Earnings Performance Research Articles

Differential performance impacts of outsider and insider interim CEO successions

ABSTRACT This study finds differential performance impacts of outsider and insider interim CEO successions. Stock markets react incrementally positively to interim CEO successions when the interim CEOs are from outside rather than inside firms. Relative to insider interim CEOs, outsider interim CEOs produce worse earnings performance and greater restructuring charges during their services but lead more frequently to outsider permanent CEO appointments followed by better long-term earnings performance. Our findings suggest that market reactions to interim CEO successions rationally impound the investors’ expectation that outsider relative to insider interim CEO successions will generate greater short-term disruption but pave the way for greater long-term performance improvement.

Can Earnings Performance Weaken the Negative Impact of Effective Tax Rate on Company’s Growth Prospects? An Empirical Study Based on Listed Firms of Financial Industry in Indonesia

Effective tax rate in Indonesia is relatively high when compared to some other ASEAN countries. High effective tax rate can affect company’s future growth prospects. This study aims to examine the impact of effective tax rate on the growth prospects of companies with earnings performance as moderating variable. The sample used was financial services companies listed on the Indonesia Stock Exchange in the period 2009-2018, with a total of 301 firm-year observations. This study used multiple regression analysis for panel data with the fixed effect method. The results revealed that effective tax rate had a significant negative impact on company’s growth prospects. Meanwhile, earnings performance, as a moderating variable, did not have a significant impact on the weakening of the negative effect of effective tax rate on company’s future growth opportunities. The results of this study are expected to be a reference for the government in setting tax rates in the future by considering that tax rates can have an impact on company’s growth potential.

PERAN KINERJA LABA DALAM MEMODERASI PENGARUH ANTARA CORPORATE SOCIAL RESPONSIBILITY TERHADAP PENGHINDARAN PAJAK

This research aims to determine the role of earnings performance in moderating the influence of Corporate Social Responsibility to Tax Avoidance. The research methode used was the Analytical Causal Associative with a sample size of 31 mining sector companies listed on Indonesia Stock Exchange in 2015-2018. Data collected in this research are secondary data using non-participant observation with the analysis tool E-views 9. Based on the results of the reasearch, it was found that Corporate Social Responsibility affects tax avoidance and earning performance is able to strengthen the influence beetwen Corporate Social Responsibility On Tax Avoidance. Keywords : Corporate Social Responsibility, Profit Performance, Tax Avoidance

Implikasi Penerapan Activity Based Costing System Terhadap Kinerja Perusahaan Dan Keunggulan Bersaing

The strategy for determining the accurate production cost is one way for the company to compete among its competitors. Activity Based Costing assumes allcosts have a cause, and the causes can be managed so that the costs charged can be effective and efficient. Several studies have shown that there are differences in production costs between calculations using traditional methods and Activity Based Costing. Previous studies have shown that production costs are more accurate when using the Activity Based Costing method of calculation. Bjornenak and Mitchell (1999) in Rendy and Devie (2013) argue that Activity Based Costing is a system that is promoted and adopted as a basis for strategic decision-making and to improve earnings performance. According to Reimann (1990) the use of the Activity Based Costing system encourages companies to produce products that have competitive advantages. The results of several studies show that the ability of the Activity Based Costing system can not only measure product costs accurately, but the information generated can be used for various other strategic interests within the company, and the implementation of the Activity Based Costing system is not only focused on the financial aspects, but also on other nonfinancial aspects which are indicators of the success of company performance. 

Do capital expenditures influence earnings performance: Evidence from loss‐making firms

AbstractWe examine the association between capital expenditures and near‐term earnings performance for loss‐making firms. Using a sample of 24,030 firm‐year observations from 2006 to 2015, we find that loss‐making firms show different patterns of capital expenditures than profit‐making firms. Moreover, we find that capital expenditures of loss‐making firms have a greater influence on the absolute value of near‐term earnings performance. We also examine the effect of capital expenditures on stock compensation and find a positive association between them for profit‐making firms but not for loss‐making firms. Further, our results indicate that the negative association between capital expenditures and near‐term earnings performance for loss‐making firms is not conditional on the monitoring by institutional investors and creditors. Our findings contribute to the debate on capital expenditure accounting in loss‐making firms.

Does cooperation among women enhance or impede firm performance?

