Annual Earnings Announcements Research Articles

Business Group Analysts

We exploit the rich data of business groups in China and identify sell-side analysts following multiple listed firms within a business group (BG analysts). For a group firm, we find that BG analysts issue more accurate forecasts than non-BG analysts. Such an effect is more pronounced when the focal firm shares stronger economic links with, and when its covering analysts have greater information demand for, its group peers. Further analyses suggest evidence of intragroup information flows. Around group peers’ annual earnings announcements, BG analysts are more likely than non-BG analysts to revise their forecasts for the focal firm along the same direction as group peers’ earnings surprises. Confined to analysts’ coverage initiations for a group firm, those who have covered the focal firm’s group peers prior to the coverage initiation show superior forecasting performance during the initiation year. By adopting the unique perspective of business groups, i.e., a prevalent organizational structure, our study shows that information commonalities within a business group shape analyst behaviour.

Who Gets Believed? Trust and Investor Reaction to Earnings Announcements in Sharīʿah-Compliant vs. Sharīʿah Non-Compliant Firms

Purpose ‒ Considering the proclamations of trustworthiness within the Islamic financial system and the positive relationship between stock market reaction and earnings announcement of the trustworthy firm, this paper aims to empirically test the presence of trust in Sharīʿah-compliant listed firms in Pakistan. Design/Methodology/Approach ‒ The research question has been addressed by investigating firms listed on the Pakistan Stock Exchange (PSX) from 1 July 2019 to 30 June 2020. Event study method has been used by taking Abnormal Return Variance (ARV) and Abnormal Trading Volume (ATV) as proxies to measure the investors’ reaction following earnings announcements. Findings ‒ The results suggest that stock price variations around earnings announcements are negatively related to trustworthy firms compared to less-trusted firms (i.e., Sharīʿah non-compliant firms). For ATV, it was found that traders react to annual earnings announcements for both types of firms in a similar way. Originality/Value ‒ This research is an attempt to evaluate the Islamic financial system from its trustworthiness perspective. Sufficient literature has already documented that being trustworthy is obligatory for Sharīʿah-compliant firms. This study contributes to the literature by examining whether the market/investors trust such firms or not. Research Limitations/Implications ‒ This research is based on a single-country analysis with a research span of one year. Cross-country analysis with a broader time horizon may give further clarity. Practical Implications ‒ This paper has made a valuable contribution to the literature by providing the guideline on how investors’ reactions to Sharīʿah-compliant firms differ from their reactions to Sharīʿah non-compliant firms. It also indicates how religious elements may subdue other social factors such as trust. This paper has also explored the market reaction by assessing both the liquidity and volatility of the stock market in Pakistan.

Market Reaction to Local Attention around Earnings Announcements in China: Evidence from Internet Search Activity

The existing literature shows that, due to locality and familiarity, spatial investor–firm adjacency plays a key role in determining stock investor attention, as proxied by the location where investors initiate an Internet search of the ticker symbol. This paper investigates whether Chinese stock markets exhibit the same pattern observed in the U.S. market—demand for a firm’s information can exert strong effects on the stock market response during earnings announcements of the firm. Specifically, for each Chinese publicly listed firm, this paper constructs a dynamic local attention ratio that divides the search volume generated within the province where the firm is registered by the contemporaneous nationwide search volume consisting of 31 provinces in total. During 2011–2018 in China’s A-share market, it was found that the local attention measure leads the market response around annual earnings announcement dates. For firms with higher local attention, trading is more active before the announcement, and the price changes can better predict incoming earnings news. At the announcement, while trading remains active, the predictivity of price changes for earnings becomes weaker. Furthermore, we only found evidence that supports the local information advantage argument in explaining the locality of Chinese investors’ attention.

Investor Herding and Price Informativeness in Global Markets: Evidence from Earnings Announcements

The authors examine whether herd activity promotes the efficient pricing of value-relevant information conveyed by annual earnings announcements. Using a global panel sample representing 35 countries, they find that price informativeness increases with herding effects around the time of the earnings disclosure. In addition, the positive herding-informativeness relationship is greater in countries with stronger legal systems and stronger political regimes. A series of robustness tests confirm these relationships. The study findings demonstrate that the tendency to herd plays a beneficial role in expediting information dissemination and reducing trader disagreement. This implies that this positive association is probably driven by the presence of investigative herding.

