to firms' earnings news, and help explain puzzling prior evidence that announcement risk premia precede the actual announcements. Our study informs methods for research centering on earnings announcements and offers a possible explanation for patterns in returns around anticipated periods of heightened inventory risks, including alternative firm‐level, industry‐level, and macroeconomic information events.     

The Pre‐FOMC Announcement Drift

We document large average excess returns on U.S. equities in anticipation of monetary policy decisions made at scheduled meetings of the Federal Open Market Committee (FOMC) in the past few decades. These pre‐FOMC returns have increased over time and account for sizable fractions of total annual realized stock returns. While other major international equity indices experienced similar pre‐FOMC returns, we find no such effect in U.S. Treasury securities and money market futures. Other major U.S. macroeconomic news announcements also do not give rise to preannouncement excess equity returns. We discuss challenges in explaining these returns with standard asset pricing theory.     

The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity

With transaction costs for trading goods, the nominal exchange rate moves within a band around the nominal purchasing power parity (PPP) value. We model the behavior of the band and of the exchange rate within the band. The model explains why there are below-unity slope coefficients in regression tests of PPP, and why these increase toward unity under hyperinflation or with low-frequency data. Our results are independent of the presence of nontraded goods in the economy.     

The Politics of Transaction Costs

This article aims to develop a model for analysing the operation and outcomes of the contracting process as it applies to public services, and to explore the politics of transaction costs involved in this process using a case study of Compulsory Competitive Tendering (CCT) in the UK. For this purpose the article deals with the policy outputs from two time periods, 1991 and 1994, which are regarded as the most dynamic years in terms of CCT policy implementation. The article also demonstrates how transaction costs may be manipulated in the contracting process by the interested parties. Finally, it suggests that the politics of transaction costs should be studied systematically in the future.     

Underreaction to Industry‐Wide Earnings and the Post‐Forecast Revision Drift

We test whether the post‐forecast revision drift is mainly attributable to investors’ underreaction to industry‐wide earnings news conveyed by analysts’ forecast revisions. We find a large drift associated with industry‐wide earnings news but no drift associated with firm‐specific earnings news. Consistent with the functional fixation hypothesis, we provide evidence that the post‐forecast revision drift is driven by investors’ underreaction to the higher persistence of industry‐wide earnings. Although prior research has focused on differential persistence of earnings components stemming from managerial reporting discretion, we provide evidence suggesting that investors do not fully understand the differential earnings persistence attributable to industry fundamentals.     

Transaction Costs and the Pricing of Assets

The existence of transaction costs explains why investors do not fully diversify their portfolios. This paper examines the implications of such limited diversification on equilibrium asset prices in the framework of the capital asset pricing model. In the pricing equation obtained here an asset's risk premium depends on a weighted average of its covariance with the market and its own variance.     

The Effect of Earnings–Announcement Timing on Earnings Management

This paper examines whether firms which delay earnings announcements engage in earnings management. The cross–sectional version of the modified Jones 1995 model is used to estimate 'normal' accruals. Prior research has documented that, on average, delayed earnings announcements are associated with negative earnings surprises. Our evidence suggests that the market anticipates unfavorable earnings news when it observes reporting delays. As a consequence, late reporters appear to make the most of a bad situation by employing income–decreasing accruals in big–bath–type earnings management and in contractual renegotiations. We find that the magnitude of income–reducing abnormal accruals is related to the reporting lag.     

Accruals, Cash Flows and the Post‐Earnings‐Announcement Drift

Abstract:   Several prior studies have shown that cash flows have significantly greater impact on stock prices than accruals. We examine the implications of these findings for the post‐earnings‐announcement‐drift anomaly. We argue that, if investors under‐react to earnings news, then the larger price impact of cash flows causes the cash flow component of earnings news to predict future returns better than the accruals component. Consistent with this argument, we show that unexpected cash flows are more positively related to future returns, than are unexpected accruals. Also, unexpected cash flows are found to predict future returns above and beyond that predicted by earnings surprises. Finally, we show that a strategy that decomposes earnings news into its components significantly outperforms strategies based on earnings news alone. The results support under‐reaction explanations for the drift.     

