Abnormal Earnings Research Articles

Information Asymmetry and Valuation Effects of Debt Financing

AbstractThis study demonstrates that under conditions of information asymmetry, shareholders earn positive returns around the shelf registration date of straight debt. The results provide evidence to support Miller and Rock's conclusion that new expected financing by firms can result in positive returns to shareholders and Blazenko's contention that positive returns around the announcement date of straight debt issuance may be found by studying firms with asymmetric information. Firms with reported research and development expenses are assumed to have a higher level of asymmetric information and a greater chance of requiring new outside financing. Research and development expense intensity and abnormal earnings in future periods are found to be significant in a cross‐sectional regression explaining abnormal returns for days surrounding the announcement period.

A Model of Accrual Measurement with Implications for the Evolution of the Book-to-Market Ratio

This paper constructs a model of accrual measurement and tests its implications for the evolution of the book-to-market ratio. The model captures the intuition that book value is untimely or smoothed relative to market value, so that movements in market value have relatively high variance and low predictability, compared with movements in book value. Empirical tests of the model use lagged market value changes to forecast the mean reversion of the book-to-market ratio. This paper complements recent research investigating the role of book-to-market ratios in security analysis. Accounting theorists (e.g., Edwards and Bell [1961] and Feltham and Ohlson [1995]) have long recognized the critical role of book-to-market ratios as predictors of abnormal earnings in earnings-based valuation models. Tests of such valuation models (e.g., Ou and Penman [1993]) confront the practical problem of determining the horizon beyond which abnormal earnings are expected to be zero. The model in this paper implies that this horizon is determined by the remaining useful life of assets, and that the expected path of abnormal earnings over this horizon reflects the pattern of expiration of the useful lives of assets in place.

An international comparison of earnings/price ratios, estimation risk and growth

This study examines the variables that affect the cross-sectional distributions of earnings/price (E/P) ratios both within and across countries. A theoretical model shows that the following variables affect the variation in E/P ratios: (i) interest rates, (ii) dividend yield, (iii) growth (abnormal earnings), and (iv) estimation risk (the uncertainty about abnormal earnings). The model also shows that there is a non-linear relationship between E/P ratios and these variables. This model is applied to a large set of data from twelve different countries. The empirical results are usually consistent with the theoretical model.

Valuation effects of corporate debt offerings

This paper analyzes the effect of corporate debt offerings on stock prices. Straight debt offerings have non-positive price effects, while convertible debt offerings have significantly negative effects. Public utility mortgage (non-convertible) bond offerings have marginally negative effects, and the effect is significantly negative when the proceeds are used to finance the utility's investment program. Cross-sectional regressions reveal no relation between offer-induced price effects and offering size, rating, post-offer changes in abnormal earnings or debt-related tax shields. The evidence is inconsistent with theories predicting that the price effects of capital structure changes go in the direction of the leverage change.

Valuation Response to New Information: A Test of Resource Mobility and Market Structure

This article hypothesizes that resources employed in concentrated industries are more specialized and durable and therefore less mobile than resources employed in atomistic industries. The hypothesis is tested by estimating the relationship between changes in the market value of a firm's securities and changes in its earnings levels and comparing this relation under different market structures. The response of market values to earnings changes is found to be greater for concentrated industries than for atomistic industries. This difference is interpreted as evidence that abnormal earnings persist longer in concentrated industries because of the lower degree of resource mobility.