Based on the notion that women cooperate more with women than with men, we investigate whether women managers work more effectively when monitored by women directors. We find that when a firm has women as its top managers, its accounting profitability increases with the proportion of women on the board of directors. However, the improvement in profitability is associated with earnings management. We show that women are likely to be appointed to precarious leadership positions, which puts pressure on them to ameliorate the weak earnings performance. Finally, consistent with the interaction between women resulting in an unfavourable response from investors, we document a negative stock market reaction to the appointment of female top managers in the presence of women on the board.

Does Routine Labor Generate Routine Earnings?

A substantial body of research investigates how skills and attributes of upper management affect firm policies and performance, but the impact of workers outside of upper management has received little attention due to scarcity of data involving lower-level workers. Prior research also suggests that operating uncertainty impedes managers’ ability to understand and predict their own firm’s future earnings performance, leading to accrual estimation errors, and that higher-ability managers are better able to transform economic predictability into smoother accruals and earnings. We predict and find that a firm’s utilization of routine labor (defined as labor at greater risk of future automation) contributes to firms’ and managers’ propensity to report more persistent and predictable accruals and earnings. Results indicate that routine labor generates the most predictable and persistent accruals when managers have higher ability and when firm efficiency is higher, when firms build up inventory and therefore accrue a greater proportion of labor cost, and when the routine labor supply is less impacted by external economic policy (in the form of state minimum wage increases). Taken together, our results suggest the characteristics of lower-level workers interact with those of managers, firms, and the economy to determine the persistence of accruals and earnings.

The impact of insider trading on analyst coverage and forecasts

Purpose The purpose of this study is to examine the effect of insider trading on analyst coverage and the properties of analyst earnings forecasts. Given the central role of analysts for information diffusion in stock markets, advancing understanding of the role insider trades may play in analyst coverage and forecasts, especially in the context of a changing legal environment (e.g. the implementation of Regulation Fair Disclosure [Reg FD]), should be a worthy goal. Design/methodology/approach To address the research questions, the authors run regressions in which the authors identify and control for as many possible determinants of analyst coverage and forecasts (e.g. firm size, information asymmetry and earnings performance) that are correlated with insider trades. To alleviate endogeneity concerns, the authors use three approaches. First, the authors extend the sample period to the post-Reg-FD period in which managers are not allowed to provide private information to financial analysts. Second, the authors measure analyst coverage in a window that is lagged by insider trades. Third, the authors employ firm-fixed-effects regressions in all the multivariate tests. Finally, following Larcker and Rusticus (2010), the authors conduct the impact threshold for a confounding variable test to assure that all regression analyses are indeed immune to the potential correlated-omitted-variable bias. Findings The authors find that the level of analyst coverage is positively related to the intensity of insider trades and that analyst coverage is more strongly associated with insider purchases than with insider sales. The authors also find that the positive association between analyst coverage and insider trades is less pronounced after the passage of Reg FD. Further investigations reveal that analysts revise their earnings forecasts upward following insider purchases, the informativeness of analyst forecast revisions significantly increases following insider purchases and optimistic bias in analyst forecast revisions is reduced as a result of insider purchases; the authors do not find similar evidence for insider sales. Research limitations/implications A large body of insider trading literature (Johnson et al., 2009; Badertscher et al., 2011; Thevenot 2012; Skaife et al., 2013; Billings and Cedergren 2015; Dechow et al., 2016) provides evidence that insiders actively trade on their private information, such as their foreknowledge of price-relevant corporate events. This literature suggests that insider trades are potentially value-relevant and are informative about a firm’s future prospects. However, less research attention has been paid to investigating how insider trades might affect market participants’ (especially sophisticated participants’) behavior. This study contributes to understanding the role that insider trading may play in shaping analyst behavior. Practical implications Prior research (Frankel and Li, 2004; Lustgarten and Mande, 1995; Carpenter and Remmers, 2001; Seyhun, 1990) maintains that insider sales are less informative about a firm’s future prospects than are insider purchases because insider sales might take place for the liquidity and diversification purposes. By probing the stock price responses to insider selling activities, Lakonishok and Lee (2001), Jeng et al. (2003) and Fidrmuc et al. (2006) infer that insider selling is not informative about future firm performance. However, for such an inference, the authors cannot rule out the possibility that insider sales do convey value-relevant information, but the stock market does not react correctly to such trading information (Beneish and Vargus, 2002). Because the authors focus on examining analysts’ responses to insider sales, and analysts are supposed to be sophisticated in information processing, this study adds more compelling evidence for the notion that insider sales convey less information about a firm’s future prospects than do insider purchases. Social implications There is an ongoing debate about the benefits and drawbacks of insider trading. Opponents of insider trading view insider trades as inequitable and immoral and assert that restricting insider trades curbs resource misallocation and benefits the whole society. Proponents contend that insider trading accelerates the price discovery process, increases market efficiency (Leland, 1992; Bernhardt et al., 1995; Choi et al., 2016) and may even play a role in rewarding and motivating executives (Roulstone, 2003; Denis and Xu, 2013). The authors add to this debate by documenting that insider trading increases the amount of information valuable to analyst research activities and helps enhance analyst services. Originality/value To the best of the authors’ knowledge, this study is the first to offer firm-level evidence of a positive association between insider trades and analyst coverage. By accounting for the post-Reg-FD regime, this paper is also the first to provide evidence on how analysts, in the absence of access to management’s private information because of the regime change by Reg FD, react to insider trades.