Determinants of the Timeliness of Annual Earnings Announcement: Interaction Effect between Corporate Posture and Perception on Internal Control Systems

Determinants of the Timeliness of Annual Earnings Announcement: Interaction Effect between Corporate Posture and Perception on Internal Control Systems

Comparing Non-GAAP EPS in Earnings Announcements and Proxy Statements

We compare non-GAAP earnings per share (EPS) in firms’ annual earnings announcements and proxy statements using hand-collected data from U.S. Securities and Exchange Commission filings. We find that proxies for capital market incentives (contracting incentives) are more highly associated with firms’ disclosure of non-GAAP EPS in annual earnings announcements (proxy statements). However, we find systematic differences in the properties of firms’ non-GAAP earnings and exclusions depending on whether they disclose non-GAAP EPS in both the earnings announcement and the proxy statement. When firms disclose non-GAAP EPS in both documents, we find that non-GAAP EPS is more useful for assessing firm value. Specifically, these firms are more likely to: (1) exclude nonrecurring items, (2) exclude less persistent earnings components, and (3) provide less aggressive non-GAAP EPS. Our results suggest that non-GAAP EPS is higher in quality for investors when disclosed in both the annual earnings announcement and the proxy statement. We provide some of the first large-sample evidence consistent with the use of non-GAAP EPS metrics in both financial reporting and compensation contracting.This paper was accepted by Brian Bushee, accounting.

Releasing Earnings when the Audit is Less Complete: Implications for Audit Quality and the Auditor/Client Relationship

SYNOPSISThis study examines the effect of audit completeness at the annual earnings announcement date on audit quality and auditor/client retention decisions. The vast majority of companies now release earnings before the year-end audit is complete while, historically, companies would release earnings on or after the date of audit completion. Management's decision to release earnings when the audit is less complete can adversely impact audit quality and has negative implications for the overall auditor/client dynamic. We find that audits that are less complete at the earnings announcement date are associated with a higher likelihood of financial statement misstatements in audit areas that are typically performed toward the end of audit fieldwork. We also find a higher likelihood of auditor turnover during the following year. Taken together, the results suggest lower financial reporting/audit quality and higher auditor turnover for companies that release earnings when the audit is less complete.Data Availability: The data used are publicly available from the sources cited in the text.

The Increasing Usefulness of Annual Earnings Announcements: An Examination of Changes in Disagreement Using Analyst Forecasts

Researchers in accounting have recently provided evidence of a striking increase in the usefulness of earnings announcements based on stock market price and volume reactions (Beaver et al., 2018; Barron et al., 2018). Price reactions, however, are unable to capture investor disagreement and volume reactions capture both the resolution of prior disagreement and newfound disagreement generated by earnings announcements. Thus, it remains to be determined if earnings announcements have become increasingly useful in leveling the informational playing field, a key public policy objective of financial reporting. To address this possibility, we examine changes in disagreement around annual earnings announcements over the last forty years using analyst forecast measures found in the literature. First, we show that forecast dispersion is reduced around earnings announcements and this reduction has increased over time. Next, we use a forecast measure of informedness from Barron et al. (1998) to show that analysts as a group are more informed by earnings announcements in recent time periods. Finally, we use Barron et al.’s forecast measure of consensus to show that the ability of earnings announcements to make analysts more commonly informed has increased over time.

Relation between the Accelerations of the Timing of Annual Earnings Announcements and the Corporate Stance toward Financial Reporting

Relation between the Accelerations of the Timing of Annual Earnings Announcements and the Corporate Stance toward Financial Reporting

A longitudinal analysis for informativeness of earnings announcements in Borsa Istanbul

Purpose The purpose of this paper is to assess the information value of earnings announcements for the 2007–2017 period in Borsa Istanbul. Design/methodology/approach Abnormal volatility (AVOL) and abnormal absolute return (AAR) in the three-day window around the earnings announcement are used as proxies for information content. A pooled regression of AVOL and AAR is conducted to test for the existence of information content and analyze its time trend along with its determinants. Findings The authors find significantly positive AVOL and AAR which shows that earnings have information content for investors during the sample period. Furthermore, both proxies demonstrate a positive time trend after controlling for various firm characteristics and surprise measures. The authors take this as evidence that overall informativeness of earnings has increased over time. The authors observe that this increase is most prevalent for growth companies and earnings announcements with high absolute surprise. This study provides partial support for the hypothesis that value of earnings announcements has increased after an improvement in information dissemination technology with the inception of the online disclosure platform, KAP. Practical implications Understanding information value of earnings announcements is of interest for companies which prepare earnings reports, regulators who set standards on their content and frequency and investors which make investment decisions based on information released at these announcements. Originality/value There had been few non-US studies related to information value of earnings announcements. The overwhelming majority of these are conducted using limited data sets from the latter part of the last century and only analyze annual earnings announcements. The authors aim to shed light on the subject using a broad and recent sample of quarterly earnings announcements from a major emerging market, Turkey.

