Earnings Information Research Articles

Flight to Earnings: The Role of Earnings in Periods of Capital Scarcity

We examine the link between the scarcity of arbitrage capital and investors’ response to firms’ earnings information. The cost of financing levered investment strategies (i.e., investing with borrowed funds) increases in the risk profile of the securities being traded. As a result, when capital is scarce, levered traders face heightened incentives to tilt their portfolios in the direction of firms’ earnings information as an indicator of lesser risk because doing so mitigates financing constraints. Our results suggest that these investors become more responsive to firms’ earnings announcements when capital is scarce. Moreover, market prices display a stronger reaction to firms’ announcements and less postearnings announcement drift. Together, our findings suggest the scarcity of arbitrage capital spurs both the use of and responsiveness of market prices to firms’ earnings news. This paper was accepted by Brian Bushee, accounting. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2022.4538 .

The Effects of Cost Stickiness on Real Earnings Management: A Data Analysis of Export Marketers

Purpose Export marketers may have incentives to attempt real earnings management to avoid low reported earnings. Therefore, we attempted to verify the relationship between cost stickiness and real earnings management in the context of export marketing. Design/methodology/approach Data were collected from exporters that settle-accounts in December excluding financial businesses listed on the stock market from 2015 to 2019. Multiple regression analysis were employed to analyze the data. Findings - The results showed that there is a negative relationship between cost stickiness and real earnings management. In addition, the results showed that export marketers little attempt to offset the cost inefficiency caused by the increase in expense because of cost stickiness with opportunistic management activities through real earnings management. Rather, as the level of real earnings management appears lower, exporters showing cost stickiness are expected to report management performance based on actual marketing. Furthermore, exporters with a high level of managerial centrality or high managerial overconfidence little attempt to offset cost inefficiency caused by cost stickiness with real earnings management activities. Research implications or Originality - Our study is the first to investigate the quality of earnings information of exporters with cost stickiness. Based on the results, we suggested efficient marketing strategies for exporters.

Firm complexity and post-earnings announcement drift

We show that the post-earnings announcement drift (PEAD) is stronger for conglomerates than single-segment firms. Conglomerates, on average, are larger than single segment firms, so it is unlikely that limits-to-arbitrage drive the difference in PEAD. Rather, we hypothesize that market participants find it more costly and difficult to understand firm-specific earnings information regarding conglomerates, as they have more complicated business models than single-segment firms. This in turn slows information processing about them. In support of our hypothesis, we find that, compared to single-segment firms with similar firm characteristics, conglomerates have relatively low institutional ownership and short interest, are covered by fewer analysts, and these analysts have less industry expertise and make larger forecast errors. Finally, we find that an increase in organizational complexity leads to larger PEAD and document that more complicated conglomerates have even greater PEAD. Our results are robust to an extensive list of alternative explanations of PEAD as well as alternative measures of firm complexity.

Analysts’ long-term growth forecasts and the post-earnings-announcement drift

PurposeThis study examines the relation between the presence of analysts’ long-term growth (LTG) forecasts and the post-earnings-announcement drift (PEAD).Design/methodology/approachUsing a sample of firm-quarters from 1995 to 2013, the author conducts various regression analyses.FindingsThe author finds that the magnitude of PEAD is significantly smaller for firms with LTG forecasts. The relationship holds after controlling for a wide range of explanatory variables for PEAD returns or for the presence of LTG forecasts. The author further investigates three nonexclusive hypotheses to explain this relationship. First, LTG forecasts may convey incremental value-relevant information that facilitates investors’ processing of short-term earnings information. Second, the presence of LTG forecasts may indicate superiority in analysts’ short-term forecast ability and identify firms with more efficient short-term forecasts. Third, the presence of LTG forecasts may be associated with cross-sectional differences in the persistence of earnings surprises. The author finds that none of these fully accounts for the negative relationship between the presence of LTG forecasts and PEAD returns. Instead, the relationship may be a result of the presence of LTG forecasts capturing some unobservable firm characteristics beyond those identified in prior studies.Originality/valueThis study contributes to the PEAD literature by identifying a novel analyst-based predictor of the cross-sectional variation in PEAD returns.

Do ETFs affect ADRs and U.S. domestic stocks differently?

This study examines the effect of exchange-traded funds (ETFs) on their underlying American depositary receipts (ADRs). We find that the percentage of ADR shares owned by ETFs increased dramatically in the past two decades. While ETF ownership is positively associated with stock liquidity for ADR firms, the same is not true for U.S. firms. In addition, ETF ownership improves ADR firms’ information environment by helping incorporate their earnings information. Furthermore, ETF ownership helps incorporate systematic related earnings into stock returns but not firm-specific earnings. Overall, our results show that ETFs are beneficial to ADR stocks by providing better liquidity and information efficiency. Our results are interesting to academics, investors, and policy makers.

