Bad Economic News Research Articles

Evaluation of Weak-Form Efficient Market Hypothesis in Zimbabwe Stock Exchange during Pandemic Period

Stock markets, just like other sectors of businesses have been impacted by the COVID-19 pandemic. COVID-19 has caused things to change in some sort; behavior, culture, and economy. Investors’ behavior and expectations may have been shaken. Huge stock market dislocations may have occurred as individual and institutional investors react to bad economic news. This paper evaluated the Zimbabwe Stock Exchange (ZSE) for evidence of a weak-form efficient market hypothesis in the context of a random walk model for the pandemic period. The study used low-frequency data (monthly) from January 2020 to February 2022 for its analysis. The study employed autocorrelation tests, unit root test runs tests, and variance ratio tests. The study found that the autocorrelation tests run tests and the variance ratio tests failed to reject the random walk hypothesis, while the unit root test have opposite results. Given that the variance ratio test is more powerful than the unit root test and that unit root tests have very poor power properties, the study concludes that the ZSE followed a random walk during the pandemic period. The study, however, believes that the efficiency of the stock market may have been attributed to inflation problems during the period. As inflation sours, the revenue growth becomes of nominal terms not real terms, hence actual returns in real terms become meaningless in the financial trade. The study recommended further development of the stock market to resemble those of developed markets with various trading products, greater participation, automation, and capitalization.

Asymmetric Timeliness in Earnings: Insights from Earnings Disaggregation

We revisit the asymmetric timeliness of earnings as proposed by Basu (1997). For a large sample of US firm years from 1970-2019, we show that earnings are asymmetrically timely with respect to bad economic news, and that this is robust to the declining timeliness of good news, different time periods, changes in accounting standards and changes in sample firms. When we disaggregate earnings into its market, industry and firm idiosyncratic sources, it is apparent that asymmetrical timeliness is restricted to the idiosyncratic component. This result supports the argument in Watts (2003), that asymmetric timeliness is primarily a response to information asymmetry issues in contracts that rely on accounting information.

Are Managers’ Disagreements With the Market Justified? Evidence From Accounting Loss Recognition

A manager may choose not to record the full extent of bad economic news reflected in negative stock returns (i.e. a manager may exercise low timely loss recognition) if she believes she has private information that justifies a more favorable outlook than the stock market’s pessimistic outlook. Researchers often interpret the resulting deviations between earnings and stock returns as distortions in earnings. However, if managers' more favorable view is correct, earnings will more closely reflect the changes in fundamental value even as they become less aligned with stock returns. In other words, greater deviations between earnings and returns may actually be consistent with more rather than less transparent earnings. We test this possibility using a sample of firm years with negative annual returns. Using future returns as the proxy for the public revelation of managers’ favorable private information, we find that future returns offset current negative returns to a greater extent when managers exercise lower levels of timely loss recognition. Equivalently, we document a negative association between future returns and the portion of implied losses in current negative returns that managers do not recognize. This negative association is stronger when it is more likely that managers have private information. The association is also stronger when managers face higher disclosure costs that prevent full disclosure of their favorable private information. We also find that only a relatively small portion of unrecognized implied losses is recognized in earnings during the subsequent three years. These findings indicate that the traditional explanation for misalignments between earnings and negative stock returns as being due to delayed recognition of economic losses is only partial. Such misalignments are also due to managers’ use of appropriate discretion to include favorable private information in earnings.

Negative accounting earnings and gross domestic product

Konchitchki and Patatoukas Journal of Accounting and Economics 57 (1-2), 76–88, (2014a) show that aggregate accounting earnings growth predicts future nominal gross domestic product (GDP) growth and that professional macro forecasters do not fully incorporate the information contained in aggregate accounting earnings. Based on results from prior literature, which find that accounting earnings reflect bad economic news in a timelier manner than good news, we condition Konchitchki and Patatoukas’s GDP growth forecast model on the sign of earnings changes. We show that negative changes in aggregate earnings predict future GDP growth while positive changes in earnings do not. Furthermore, we show that professional macro forecasters underreact to the information contained in negative changes in aggregate earnings about future GDP growth. Additional tests suggest our findings are a result of conservative accruals in earnings.

Censorship, the Media, and the Market in China

Pervasive media censorship in China is often seen as a strictly political issue. Although in past years reporters have had leeway to report on economic issues, the Chinese Party/state has moved to tamp down economic journalism, even arresting those who report on bad economic news. This shift brings to the fore an issue long ignored by social scientists – economic censorship. Economic censorship takes place when state-owned enterprises (SOEs) or large private companies pressure the state to censor negative reports or directly pay off media companies to quash such reports in favor of more positive ones. Such economic censorship distorts markets and shifts investor money away from new market entrants and towards large, well-resourced and well-connected SOEs. Using a database of Chinese newspaper articles from 2004 to 2006 and a separate database of newspaper articles, blog posts and micro-blog posts from 2010, and supplemented by secondary sources, this paper examines how media coverage is distorted by censorship and corruption to the benefit of China’s entrenched interests. In particular, I find that private and provincially owned companies receive much more press coverage than do their central government (SASAC) owned equivalents, controlling for a number of factors.