EBITDA and Managers' Investment and Leverage Choices

ABSTRACTEBITDA is a commonly used performance measure for (i) valuation, (ii) debt contracting, and (iii) executive compensation. The widespread use of EBITDA by stakeholders may induce managers to focus their attention on EBITDA. Since EBITDA excludes various expenses, managers who fixate on EBITDA may underweight the excluded expenses when determining their firms' investments in capital and leverage levels. I find that managers who fixate on EBITDA overinvest in capital and overlever their firm relative to their industry peers. These results are robust to alternative proxies for managers' focus on EBITDA and alternative specifications. I also find that firms whose managers focus on EBITDA have weaker operating performance, which is attributed to higher depreciation expense. My primary proxy for managers' focus on EBITDA is whether they choose to disclose EBITDA in annual earnings announcements. I find that the use of EBITDA in setting executive compensation, the prevalence of EBITDA estimates by analysts, and the use of EBITDA‐based covenants in firms' debt contracts are all positively associated with the propensity to disclose EBITDA in earnings announcements. I find weaker evidence of opportunistic motives explaining EBITDA disclosure. These results are consistent with managers disclosing EBITDA to portray to investors that it is a metric they seek to maximize. Overall, this study suggests that while EBITDA is a widely used metric, there is a systematic cost to using this measure—it provides managers with incentives to overinvest in capital and to acquire excessive debt.

Group-Affiliated Analysts’ Strategic Forecasts During a Year: Evidence from Korea

ABSTRACTIn examining the family-controlled business groups in Korea, prior literature shows that group-affiliated analysts’ forecasts are optimistically biased. This article investigates whether the group-affiliated analysts strategically time the level of accuracy and bias in their forecasts for the same group-affiliated firms due to the change in information asymmetry in the market. The results show that the group-affiliated analysts issue more accurate and less optimistic earnings forecasts for the affiliated firms when the level of information asymmetry is low; particularly, in April, which is right after annual earnings announcements.

The Market Response to Auditor-Provided Distress Signals in First-Time Going Concern Modifications

Going concern modifications (GCMs) are intended to provide market participants with information related to financial distress and prior research suggests that the disclosure of a GCM elicits a substantial negative market reaction from investors. In this study, we illustrate the importance of disentangling the response to the GCM itself from the response to concurrent material disclosures. We find that a large majority of first-time GCMs are issued concurrently with annual earnings announcements (EAs) or other significant management disclosures. We also find that the market reaction surrounding GCMs is significantly more pronounced when GCMs are disclosed with EAs, and we find no convincing evidence of a market response to GCMs disclosed following EAs. Finally, we find no difference in the market response to EAs issued with GCMs versus EAs issued prior to GCMs. Taken together, our findings suggest that the market reaction previously attributed to the auditor’s GCM is largely attributable to other management disclosures.

Internal Control Systems Development and Its Impact on Improving Timeliness of Annual Earnings Announcements: Focusing on Basic Policy Announcements on Internal Control Systems Development

Internal Control Systems Development and Its Impact on Improving Timeliness of Annual Earnings Announcements: Focusing on Basic Policy Announcements on Internal Control Systems Development

Consistency As a Path to Comparability: Benefits and Costs

This paper analyzes the benefits and costs of financial statement comparability from an information perspective. We first show analytically that comparability yields both information gains and losses because it enhances the correlation among firms' reported earnings (common informativeness) at the expense of firms' own reporting precision (individual informativeness). We then provide theoretical justification for the comparability measure of De Franco, Kothari, and Verdi (2011) and show that it is negatively associated with implied volatility at annual earnings announcements. This result suggests that comparability, on average, improves earnings informativeness. More importantly, consistent with our model predictions, comparability's net information benefits decrease when firms' economic fundamentals are highly correlated and/or volatile. These results are robust to using financial crises and industry merger waves as instrumental variables for fundamental correlation and fundamental volatility, respectively. Overall, this paper provides a framework for studying comparability and highlights the potential information cost of increased comparability.