The Transitory Nature of Negative Earnings and the Implications for Earnings Prediction and Stock Valuation

The value-irrelevance of losses largely results from the transitory nature of losses and the diminished relationship between current and future earnings. This study develops a sales-based model of future normal earnings that is useful in analyzing future earnings prospects of loss firms. Results indicate that the developed model is associated with future earnings realizations and current stock price and is shown to be incrementally value-relevant (with book value) in price regressions for loss firms. Investigation of the relative valuation role of the prediction model provides evidence that the model is associated with equity value for loss firms expected to survive.     

交易费用视角下的金融集聚效应

从交易费用视角看,产业集聚可以扩大市场广度,增加市场深度,从而拓展市场范围,促进分工的进一步发展并实现分工的利益.金融集聚作为产业集聚的一种形式,通过和当地服务业、制造业的互动拓展了金融产业的市场广度;通过金融企业之间的竞争合作关系增加了金融产业的市场深度,对区域金融产业产生积极的集聚效应,促进了地区金融业的良性发展.     

Fundamental Information and Monetary Policy: The Implications for Earnings and Earnings Forecasts

Building on the work of Lev and Thiagarajan (1993) and Abarbanell and Bushee (1997 and 1998) this paper tests whether market-based information including dividend yield (Fama and French, 1998), firm size (Reinganum, 1981), and the ratio of book value to market value (Fama and French, 1992) add explanatory power to accounting data for predicting future earnings. The paper also tests whether earnings changes and the predictability of those changes are conditioned on monetary policy. It is found that the ratio of book value to market value is significantly related to earnings changes. Analyst forecast accuracy differs depending on monetary policy regime, but this difference is not due to differing interpretation of fundamental signals on financial statements appearing under differing monetary policy regimes. It is also found that there is a significant relation between monetary policy, earnings changes, and the level of signals concerning earnings changes.     

The Earnings Implications of Pension Expense

Abstract

Recent challenges to the actuarial pension model and a movement to harmonize international accounting standards both suggest that the current Canadian standards for pension accounting, CICA 3461, may see substantial revision during upcoming years. To understand better the implications of these possible accounting changes, this paper presents the results of a stochastic analysis that quantifies how the volatility of pension expense for a sample of ten Canadian companies sponsoring defined benefit plans will be increased by the adoption of immediate recognition accounting. For certain companies this increase is significant and is shown to have a material earnings impact. The implications of this earnings volatility for the future of defined benefit pension plans are also explored.     

Analysis of the Nonlinear Option Pricing Model Under Variable Transaction Costs

In this paper we analyze a nonlinear Black–Scholes model for option pricing under variable transaction costs. The diffusion coefficient of the nonlinear parabolic equation for the price V is assumed to be a function of the underlying asset price and the Gamma of the option. We show that the generalizations of the classical Black–Scholes model can be analyzed by means of transformation of the fully nonlinear parabolic equation into a quasilinear parabolic equation for the second derivative of the option price. We show existence of a classical smooth solution and prove useful bounds on the option prices. Furthermore, we construct an effective numerical scheme for approximation of the solution. The solutions are obtained by means of the efficient numerical discretization scheme of the Gamma equation. Several computational examples are presented.     

产业集群交易费用分析及其超边际模型研究

产业集群是当今世界经济中颇具特色的经济组织形式,其自身具有较强的竞争优势,而交易费用是使产业集群具有竞争优势的关键因素。运用超边际分析方法结合交易费用内部化理论,在对产业集群交易费用分析的基础上,构建产业集群交易费用超边际模型和逻辑模型,并通过模型超边际结构模式分析得出:产业集群有助于减少交易间服务费用和学习费用,使得交易费用降低,促进产业分工进一步深化,提高企业的竞争优势。