Religious CEOs and earnings informativeness

PurposeThis study aims to investigate how holding public subsidiaries affects the information environment of consolidated entities in Germany.Design/methodology/approachThe sample consists of German consolidated entities that are traded on major German stock exchanges over the fiscal years 2005-2012 and hold subsidiaries with public common equity. The informativeness of earnings, defined as the association between earnings and returns, is used to investigate how holding public subsidiaries affects the information environment of consolidated entities.FindingsFindings suggest that public subsidiary earnings are incrementally informative about consolidated entity returns beyond both consolidated and segment earnings reported by consolidated entities in Germany. An investigation into the factors that affect the incremental informativeness of public subsidiary earnings reveals that public subsidiary earnings are more incrementally informative when, compared to the consolidated entity, they are relatively large, have dissimilar growth prospects and are from the same country (i.e. Germany).Practical implicationsThese findings suggest that this disclosure is useful to investors and that this type of disclosure could be valuable to adopt in other countries that do not have this disclosure requirement.Originality/valueThese findings contribute to the streams of literature that: investigate ways that regulators can improve the information environment of corporations, compare the informativeness of accounting measures and investigate the informativeness of subsidiary information.

PurposeThe purpose of this paper is to examine restrictions placed by the Troubled Asset Relief Program (TARP) on executive compensation during the financial crisis. Since it remains unclear if TARP restored public confidence in financial institutions, the authors also analyze what effect such regulations had on investors’ confidence in the information provided by earning with respect to executive compensation during this critical period.Design/methodology/approachTo test the assertions, the authors employ an Earnings Response Coefficient model, which captures the association between firms’ earnings surprise (ES) and perceived earnings informativeness. The authors implement both a long- and short-window test to obtain a better understanding of the effects of TARP on financial institutions’ earnings informativeness. The authors use the long-window approach to gather evidence about whether and how financial institutions’ ES are absorbed into security prices conditional on both their participation in TARP and their compliance with TARP’s compensation restrictions. The authors attempt to establish a stronger causal link by also using a short-window approach.FindingsThe authors find that firms paying their CEOs above the TARP threshold show higher earnings informativeness. Financial institutions that paid their CEOs above the TARP threshold achieved better performance during their participation in TARP. The authors also find that a decrease in total compensation while participating in TARP is associated with improved earnings informativeness. Lastly, separating total compensation into its cash and stock-based components, the authors find that firms improve earnings informativeness when they increase (decrease) cash (performance) compensation during TARP. However, overall earnings informativeness decreases during and after TARP relative to the pre-TARP period.Practical implicationsThe research suggests that executive compensation incentives affect earnings informativeness and that tradeoffs are made between direct and indirect costs in retaining executives. The results have implications for policy makers, investors and researchers because the results allow policy makers and regulators to improve on how they design and implement accounting, market and finance regulations and reforms. Investors may potentially use the results when evaluating firm experiencing financial and, in some case, political distress. It also helps firms and offering optimal compensation contracts to create proper incentives for executives and ensure that managerial actions result in successful firm performance.Social implicationsThe study shows how firms react to changing regulations that affect executive compensation and earning informativeness. The results of the study allow regulators to potentially design more effective regulations by targeting certain aspects of firms’ operation such excessive risk-taking behavior and rent extraction opportunities.Originality/valueThere are very few studies that deal with how firms react to regulation that affect executive compensation. The authors provide evidence regarding what effect TARP and its compensation restrictions had on financial institutions’ earnings informativeness. The evidence in the study will further regulators’ understanding of whether TARP improved investors’ confidence in financial institutions. The paper also contributes to the understanding in how changes in executive compensation in times of high political scrutiny affect investors’ perceptions of firm performance.

Crossed-listed foreign firms' earnings informativeness, earnings management and disclosures of corporate governance information under SOX

We examine whether and how the time-oriented tendency embedded in languages influences income smoothing. Separating languages into weak- versus strong-future time reference (FTR) groups, we find that firms in weak-FTR countries tend to smooth earnings more. We also find that when firms should value long-term relationships with stakeholders (i.e., debtholders, suppliers, customers, and employees) more, those in weak-FTR countries are more likely to smooth earnings. Finally, we find that the smoothed income driven by speakers of weak-FTR languages enhances the informativeness of corporate earnings. These findings provide new insights into how language influences income smoothing behavior, the use of smoothed income to maintain stakeholder relationships, and the informativeness of earnings.

