Abstract
This paper estimates and compares the long-term market reaction to earnings innovation (ERC) in the five main emerging economies – Brazil, Russia, India, China and South Africa (BRICS) – and analyzes the effects of nonlinearity of unexpected earnings, negative earnings and firm size on ERC. The tests are based on 31,159 firm-year observations from 1995 to 2013 from a total sample of 2,290 listed firms and the econometric estimation process is based on countryspecific longitudinal ordinary least squares regressions. The results showed that accounting information has marginal implications for stock prices in all countries; however, the determinants of ERC vary along time and across countries as context-specific components. The results also show that (i) the nonlinear effects of unexpected earnings in ERC are a common trend in all evaluated countries but Russia; (ii) the negative earnings effects on ERC are documented in Brazil, India and Russia, whereas they do not hold true for China and South Africa; and (iii) only in China a significant effect of firm size is observed in the way market agents incorporate earnings information in the long run. Keywords: accounting earnings, earnings response coefficient, emerging markets, BRICS.
Highlights
It is well accepted and documented that financial statements provide useful information for market participants
Considering that earnings response coefficient (ERC) has cross-sectional differences between firms (Collins and Kothari, 1989; Easton and Zmijewski, 1989; Frankel and Lee, 1998) and cross-sectional differences according to market characteristics (Ariff et al, 2013; Ball et al, 2009; Bao, 2009), the aim of this paper is to analyze and compare the market reaction to earnings innovation in the five main emerging economies – Brazil, Russia, India, China and South Africa (BRICS)
The non-linear and the negative earnings effects account for firm-specific earnings patterns and the differences in firm size can account for both information content (Collins et al, 1987) and risk (Alford, 1992)
Summary
It is well accepted and documented that financial statements provide useful information for market participants. The results show that, the accounting information has relevant implications to stock prices and firm valuation in all the emerging markets analysed, the determinants of the extension to which market agents incorporate these information in earnings vary across countries and along time as contextspecific components. This paper contributes to the literature by expanding the emerging market literature, by documenting significant differences in the way market agents incorporate accounting information and the determinants of these differences. From previous literature, which report systematic effects of ERC in one specific market (especially the US market), this paper documents for the first time – by accounting for potential variations in annual returns, derived from macroeconomic conditions and market sophistication over the years – that effects of non-linearity, negative earnings and size (potential proxy for information content and risk) play different roles in each analysed country. Final remarks and future extensions summarizes the findings and presents final remarks
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