Properties Of Earnings Research Articles

Financial reporting and disclosure practices in China

We study financial reporting and disclosure practices in China using survey methods similar to prior studies of U.S. firms (i.e., Graham et al., 2005; Dichev et al., 2013). Comparing earnings features, motives to manage and smooth earnings, and voluntary disclosure practices between the two countries, we reveal three major differences. First, Chinese firms exhibit a stronger preference for predictive, relative to verifiable, attributes of earnings that can signal stable firm performance to their stakeholders. Second, smooth earnings are desired by various stakeholders and can be achieved through coordination among connected stakeholders, which is conceptually different from earnings management. Third, Chinese firms consider public disclosure as less relevant in the reduction of the cost of capital. In addition, Chinese firms do not have a bias towards conservative reporting. We explain and reconcile these differences as resulting from some unique institutional features of China. Our study provides novel field evidence that contributes to, expands, and directly corroborates existing empirical studies.

How Does Culture Impinge Upon Managers’ Demeanor of Earnings Management? Evidence from Cross-Country Analysis

We examine the impact of national culture on earnings. Specifically, we examine managers’ likelihood of using accrual or real earnings management (REM) and the role of culture on various attributes of earnings (accruals quality, persistence, smoothing, and predictability). We measure national culture using Hofstede’s six dimensions of culture (1984, 2001, 2010). Using data from 36 countries during 1997–2018, we find that managers are likely to use both accruals and REM in high power distance (PDI) countries. In long-term-oriented countries, managers are more likely to use REM. In uncertainty avoidance (UAI) countries, in high individualist countries, and in higher indulgent versus restraint countries, managers are less likely to use either type of earnings management. In masculine countries, managers tend to use lower accruals management and rely on production cost REM. We also find the use of accruals management and the use of REM are substitutes for each other. In addition, we are able to classify countries into four earnings quality groups based on the culture impact on the earnings attributes (primarily driven by accruals quality, predictability, and smoothing). Persistence is generally not significant in classifying countries by earnings attributes. Our findings indicate that a universal set of accounting standards is a challenging goal to achieve given the cultural diversity across countries. To improve the existing corporate governance framework and to ensure high quality and uniform financial statements, the enforcement of standards should be tailored to specific cultures, or at a minimum, corporate boards need to be more culturally diversified.

The Effects of International Financial Reporting Standards on Financial Reporting Quality

The purpose of this study is to investigate whether the financial reporting under International Financial Reporting Standards (IFRS) has more quality than local GAAP for firms listed on Taiwan stock exchange. Financial Reporting Quality is measured in this study by three attributes of earnings introduced in previous literature, namely: 1) earnings management expressed as managing towards positive earnings and earnings smoothing and, 2) timely loss recognition expressed as the asymmetric incorporation of economic gains and losses and large negative net income, and 3) value relevance. Ordinary Least Square (OLS) Regression analysis, Ztest, and Binary Logistic Regression are employed to investigate the pre-IFRS (2008- 2010) and post-IFRS (2012-2014) adoption periods on value relevance, earnings management, and timely loss recognition. The study employs a sample of 426 manufacturing firms from 8 industries listed on Taiwan stock exchange. The study finds that firms adopting IFRS evidence less earnings smoothing. However, there is no significant difference in either the timely loss recognition or the value relevance of accounting information between the pre and post-adoption periods. This study contributes to the literature by using data from an emerging market. It provides an insight to practitioners, international standard setters and regulators into the international debate on the effects of the switch from local GAAP to IFRS on Financial Reporting Quality.

Do Institutional Investors Enhance Accounting Earnings Attributes in the Korean Market?

ABSTRACTThis study examines whether the effectiveness of institutional monitoring depends on the economic conditions of emerging capital markets. We use trading volume data by investor type to compute a proxy for total institutional ownership. We then analyze the impact of the proxy variable on accounting earnings attributes and examine whether the association between the two depends on an expectation of market growth. We find that the effect of institutional monitoring decreases when market growth is expected to be low, implying that market growth may be a critical determinant of institutional investors’ long-term monitoring effectiveness in emerging capital markets.