PurposeWith the growing awareness about the environment and climate, sustainability has gained increased attention of investors. Many investors now factor in the long-term sustainability of successful and responsible companies when making their investment choices. The purpose of this paper is to investigate whether or not the sustainability performance of a company affects the informativeness of its earnings by exploring the mediating effect of sustainability performance on the association between stock returns and earnings changes.Design/methodology/approachUsing a sample of firms for the period 2009–2016 with available sustainability data from TruValue Labs' database, the authors investigate how the sustainability performance of a firm mediates the relationship between stock returns and earnings (changes). The authors use ordinary least squares (OLS) regressions to test their hypotheses.FindingsConsistent with the voluntary disclosure and environmental, social and governance (ESG) performance literature, the authors find that higher sustainability performance improves the stock price informativeness of earnings. The authors find evidence in support of increased earnings response coefficient with increased sustainability performance.Research limitations/implicationsThis study adds to the literature supporting the notion of sustainability investing indicating that sustainability performance of a firm affects the stock price informativeness and predictability of earnings (changes) of the firm.Originality/valueThis study has value for, both, investors and managers regarding the importance of sustainability performance of the firm. Sustainability performance of the firm sends signals to market participants, increasing the informational content of the reported earnings as well as predictability of future earnings.

The effect of real earnings management on the persistence and informativeness of earnings

Purpose The purpose of this paper is to investigate whether the communication that takes place through the sustainability disclosure (SD) route has an effect on earnings informativeness (EI) of firms in an emerging market. Design/methodology/approach The sample consists of companies listed on the Colombo Stock Exchange in Sri Lanka, where SD is a new phenomenon and a voluntary reporting initiative. Regression analysis is executed on the panel data to achieve the study objective. Findings The result reveals a positive association between SD and EI. Sustainability reports may provide useful information that supplements merely financial data, aiding the stakeholders to interpret the financial reporting better. The finding premises that SD enhances EI, communicating value relevant information to capital market participants. Practical implications SD does much to reduce capital market participants’ uncertainties, thereby aiding them to assess financial information better. Social implications The findings of the study confirm earlier research findings that indicate a positive association between SD and EI, suggesting that capital market participants are gradually becoming aware of the value relevance of sustainability reports. Originality/value This is the first study investigating SD and EI association that is specific to the Sri Lankan context. Owing to the sparse studies done on the SD and EI association, this study should contribute significantly to the existing literature by broadening the geographical coverage.

Manuscript TypeEmpiricalResearch Question/IssueFocusing on an environment where ownership concentration is prevalent and where the presence of politically connected directors on the board is the natural form of political connection, we analyze the effect of political connections on earnings informativeness. We also examine a question that has not been considered in previous research, namely, the impact of the level of divergence between the dominant owner's voting and cash flow rights on earnings informativeness for politically connected firms.Research Findings/InsightsWe find that the presence of politicians on the board negatively affects earnings informativeness. We also find a positive impact of the divergence between the dominant owner's voting and cash flow rights on the informativeness of accounting earnings in politically connected firms.Theoretical/Academic ImplicationsWe show that the relationship between political ties and earnings informativeness is explained by an information effect, whereby politicians and shareholders are interested in providing as little information to the market as possible in order to protect political ties from public scrutiny and prevent the leakage of competitive advantages to competitors. Additionally, we show that the positive effect of divergence between the dominant owner's voting and cash flow rights on earnings informativeness in firms that belong to a pyramid is explained both by an alignment effect, whereby political connections promote transparency, as well as by a stewardship effect, whereby the ultimate owner of the pyramid, acting as a steward, places politicians on the board to increase the firm's reputation and reports earnings in good faith.Practitioner/Policy ImplicationsThe results of our study may be useful to regulators interested in increasing transparency in order to promote a more efficient allocation of resources. In particular, the results suggest that in countries where recent reforms aim to improve investor protection and market confidence, regulators should encourage the disclosure of firm political ties. The results of our study may also be useful to investors, financial analysts and auditors, as they highlight the importance of considering specific features of the corporate governance system when assessing the credibility of accounting information.

This paper investigates the timing and the pattern of earnings information flow to the market. The return-earnings covariance is proposed as a measure of the magnitude of earnings information flow, alternative to the hedge portfolio returns. It is found that earnings information starts to arrive at the market about six and a half quarters prior to the earnings announcement. The flow of information continues to increase till the second quarter of the current year through the third quarter and suddenly drops in the last quarter. About a quarter of earnings information arrives during the earnings announcement weeks. Results also show that large firms' earnings information arrives at the market earlier, more in the prior year, more in earlier quarters of a given year, and more during non-announcement weeks than small firms' earnings information.