Big 4 Auditors, Litigation Risk, and Disclosure Tone

We examine the effect of Big 4 auditors on management’s use of optimistic language in audited financial statement disclosures. While regulators and practitioners consider the audit of disclosures to be increasingly important, empirical evidence of an auditor’s effect on management’s qualitative disclosure choices is limited. Focusing on the notes to the financial statements, which are the primary disclosure item subject to audit, we find that the tone of the qualitative footnote disclosures is significantly more reflective of bad economic news in the presence of a Big 4 auditor compared with a non-Big 4 auditor. This inference continues to hold for a matched sample constructed using entropy balancing to control for inherent differences between clients of Big 4 and non-Big 4 auditors. The Big 4 effect on footnote disclosure tone is more pronounced for the subsample of companies with high litigation risk. A transaction-based analysis of specific footnotes reveals a generally signficant Big 4 effect on footnote disclosure tone when the footnotes are related to signficant business transactions under the Broad Transactions category of the Financial Accounting Standards Board’s Accounting Standards Codification. Finally, when we examine Management’s Discussion and Analysis, which is not subject to audit, we do not find a Big 4 effect on the sensitivity of its tone to bad news. Our results are consistent with higher litigation exposure motivating Big 4 auditors to constrain management’s use of optimistic language while auditing financial reports. This research provides new evidence to the ongoing regulatory discussions regarding the value of auditing disclosures.

Corruption, Censorship, the Media, and the Market in China

Pervasive media censorship in China is often seen as a strictly political issue. Although in recent years reporters have had some leeway to report on economic issues, the Chinese Party/state has moved to tamp down economic journalism, even arresting those who report on bad economic news. This shift brings to the fore an issue long ignored by IPE scholars – economic censorship. This economic censorship takes place when state-owned enterprises (SOEs) or large private companies pressure the state to censor negative reports or directly pay off media companies to quash such reports in favor of more positive ones. Such economic censorship distorts markets and shifts investor money away from new market entrants and towards large, well-resourced and well-connected SOEs. Using a database of Chinese newspaper articles from 2004-2006 and a separate database of newspaper articles, blog posts and micro-blog posts from 2010, and supplemented by interview data and leaked censorship directives, this paper examines how media coverage is distorted by censorship and corruption to the benefit of China’s entrenched interests. In particular, I find that private and provincially owned companies receive much more press coverage than do their central government (SASAC) owned equivalents, controlling for a number of factors.

The Contractionary Effect of Bad Economic News

Is bad economic news a self‐fulfilling prophecy? This paper examines the local employment effects of exposure to pessimistic economic news. By combining detailed data on newspaper subscriptions with a tabulation of negative newspaper stories, the flow of such news across the United States during the 2008 recession is reconstructed at county and quarterly levels. The resulting data set is used to estimate the causal impact of such news on unemployment, hiring, and separation rates. Exposure to pessimistic news is found to suppress hiring and total employment during the early stages of the recession by up to 40% compared to prerecession levels; such news can account for some 7% of the total reduction in employment between 2007 and 2010. Content analysis of the articles in question rules out the possibility that this relationship is driven by reverse causation, that is, newspapers merely reporting poor economic performance. Further analysis of Google search data suggests that the effect is mediated by changes in public attitude caused by exposure to negative news. These findings imply that labor market outcomes can differ due to arbitrary differences in the dispersal of economic information. Bearings on economic theory, including the notions of “sunspots” and “animal spirits,” are discussed.

Like Father, Like Son: Justin Trudeau and Valence Voting in Canada’s 2015 Federal Election

Canada's 2015 federal election was an exiting, as well as a nostalgia provoking, contest. After nine years in office, Prime Minister Stephen Harper and the governing Conservatives were defeated by the resurgent Liberals led by Justin Trudeau. Trudeau is the son of Pierre Trudeau, perhaps Canada’s best known prime minister. Analyses of national survey data demonstrate that party leader images—a major component of the valence politics model of electoral choice—were important in both cases. Unlike his father, Justin Trudeau was castigated as a lightweight and just not ready. However, articulating plausible policies to jump-start Canada's sluggish economy and espousing sunny ways, the younger Trudeau was warmly received by many voters. In contrast, Harper's image of managerial competence was tarnished by bad economic news, and his attempt to refocus the campaign on emotionally charged cultural issues failed. The result was a Liberal majority government and a prime minister named Trudeau.