Earnings quality of Indonesian firms surrounding initial public offerings

This research aims to examine the changes in earnings quality of Indonesian firms transitioning from private to public companies by examining accounting-based attributes of earnings; accrual quality, earnings persistence, and earnings predictability, before and after IPO. Accrual quality is assessed using the abnormal accrual model and Dechow and Dichev (DD) model; earnings persistence and predictability are assessed through net income autoregressive model. Using 103 Indonesian non-finance IPO firms, this research concludes that earnings quality of IPO firms changed along with the alteration of their status from private to public firms. Post-IPO (after becoming public firms), the sample shows a higher quality of earnings in terms of accrual quality and earnings persistence increases after IPO. However, this research could not reject the hypothesis of decreasing post-IPO earnings predictability due to the nature of IPO firms.

The Effects of Cross-Border Cooperation on Enforcement and Earnings Attributes

The events of Sept. 11, 2001, prompted sweeping cross-border coordination efforts for securities regulators around the globe. After 9/11, the International Organization of Securities Commissions (IOSCO) forged an arrangement—the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMOU)—that standardizes the protocol for information sharing among participating securities regulators. I link this arrangement to the ability of the SEC to pursue U.S.-listed foreign firms by showing that the probability of enforcement increases by a factor of two or more in firms whose home countries enlist in the MMOU. A much more limited effect on enforcement is observed for similar but bilateral information-sharing agreements, indicating that a broader network creates powerful incentives that are difficult to replicate bilaterally. Because different countries enter the MMOU at different times, their enlistments create a set of staggered shocks to the SEC’s enforcement capacity for U.S.-listed foreign firms. These shocks are associated with predictable improvements in U.S. GAAP-reconciled earnings properties; this helps resolve questions about why the earnings quality of U.S.-listed foreign firms diverged from U.S. firms during pre-MMOU periods.

The Real Effects of Accounting Earnings Attributes: Evidence from Japan

The purpose of this study is to analyze the real effects of accounting earnings attributes in Japanese financial markets. Previous studies show that useful accounting attributes optimize firm’s investment levels through alleviating asymmetric information. Biddle and Hilary (2006), however, do not find the effects in Japanese economy, and suggest that its reason is the alternative information-problem-mitigating mechanisms. For instance, main bank system is able to alleviate the effects of accounting information on investment. Nevertheless some researchers indicate that the financial intermediaries might not effective, and its importance shrinks after the 1990’s. Hence, not a trivial question is whether the real effects of EAs are observed in Japanese economy. Using long historical data of Japanese firms, I find that useful accounting information optimizes firm’s investment levels. Specifically, not all but most earnings attributes alleviate over-investment; Earnings volatility, persistence, predictability, accruals quality, and aggregated indicator. Meanwhile, they do not alleviate over/under-investment. In addition, smoothness does not have significant effects or does have the effects opposite from my expectation. In conclusion, the real effects can be observed even in Japanese economy.

Earnings Attributes and the Long-term Performance of Voluntary Disclosure of Technological Cooperation

This study investigates the effect of voluntary disclosure of technological cooperation (namely, in-bound transfer, out-bound transfer and technological alliance) on long term performance and its determinants of long term performance after the disclosure. We find that long term performance is not statistically different from zero in case of the voluntary disclosure of technological cooperation of in-bound and out-bound transfer, while there is a positive effect of the technological alliance on long term performance. We also find that long term performance after the voluntary disclosure of in-bound and out-bound transfer where the information asymmetry is high has a positive relation to earnings predictability while negative relation to discretionary accruals. In addition, the relationship between the earnings attributes (earnings predictability and discretionary accruals) and the long term performance after the voluntary disclosure of in-bound transfer and out-bound transfer is more evident in the subsample of high-tech industry than in low-tech industry.

The Effect of the Attributes of Earnings of the Holding Company on the Credit Rating

The Effect of the Attributes of Earnings of the Holding Company on the Credit Rating

The Influence of Differential Treatment between the Costs of Debt and Equity on Earnings Attributes: Evidence from the Matching between Revenues and Expenses

Accounting rules mandate that the cost of debt should be recorded as an expense, while the cost of equity does not appear in the income statement. Therefore, the amount of financing expense, and thus net income, in the income statements depends on how firms finance their business. Based on a clear, substantial trend of declining leverage since the 1990s, we examine how changes in capital structure might influence earnings attributes–the matching between revenues and expenses. We find that the contemporaneous relation between revenues and interest expense in US firms has decreased from 1972 to 2013, a result of both changes in leverage and the declining explanatory power of interest expense with respect to revenues. When we construct the weighted average costs of capital based on the costs of both debt and equity, we find the contemporaneous relation between revenues and the costs of capital has not significantly changed. Our results indicate that differential accounting treatment of the costs of debt and equity can affect earnings attributes through change in capital structure.