Autokorelasi Laba Dan Volatilitas Laba: Peningkat Audit Delay?

This study aims to test the effect of earnings autocorrelation and earnings volatility on audit delay. In the process of the test, researchers used multiple regression analysis using a research sample of 105 manufacturing companies or 525 observations with the observation range of 2015 – 2019. The result, it showed that earnings autocorrelation had an effect on increasing audit delay. It is similar that the earnings correlation which also affects audit delays. The results of this study provide implications that auditors must be more careful in carrying out the audit process, especially in capturing earnings information from time to time. This is because earnings are the information that is often used by the users in assessing a company and used to manipulate earnings. For future research, it is suggested to use specialist industrial auditors as a coding variable in an effort to suppress the occurrence of long audit delays

Investor institusional dan keinformatifan laba di Indonesia dan Jepang

This study examines the existence of institutional investors who can play a role in increasing earnings informativeness through income increasing-earnings management and income smoothing. The hypothesis was developed on the basis of the view that the motivation behind earnings management decisions is to increase the informativeness of earnings reports. The study employs sample of manufacturing companies listed on the Indonesia Stock Exchange and the Japan Stock Exchange for the period of 2010-2018. Ordinary least square and weighted least square regression models are used in cross-sectional statistical testing, which is carried out annually throughout the 2014-2018 observation period. In Japan, institutional ownership has a positive and significant effect on income increasing- earnings management, and on reverse income smoothing, as well, while these are not the case in Indonesia. This study reveals that in Japan, the institutional investors play a role of monitoring that can encourage managers to increase earnings informativeness through earnings management-income increasing followed by reverse income smoothing. This condition is not found in Indonesia. It is possible that in Indonesia, the institutional investors play a role of controlling, that may promote managerial opportunistic behavior.

Information versus Investment

AbstractWe quantify the real implications of trade-offs between firm information disclosure and long-term investment efficiency. We estimate a dynamic equilibrium model in which firm managers confront realistic incentives to misreport earnings and distort their real investment choices. The model implies a socially optimal level of disclosure regulation that exceeds the estimated value. Counterfactual analysis reveals that eliminating earnings misreporting completely through disclosure regulation incentivizes managers to distort real investment. Lower earnings informativeness raises the cost of capital, which results in a 5.7$\%$ drop in average firm value, but more modest effects on social welfare and aggregate growth.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Less timely earnings announcements and voluntary disclosure

AbstractThe release of earnings information has become less timely in recent years partly because firms increasingly disclose earnings concurrently with their periodic reports (e.g., 10‐Ks, 10‐Qs). We examine whether firms use voluntary disclosure to mitigate the negative economic consequences of less timely earnings announcements (EAs). We find that firms with less timely EAs are more likely to provide voluntary 8‐K filings over the period leading to the EA. We also find that investors’ demand for timely information, the nature of earnings news and litigation risk affect the extent to which firms provide voluntary disclosure to compensate for less timely EAs. The negative effect of less timely EAs on information asymmetry is attenuated when firms provide voluntary 8‐K filings prior to EAs. Overall, our findings suggest that firms voluntarily communicate with investors using voluntary disclosure when their EAs are less timely.

Pengaruh leverage, ukuran perusahaan, dan profitabilitas terhadap kualitas laba

Earnings quality is the quality of earnings information available to the public that is able to show the extent to which earnings can influence decision making and can be used by investors to assess the company. The quality of earnings in a financial report is very important, because if the quality of the company’s earning is low, it shows actual information about management performance in that period. If the company’s profits increase, the profits contained in the company’s financial statements cause managers to take various ways to prepare financial statements as effectively as possible for both internal and external parties. This study aims to analyze and examine the effect of leverage, firm size, and profitability on earnings quality. The population used in this study are manufacturing companies listed on the Indonesia Stock Exchange (IDX) for the 2017-2020 period with a total sampel of 380 companies. The sampling method used in this research is purposive sampling. The data analysis techique used in this study in multiple regression analysis and using the SPSS 24 program. The results of the research conducted state that leverage has a significant negative effect on earnings quality, firm size has no effect on earnings quality, and profitability has a significant positive effect on earnings quality.