The effect of conservatism on accrual and stock return

According to representation theory, hope of future good news stimulates the managers to postepone bad economic news in order to gain extra return. But in fact conservatism in accounting, as an influential control mechanism in identifying the good versus bad economic news, prevent the managers from over-optimism and provides a framework for identifying economic affairs. Therefore, it is the intention of this research to study the aforementioned challenge through analyzing the relation between conservatism, accrual persistence asymmetry and stock return. Conservatism is considered as independent variable of the research and accrual persistence asymmetry and stock return as dependent variables. Moreover, Basu’s model its used for measuring conservatism and to control risk, stock return is moderated in extent. Admitted firms in Tehran’s Bond Exchange from 2009 to 2015 constitude the date of the present research from which a sum of 66 firms (462 year-firm) are placed within the sample data of this research. The assumption of the research are tested via analyzing coefficient variables?regression modeling findings of the research suggest that there exists no meaningful relation between resistance of accrual items and stock return and another analysis rejected the existence of such relation has been rejected which suggested that law makings and standards are weak in a way that provide the ground for manipulating the real activities altimately leading to increased operational risks.

The Financial Stability Dark Side of Monetary Policy

Market risk premia play an important role in the transmission of monetary policy. If the transmission were to work asymmetrically for positive and negative shocks, monetary authorities would face a problematic trade-off: a temporary stimulus could boost the economy in the short run, but at the same time sow the seeds of a painful medium-run market reversal (the financial stability dark side of monetary policy of Stein, 2014). We study the relation between interest rates, credit spreads and output in the U.S. using monthly data and a range of nonlinear dynamic models. We find clear signs of a reduced-form asymmetry, but no evidence in support of the causal mechanism that underpins the 'dark side' argument: spreads rise noticeably ahead of economic slowdowns but they do not appear to cause them directly, particularly if they move in response to monetary shocks. This suggests that the asymmetry is best interpreted as a purely predictive relation, with markets being particularly sensitive to bad economic news; and that it creates no complications for monetary policy or for the exit strategy from monetary accommodation.

The Financial Stability Dark Side of Monetary Policy

Market risk premia play an important role in the transmission of monetary policy. If the transmission were to work asymmetrically for positive and negative shocks, monetary authorities would face a problematic trade-off: a temporary stimulus could boost the economy in the short run, but at the same time sow the seeds of a painful medium-run market reversal (the financial stability dark side of monetary policy of Stein, 2014). We study the relation between interest rates, credit spreads and output in the U.S. using monthly data and a range of nonlinear dynamic models. We find clear signs of a reduced- form asymmetry, but no evidence in support of the causal mechanism that underpins the `dark side' argument: spreads rise noticeably ahead of economic slowdowns but they do not appear to cause them directly, particularly if they move in response to monetary shocks. This suggests that the asymmetry is best interpreted as a purely predictive relation, with markets being particularly sensitive to bad economic news; and that it creates no complications for monetary policy or for the exit strategy from monetary accommodation.

The Usefulness of Negative Aggregate Earnings Changes in Predicting Future Gross Domestic Product Growth

Konchitchki and Patatoukas (2014) (hereafter KP 2014) show that aggregate accounting earnings growth predicts future nominal Gross Domestic Product (GDP) growth and that professional macro forecasters do not fully incorporate the information contained in aggregate accounting earnings. Based on results from prior literature, which find that accounting earnings reflect bad economic news in a timelier manner than good news, we condition KP’s GDP growth forecast model on the sign of earnings changes. We show that negative changes in aggregate earnings predict future GDP growth up to three quarters ahead while positive changes in earnings do not. Furthermore, we show that professional macro forecasters underreact to the information contained in negative changes in aggregate earnings about future GDP growth. In additional analyses we find evidence suggesting the incremental usefulness of negative earnings changes is driven by accounting conservatism rather than other drivers of asymmetric timeliness in earnings.

Macro determinants of volatility and volatility spillover in energy markets

We analyze the time-varying volatility and spillover effects in crude oil, heating oil, and natural gas futures markets by incorporating changes in important macroeconomic variables and major political and weather-related events into the conditional variance equations. We allow asymmetric responses to random disturbances in each market as well as to good and bad economic news related to the overall economy. Results show the presence of asymmetric effects in both random disturbances and macroeconomic variables. A bidirectional volatility spillover effect is found between natural gas and crude oil and between the natural gas and heating oil markets. Crude oil volatility is found to increase following major political, financial, and natural events. Seasonality and day-of-the-week effects are found in the crude oil and heating oil markets.