We investigate a previously overlooked type of non-tax cost associated with tax avoidance: the potential loss of earnings informativeness. Expected benefits from corporate tax planning include positive effects on after-tax earnings and an increase in firm value. However, tax avoidance can entail opaqueness which clouds investors’ view on firm performance and reduce earnings informativeness. We run multiple tests on a large U.S. firm sample over the period 1993 to 2012. First, we find that tax avoidance is significantly negatively associated with earnings informativeness, as measured by the Earnings Response Coefficient (ERC) derived from a standard pricing model. Second, we introduce a dynamic partial adjustment model to study the overall firm information quality and show that firms may not be able to compensate for the tax-related loss in earnings informativeness, e.g. by providing other (non-earnings) information. Third, we extend our research design to better control for a number of factors known to affect the ERC, such as firm growth, risk, size, and leverage (Collins and Kothari [1989]). Beyond GAAP and Cash effective tax rates, we use a range of alternative tax avoidance proxies (e.g. Frank, Lynch and Rego’s [2009] DTAX measure, Wilson’s [2009] tax shelter probabilities) to further validate our findings. Results consistently suggest that higher levels of tax avoidance are associated with lower earnings informativeness and that this finding is likely not limited to particularly aggressive types of tax avoidance.

Ownership structure and earnings informativeness: Evidence from Korea

Research Question/Issue: Focusing on an environment where the principal agency conflict steams from the divergence of interests between dominant owners and minority shareholders, and where the legal system provides weak protection to external investors, we analyze the effect of firms’ political ties on earnings informativeness. We also address a question that has not been considered in previous research, namely, the impact of the level of divergence between the dominant owner’s voting and cash flow rights on earnings informativeness for politically connected firms.Research Findings/Insights: We find that the presence of politicians on the board negatively affects earnings informativeness. We also find a positive impact of the divergence between the dominant owner’s voting and cash flow rights on the informativeness of accounting earnings in politically connected firms.Theoretical/Academic Implications: We show that the relationship between political ties and earnings informativeness is explained by an information effect, whereby politicians and shareholders are interested in providing as little information to the market as possible. Additionally, we show that the positive relationship between divergence and earnings informativeness in politically connected firms is explained by an alignment effect, whereby the existence of political ties reduces the dominant owner’s incentive to expropriate minority shareholders’ wealth, thus increasing earnings informativeness.Practitioner/Policy Implications: The results of our study may be useful for regulators interested in increasing transparency in order to promote a more efficient allocation of resources. Similarly, the results may be useful to investors, financial analysts and auditors, as they provide evidence of the importance of considering specific features of the corporate governance system when assessing the credibility of accounting information.

This paper examines the effect of Japanese corporate groupings, keiretsu, on the informativeness of earnings. Keiretsu firms maintain close financial and personal ties through cross‐shareholding, credit holding, interlocking corporate directorates, and various business transactions. We propose that the strong interrelations of the keiretsu ownership structure enhance the informativeness of earnings through efficient monitoring of managerial performance. Our empirical results show that keiretsu firms have higher earnings response coefficients than those of non‐keiretsu firms, the earnings response coefficient increases as the strength of the keiretsu relationship increases, and discretionary accruals by keiretsu firms are smaller than discretionary accruals of non‐keiretsu firms. All of these results suggest that the monitoring ability of the keiretsu improves the informativeness of earnings.

The objective of this research to test the effect of institusional ownership and committee audit characteristic on the informativeness of earnings. Especially this research to test the non-banking institusional ownership, banking institusional ownership, independent commissioner as the member of audit committee, competence a member audit commitee in accounting and financial, and frequency of meeting held by audit committee. The data is taken from secondary sourced from the Indonesian Stock Exchange. Data were analyzed using multiple regression. The result indicates that, the non-banking institutional ownership, and shareholding by banks positive effect on the informativeness of earnings. Competence audit committee members in the fields of accounting and finance, and frequency of meetings held positive effect on informativeness of earnings. However, the proportion of independent directors on the audit committee does not affect to the earnings informativeness.

This paper examines the effect of Japanese corporate groupings, keiretsu, on the informativeness of earnings. Keiretsu firms maintain close financial and personal ties through cross-shareholding, credit holding, interlocking corporate directorates, and various business transactions. We propose that the strong interrelations of the keiretsu ownership structure enhance the informativeness of earnings through efficient monitoring of managerial performance. Our empirical results show that keiretsu firms have higher earnings response coefficients than those of non-keiretsu firms, the earnings response coefficient increases as the strength of the keiretsu relationship increases, and discretionary accruals by keiretsu firms are smaller than discretionary accruals of non-keiretsu firms. All of these results suggest that the monitoring ability of the keiretsu improves the informativeness of earnings.