Accounting Comparability and Earnings Attributes

We specify measures of accounting consistency both across time and across firms based on the textual similarity of accounting policy footnotes disclosed in 10-K filings. We first examine how these measures relate to earnings quality. Accounting consistency over time is positively associated with a number of earnings quality proxies, including earnings persistence, predictability, accrual quality, and absolute discretionary accruals. We also find that lower consistency relative to other firms in the industry is associated with larger absolute accrual model residuals. Finally, we examine the information processing effects of accounting consistency. We find that greater accounting consistency in the time-series and the cross-section is associated with lower information asymmetry, as proxied by bid-ask spread and illiquidity. Greater cross-sectional consistency is also associated with greater analyst coverage, more accurate analyst forecasts, decreased dispersion in analyst forecasts, and stronger stock return synchronicity.

The Decision Usefulness of Comprehensive Income Reporting in Canada

In this study, we empirically investigate the decision usefulness of mandatory reporting of comprehensive income in Canada. Drawing upon Ohlson’s (1999) discussion of the attributes of transitory earnings, we used a sample of 324 firms listed on the Toronto Stock Exchange for the study period to test whether OCI and its individual components (namely, unrealized gains and losses on cash flow hedges, unrealized gains and losses on available for sale investments, and foreign currency translation adjustment on foreign subsidiaries) possess forecasting relevance, predictability and value relevance. We found that aggregate OCI and some of its individual components are relevant in forecasting future abnormal earnings. We also found that OCI is predictable, and incrementally value relevant to net income. The results of our study suggest that Ohlson’s description of transitory earnings might not apply to OCI, and that the reporting of comprehensive income in Canada did enhance the decision usefulness of accounting numbers.

An Empirical Study on Conditional Conservatism and Value Relevance of Earnings

Conservatism is one of the oldest concepts in accounting and has a great influence. However debates on accounting conservatism are as old as its existence. Significance of accounting conservatism also bases on being one of attributes of earnings that is a significant item in financial statements. While estimating quality of earnings, conservatism is taken into consideration. In this study it is aimed to contribute to literature on accounting conservatism with empirical research in Turkey. One of the motivations of this study is limited number of research on accounting conservatism in Turkey. Conditional conservatism which is one of two types of accounting conservatism is held in context of its impact on usefulness of accounting information for valuation. Value relevance of earnings is chosen as the proxy for usefulness of accounting information. Although accounting conservatism and value relevance of earnings or book values are very attractive research topics separately, the number of studies that analyzes the relation between these two concepts is not very high. It is An Empirical Study On Conditional Conservatism And Value Relevance Of Earnings 1698 also aimed to contribute to this area in which mixed evidence has been obtained. As measurement methods for conditional conservatism and value relevance of earnings contain both financial accounting and capital market data, another contribution of this study is to Capital Market Based Accounting Research in Turkey. Empirical evidence provided using panel data statistical analysis on 106 manufacturing firms listed on Istanbul Stock Exchange indicates that conditional conservatism has a negative impact on value relevance of earnings. The findings of the study also support the decision of International Accounting Standards Board for the exclusion of conservatism from Conceptual Framework.

Principles-Based Standards and Earnings Attributes

This study examines the relation between principles-based standards and earnings attributes. We create a firm-year-specific variable that measures the extent to which firms’ financial reporting is affected by principles-based standards. We find that firms’ earnings are more informative and persistent and have a larger positive association with future cash flows, on average, when firms’ standards are more principles based. We also find evidence that managers use the added discretion provided by principles-based standards to manage earnings when firms are near bankruptcy, issuing equity, or experiencing high growth, and if earnings are near prominent earnings benchmarks. Overall, our evidence is consistent with managers using the discretion provided by principles-based standards to communicate better the economic substance of transactions, on average, but also with some managers using the added discretion strategically when managerial incentives exist to increase reported earnings. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2016.2465 . This paper was accepted by Mary Barth, accounting.