An Assessment to Determine the Impact of Retail Shrinkage on the Sustainability and the Profitability of the XYC Franchise Retailer Stores in the Western Cape Region of South Africa

Against the backdrop of bad economic news and retail crime trends, it might be natural to be pessimistic about retailer’s abilities to strengthen their operations against shrinkage. There is nothing inevitable about higher shrinkage in any retail establishment. Threats can be identified, and strategies to deter and detect put in place. Through a combination of better strategic planning, vigilance in maintaining reasonable shrinkage control technology investment, and an understanding of why and how shrink takes place, retailers can continue to reduce shrink as a percentage of revenue, and protect their business’s profitability in these tough times. Small businesses cannot operate efficiently if employees are stealing goods and management is not properly monitoring and controlling shrinkage, Key concepts: shrinkage; store profitability; loss prevention

Moment Marketing Opportunity: The Link between Online Sentiment and Macroeconomic Conditions

We investigate the relationship between moments, in the form of past macroeconomic shocks, and users' propensity to post positive or negative content on the internet about commonly purchased products. Our research uses propriety data from Nielson BuzzMetrics, which contains daily measures of online sentiment for carbonated soft drink brands across multiple online social media channels, such as the number of positive, neutral, and negative online posts on any given day. A vector autoregression model then is used to study the impact that past economic indicators have on the current valence of online sentiment. The findings provide us evidence that the proportion of negative posts increases when the economy indicators are low. In particular, the link between economic conditions and online sentiment is most pronounced and robust for Coke Diet, which suggests that digital marketing managers for this product pay particular attention to the economy when timing the promotion of their online engagement. Marketing managers can then avoid social media promotion of Coke Diet on days immediately following bad economic news, as online sentiment towards this product may be especially vitriol on those days.

The messenger of inflation – how media change political competition

Voters do not like bad economic news, especially rising inflation rates. How voters learn about this news, not simply the news itself, can affect electoral behaviour. This article reports a study of media and electoral behaviour between 1960 and 2006 in 70 democratic states. It demonstrates that high inflation rates, combined with intense media coverage, resulted in more political competition and tight electoral races. Our detailed results show that European (EU-27) voters are more sensitive to television and radio coverage than they are to printed press coverage of negative economic news when compared with non-European electorates.

Economic voting in Britain, 1857–1914

Despite limited government control over the pre-1914 economy, opposition politicians were enthusiastic in blaming bad economic news on the incumbent. In a study of 458 by-elections between 1857 and 1914, we find that voters typically gave new governments a 'honeymoon' but thereafter held them responsible for high unemployment and high prices. Each 1% rise in the price level, on average, brought about a 0.21% swing against the government of the day, while each one-point rise in the percentage unemployed had double this effect. However, when we split the electorate into borough and county constituencies, economic voting appears to be confined to the former.

Effects of income smoothing practices on the conservatism of public companies listed on the BM & FBOVESPA

The aim of this study was to investigate two aspects of accounting information that may be inherently related: income smoothing practices and conditional conservatism. Theoretically, the more a firm employs income smoothing, i.e., uses accruals to reduce the variability of profits, the less possibility there is for the timely acknowledgement of future economic losses (i.e., bad economic news) in profits. Eckel's model (1981) was used in this study to classify listed companies as smoothing or non-smoothing, and Basu's model (1997) was used to quantify the degree of conditional conservatism present in each firm. To make the results more robust, samples were created with annual stock return data from both March and December. The results indicated that non-smoothing firms had a higher degree of conditional conservatism, i.e., more opportunity to recognize future economic losses because the market could use the stock return data to anticipate future losses contained in the information regarding profits. This research made it possible to observe theoretical relationships between properties of accounting information: i) there is a relationship between income smoothing and conditional conservatism (i.e., accounting choices); ii) the informational environment of the Brazilian capital market contributes to the market distinction between smoothing and non-smoothing firms; and iii) the improvement of the capital market provides economic operators with greater insight into economic losses that are contained in accounting results.

Announcing an Increase in the State Pension Age and the Recession: Which Mattered More for Expected Retirement Ages?

In March of 2010, the Irish government announced that the age at which the state pension is paid would be raised to 66 in 2014, 67 in 2021 and 68 in 2028. Also during 2010, the economic news became increasingly bad as the full scale of the fiscal and banking crises in Ireland emerged. The question we address in this paper is whether expected retirement ages of Irish individuals aged 50 to 64 changed as a result of the policy announcement and/or the bad economic news. The data we use are from the Irish Longitudinal Study on Ageing (TILDA). Between late 2009 and early 2011, over 8,500 people aged 50 and over in Ireland were interviewed about a wide range of issues including standard socio-economic items such as labour force status, earnings and education. Respondents were also asked at what age they expected to retire. Our findings show that there was no noticeable break in expected retirement ages before and after 3 March 2010 (the day on which the policy announcement was made). However, there was a clear shift of people into the categories don't plan to retire and do not know before and after September 30 2010. This was the day that the full scale of the banking crisis emerged (named by the media as Black Thursday) and was followed by the set of events which led to the bailout of November 2010. Similarly, there was a shift away from modal expected retirement ages after that date.