Information Content of Annual Earnings Announcements: Evidence from Moroccan Stock Market

The objective of our work is to study the information content of accounting results of listed companies in the Casablanca Stock Exchange. Applying the methodology adopted by Beaver (1968), we analyze the market reaction, in terms of changes in prices and volumes around the announcement of annual earnings. Our study focuses on 75 companies listed on the Casablanca Stock Exchange for the period [2010 to 2015]. It accounts for the presence of an informational content for the accounting results around the announcement date. Thus, this confirms the hypothesis of financial market efficiency in its semi-strong form (Fama, 1970) and the results obtained in other financial markets (US, French, Chinese ...).

Do firms use early guidance to disclose the effect of conservatism on future earnings?

Purpose By deferring profits and anticipating losses, conservatism makes earnings increases more persistent and earnings declines more likely to revert. Therefore, the level of conservatism in current earnings has implications for future earnings expectations. Past research shows that outsiders can fail to understand these implications. This paper aims to investigate whether firms help outsiders by voluntarily disclosing their expectations about how conservatism will affect future earnings trends. Design/methodology/approach The authors examine the likelihood and content of “early” earnings guidance – i.e. guidance about future earnings that is released around or before the announcement of current earnings. The sample is made of 8,820 annual earnings announcements, 62 per cent of which are combined with early guidance. Findings The authors find that the more conservative current earnings, the higher: the likelihood that the firm releases early guidance; the likelihood that the firm predicts a positive change in earnings; and the difference between the forecasted earnings and current earnings. The authors also find such guidance to be relevant to analysts, who use it to update their forecasts. Practical implications By showing that firms use early guidance to disclose the effect of conservatism on future earnings, the study is interesting to users and preparers because it shows that analysts need and use such disclosure; and regulators because it alleviates concerns about the information consequences of conservatism. Originality/value The findings show that firms do not refrain from committing to positive early guidance to disclose the earnings effects of conservatism. This is interesting in light of the difficulty of predicting such effects, the manager incentives to keep expectations low and the cost of committing to positive guidance instead of less risky qualitative disclosure alternatives. In this way, the authors contribute to the literature on the interrelation between voluntary disclosure and conservatism in financial reports.

The impact of earnings-announcement timing on technical analysis signal: The case of Indonesia

This study discusses technical analysis signal and earnings-announcements timing. Technical analysis signal is used to capture price reaction around earnings announcement dates. Technical analysis is selected because it is potential for competing information as fundamental information in emerging market, especially in Indonesian stock market. The longer reporting lag will result in a tendency of bigger information leakage which makes price reaction before announcements stronger. That reaction produces a reliable technical analysis signal. By using Indonesian stock market data, the results show that (1) technical analysis signal generates bigger (lower) return for late (earlier) reporting, and (2) reporting lag positively affects the performance of technical analysis signal that emerge before annual earnings announcements. These findings indicate a tendency of bigger information leakage for companies that delay earnings announcements. It contributes to building a bridge between technical analysis and earnings-announcement timing studies.

The Impact of Earnings-Announcement Timing to Technical Analysis Signal: The Case of Indonesia

This study discusses about technical analysis signal and earnings-announcements timing. Technical analysis signal is used to capture price reaction around earnings announcements. Technical analysis is selected because it is competing information to fundamental information (Flanegin and Rudd 2005), especially in emerging market (Fifield et al., 2005). The longer reporting lag will result a tendency of bigger information leakage which make price reaction before announcements are stronger. That reaction produces a reliable technical analysis signal. By using Indonesian stock market data, the results show that (1) technical analysis signal generate bigger (lower) return for late (earlier) reporting, and (2) reporting lag positively affect to the performance of technical analysis signal that emerge before annual earnings announcements, especially in “buy signal” sample. These findings also indicate a tendency of bigger information leakage for companies that delay earnings announcements. This study contributes to build a bridge between technical analysis and earnings-announcement timing studies.

The Impact of Audit Completeness and Quality on Earnings Announcement GAAP Disclosures

ABSTRACTThis study examines the role of the external audit in management's decision about the amount of GAAP financial statement information to disclose in the annual earnings announcement. The earnings announcement is a key disclosure provided by public companies. Yet, there is no requirement that earnings announcements contain audited GAAP numbers; in fact, recent trends indicate that a majority of companies release earnings before the completion of year-end audit fieldwork. I predict and find that companies that wait until the audit is more complete at the earnings announcement date and receive higher quality audits provide more detailed balance sheet, cash flow statement, and overall GAAP disclosures. I also provide evidence that complete audits and higher quality audits impact the information content of the earnings announcement. The combined results indicate that audit completeness and quality help facilitate more detailed earnings announcement disclosures and have implications for the equity market.Data Availability: Data are publicly available from sources identified in the text.