Exchange-Traded Funds and Real Investment

AbstractWe investigate the link between exchange-traded funds and real investment. Cross-sectionally, higher ETF ownership is associated with an increased sensitivity of real investment to Tobin’s q and a heightened ability of stock returns to forecast future earnings. Inclusion of stocks in industry ETFs enhances investment-$q$ sensitivity and implies greater incorporation of earnings information into prices prior to public releases. Greater nonmarket ETF ownership leads to increased (reduced) reliance of real investment on own (peers’) stock prices. Overall, the evidence is consistent with ETFs positively affecting real investment efficiency via greater flows of information.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

Relevansi Nilai Aset Dan Liabilitas Pajak Tangguhan

One of the accounting information that holds a major role for stakeholders is earnings information since it is considered could measure companies’ performance. However, the 2008 global economy crisis causes the earnings information became irrelevant to assess operational companies’ performance. This condition urges the investors to use other information, that is deferred tax information. Therefore, this research aims to test the effect of deferred tax assets and liabilities on stock prices. PSAK 46 states that deferred tax information denotes deferred tax income recoverable and income tax payable in the future which have to be presented in balance sheet. Deferred tax asset information is depicted to reflect a positive value in future company’s cash flow for the tax expense reduction, meanwhile deferred tax liabilities information reflects a negative value in future company’s cash flow because of the tax obligations that will arise in the future. The object of this research is manufacturing companies listed on Indonesia Stock Exchange in the 2011 – 2020 period. This research is using the judgment sampling method, consisting of 400 observation data. The coefficient determination shows that the dependent variable can be explained by the independent and control variables in the amount of 62%. Individually, the result of this research is that deferred tax assets have a significant positive effect on stock price, otherwise deferred tax liabilities have a significant negative effect. As a result, this study concludes that deferred tax assets and deferred tax liabilities have value relevance and this information can be used as a consideration by the investors in the making decision process.

The Relevance of Non‐Income Tax Relief*

ABSTRACTGovernments regularly offer non‐income tax relief to attract business investment. However, it is unclear whether or how markets impound information about the relief into security prices. We use novel data from retrospective public records to examine the information content of non‐income tax relief. We predict and find that the receipt and magnitude of this relief are both strongly associated with recipients' future accounting performance and future abnormal returns. We further find that abnormal returns associated with the relief cluster around future earnings information events. In combination, this evidence suggests that non‐income tax relief is value‐relevant but is incorporated into prices over time.

Market Consequences and Real Earnings Management: Empirical Study in Indonesia

This research examined the consequences of real earnings management. We analyzed real earnings management’s effects on two aspects of investment: capital market and earnings informativeness. We rely on the efficient market hypothesis theorized by Fama (1969)to predict the market and accounting consequences caused by real earnings management. Our population and samples are a non-financial company listed on the Indonesian Stock Exchange during 2013-2017. We conducted event studies that examine cumulative abnormal return and earnings response coefficient two days before and after the financial statement was published. The model results showed that real earnings management has a negative impact on both stock return and the informativeness of earnings. We also found empirical evidence that the capital market could reach an indication of earnings manipulations through real earnings management. Those results give us the insight that the Indonesian capital market level of efficiencies classified into semi-strong form.

A Cross Country Analysis of Financial Conditions and Earnings Management

This study aims to examine the effect of the company's financial condition on the earnings management behavior of companies in the Asian region. This study extends the existing research model by presenting a cross-country analysis of the relationship of financial conditions, which is specifically divided into three zones, namely financial distress, gray zone, and excellent financial condition, with corporate earnings management. The sample in this study consists of companies listed on stock exchanges of countries in Asia, with an observation period from 2009 to 2019. This study provides empirical evidence that supports the relationship between financial condition and company earnings management, which shows that earnings management is used as a tool by the management of companies that are under financial pressure to distort the quality of reported information, thereby creating a bias in the interpretation of company performance. This study proves that the characteristics of the company's financial condition, both in the safe zone, gray zone, and excellent zone, affect the pattern of company earnings management practices. This study measures earnings management using the discretionary accrual method so that it only captures earnings management practices that are part of the company's discretionary accrual management policy. Research can study earnings management further with the real earnings management approach to examine the effect of the company's financial condition on the distortion of earnings information through the company's actual activities.

The tone from above: Does tunnelling by ultimate owners impinge on the relations between managerial compensation and earnings management?