Principles-Based Standards and Earnings Attributes

This study examines the relation between principles-based standards and earnings attributes. We create a firm-year specific variable that measures the extent to which firms’ financial reporting is affected by principles-based standards. We find that firms’ earnings are more informative and persistent, and have a larger positive association with future cash flows, on average, when firms’ standards are more principles-based. We also find evidence that managers use the added discretion provided by principles-based standards to manage earnings when firms are near bankruptcy, issuing equity, or experiencing high growth, and if earnings are near prominent earnings benchmarks. Overall, our evidence is consistent with managers using the discretion provided by principles-based standards to communicate better the economic substance of transactions, on average, but also with some managers using the added discretion strategically when managerial incentives exist to increase reported earnings.

The Association between Earnings Attributes and Analysts Forecast

The Association between Earnings Attributes and Analysts Forecast

How do auditors view managers’ voluntary disclosure strategy? The effect of earnings guidance on audit fees

The objective of this study is to examine the relation between attributes of earnings forecasts issued by managers and audit fees. Although there is an extensive literature on managers’ disclosure of earnings forecasts, there is a paucity of research on how auditors incorporate information from these voluntary disclosures. We find that the issuance of an annual or quarterly management earnings forecast in the prior period is positively associated with the current period audit fees. Our results indicate that on average, audit fees are higher by about 7% for firm-years associated with an annual forecast. Among the firms that issue earnings forecasts, we find no association between audit fees and likelihood of updating a previously issued earnings forecast, indicating that auditors do not view such behavior negatively. Further, we find audit fees to be positively associated with the error and the bias (or optimism) in the forecasts for annual forecasts but not for quarterly forecasts. Overall, these results suggest that management’s forecast behavior captures higher business risk for the auditor via greater risk of earnings management or litigation risk.

Relaxing the Reconciliation Requirement in Non-U.S. Firms' SEC Filings: Changes in GAAP, Earnings Attributes, and Earnings Informativeness

Relaxing the Reconciliation Requirement in Non-U.S. Firms' SEC Filings: Changes in GAAP, Earnings Attributes, and Earnings Informativeness

Relaxing the Reconciliation Requirement in Non-U.S. Firms' SEC Filings: Changes in GAAP, Earnings Attributes, and Earnings Informativeness

We investigate the changes in earnings information content and earnings attributes, for non-U.S. firms listed in U.S. equity markets, following the 2007 relaxation of the SEC requirement to reconcile IFRS earnings and stockholders’ equity to U.S. GAAP in annual regulatory filings. We analyze a sample of non-U.S. firms listed on U.S. exchanges that use IFRS, domestic GAAP, or U.S. GAAP from 2005 to 2008. Prior literature finds no changes in informativeness following the regulation for IFRS-using firms. However, when we partition the IFRS-using firms into two groups based on managers’ incentives to provide informative disclosures, we find that those firms with incentives to be more informative had significant increases in the information content of their earnings. Furthermore, we do not find any decrease in information content of earnings for firms without such incentives. We also document that this change in earnings informativeness was contemporaneous with a change in earnings attributes.

The Effect of Accounting-Based Earnings Attributes on CEO Compensation

This study is the first study to explore how four accounting-based earnings attributes (persistence, accruals, predictability, and smoothness) affect the relation between accounting rate of return and CEO compensation. We test the hypothesis that favorable values of earnings attributes increase pay-performance relations. The results from the models, which simultaneously include four earnings attributes, show that predictability increases the relations between change in ROA and compensation, excluding salary. High earnings smoothness also increases pay-performance relations in equity and total compensation models. Therefore, different types of earnings attributes are used to set different types of compensation. Contrary to prior studies Baber et al. (1998 and 1999), the pay-performance relation is strongest when earnings exhibit the quality of predictability, not persistence. This study provides an empirical evidence that, besides variance of performance measures, earning attributes are used to weigh performance measures. In addition, it also exhibits the usefulness of earnings attributes for setting CEO compensation.