Regional heterogeneity among non-operating earnings quality, stock returns, and firm value in biotech industry

Abstract

This paper analyses regional heterogeneity under the discretionary measures of non-operating earnings quality and stock returns on firm value in Taiwan’s biotech industry during 2008–2015. An econometric framework based on panel smooth transition regression models is employed in a non-linear panel data model. The results show that biotech firms near the bottom threshold for operating income have low-quality non-operating earnings and those near the upper threshold demonstrate the opposite. Investors who exclusively focus on stock returns are thus likely to miss important information about the quality of earnings.