AbstractThis study aims to explore the impact of tunnelling by ultimate owners on the relation between managerial compensation and earnings management. Using a sample of the Chinese listed firms from 2009 to 2019, we find that tunnelling by ultimate owners leads to adjustments in pay‐performance sensitivity and impinges on the magnitude of earnings management. In private‐dominated firms, tunnelling by ultimate owners reduces pay‐performance sensitivity, and the decreased pay‐performance incentives do not motivate managers to inflate corporate profits by manipulating earnings information. Moreover, owing to managers' resistances, tunnelling does not generate more severe problems in the quality of earnings information. In state‐dominated firms, due to government regulation, tunnelling by ultimate owners does not induce significant adjustments in pay‐performance sensitivity. However, due to the strong motivation of managers delighting their superiors in the administrative hierarchy by adjusting financial reporting, the quality of earnings information of state‐dominated firms may be worse. Our results suggest that in firms with concentrated ownership structures‐irrespective of the nature of ownership, both the formulation and implementation of managerial compensation incentive programmes, and the magnitude of earnings management, are equilibrium results of a dynamic game between ultimate owners and managers.

Impression management techniques employed by listed companies on the Johannesburg Stock Exchange when using Twitter

The study investigates if companies listed on the Johannesburg Stock Exchange (JSE) use impression management techniques when disclosing earnings-related information on Twitter. A content analysis was followed as a research methodology to conduct the study. The findings indicate that Twitter is not widely used by listed companies to disclose earnings information. However, where Twitter is used, companies do employ impression management techniques. The impression management techniques differ depending on whether the earnings information distributed is positive or negative. This was evident as tweets with a positive tone were circulated much more than tweets with a negative or neutral tone. The use of self-presentational and dissemination patterns also differed significantly across the tone of tweets. Positive tweets contained more narratives compared to negative tweets, indicating that negative information is concealed. Negative tweets predominantly did not contain hashtags, once again indicating that companies often conceal negative information. Most positive and neutral tweets contained hashtags, illustrating that companies often use Twitteras a means to alter users’ perceptions towards a positive image. Understanding how companies use impression management techniques will assist users in interpreting and using the information shared. The research may also be beneficial to regulators who may consider drafting guidance and standards regarding the use of social media by companies.

Do Mutual Funds Trade on Earnings News? The Information Content of Large Active Trades

Using monthly holdings data, we show that in contrast to findings in existing literature, mutual fund trades in aggregate do not have predictive power for future earnings information. We identify active trades by mutual funds, that is, trades not passively driven by fund flows, and show that only large active trades by mutual funds contain information on future earnings. Moreover, we show evidence that large active trades by mutual funds help incorporate future earnings information into stock prices and significantly improve stock price efficiency. Finally, we show that large active trades by mutual funds prior to earnings announcements deliver superior abnormal returns. Mutual fund managers that actively trade on future earnings information are skilled; the top quintile skilled funds on average outperform those in the bottom quintile by 127 bps in four-factor alpha over subsequent four quarters.

영업권 손상인식과 주가의 미래이익정보성

In this study, we investigate whether discretionary recognition of goodwill impairment affects the stock price informativeness of future earnings. Using firm-year observations with a positive beginning goodwill balance from 2011 to 2016, we test whether the decision to recognize impairment loss inconsistent with impairment indication (accelerated impairment) improves the future earnings response coefficient (FERC). We find that the accelerated impairers exhibit greater FERCs, lower value relevance of pre-impairment goodwill, and higher persistence of reported EPS. We suggest that early recognition of impairment from potentially overstated goodwill assists investors in better predicting future earnings by mitigating the measurement error inherent in goodwill book value and smoothing the earnings time series. Our findings fill the literature gap by shedding light on the positive role of accounting discretion exercised under the context of low level fair value applied to goodwill impairment test.

Pengaruh Ukuran Perusahaan, Financial Leverage dan Kualitas Audit Terhadap Perataan Laba (Income Smoothing) Pada Perusahaan Manufaktur Sektor Industri Barang Konsumsi Tahun 2017-2020

Earnings information is paramount for investors because they can provide an overview of how dividends will be paid when investing their capital. Income smoothing is the practice of profit manipulation to reduce fluctuations in net income over a period of time. This study aims to determine how company size, financial leverage and audit quality affect earnings smoothing in manufacturing companies listed on the Indonesian Stock Exchange over the period 2017-2020. Targeted sampling is used as the sampling method, sample companies based on criteria was 31 companies with an observation period of 4 years, 2017 to 2020, so that 124 research samples were obtained. Eckel index measuring income smoothing using the technique of logistic regression analysis. Theory of eckel is used to calculate income smoothing. Hypothesis testing with logistic regression analysis. Research resultshow that company size, financial leverage and audit quality all have an impact on income smoothing. Firm size has no significant positive effect on income smoothing, financial leverage as measured by debt to equity ratio has no significant negative effect on income smoothing, while audit quality has a significant and negative effect on income smoothing.