CEO Turnover and Accounting Earnings: The Role of Earnings Persistence

Although earnings persistence should have a nontrivial impact on chief executive officer (CEO) turnover decisions, prior studies have paid little attention to the role of earnings persistence in CEO turnover decisions. This study examines the effect of earnings persistence on the sensitivity (i.e., the negative relation) of CEO turnover to earnings performance. First, we find that the sensitivity of forced CEO turnovers to earnings performance is greater when earnings are more persistent. We also show that among numerous earnings attributes, earnings persistence is the most direct and dominant attribute in explaining CEO turnover-earnings sensitivity. Further, when the effect of earnings persistence on CEO compensation-earnings sensitivity is weak, the effect of earnings persistence on CEO turnover-earnings sensitivity is stronger, suggesting that the executive discipline system substitutes for the compensation system when earnings persistence is neglected by compensation policies. Overall, our findings suggest that earnings persistence plays a crucial role in CEO turnover decisions by elevating the board’s knowledge on the future performance implications of current earnings. Finally, the role of persistence is even more crucial when it is neglected by executive compensation policies. This paper was accepted by Shiva Rajgopal, accounting.

Investors’ Valuations of Female CEOs: Risk Management Performance and Information Asymmetry

This paper examines the relationship between female CEOs’ risk management and earnings performance, considering that risk involves a corresponding proportionate return. We find that female CEOs have a positive relationship with the quality of internal control but a negative relationship with profitability during the 2007-2009 financial crisis, which means that the tradeoff between risk and return occurs in a crisis. Nevertheless, female CEOs show no significant relationship with company value. This finding suggests that the tradeoff between risk and return causes offset effects on the firm value during a crisis. We further investigate whether risk-related motivations influence female CEOs’ risk management performance. We set CEOs’ company-related wealth as a risk-taking motivation, and CEO age and high share ownership as risk-averse motivations. In conclusion, risk-related motivations do not advance risk management performance. This finding calls into question the argument of some literature that women's risk management ability stems from their risk-averse tendency. Notably, the risk-taking motivation positively relates to return of asset and company value, but has a negative effect on company value during a crisis. Moreover, it undermines female CEOs’ risk management during a crisis and dilutes the risk-return tradeoff.

Earnings Management and Performance Incentives — The Monitoring Effect of Analysts’ Coverage

Earnings Management and Performance Incentives — The Monitoring Effect of Analysts’ Coverage

Managerial Overconfidence, Research and Development, and Earnings Management: Perspective from Capitalization and Expense

Managerial overconfidence, originally disputed in terms of finance and accounting, has been dated back to Malmendier and Tate (2005a,b). Galasso and Simcoe (2011) studied the relationship between CEO overconfidence and innovation, focusing on patents, in which they found that overconfident CEO underestimates risks in R&D activities, resulting in more R&D expenditure. However, little literature concentrates on expense and capitalization of R&D expenditure in China, where new accounting rule applied since 2007, and correspondingly the relationship between overconfidence and preference of expense and capitalization. By Tobit model and GMM model, we found that overconfidence managers have incentives to capitalize on R&D expenditure, because accrual earnings management motivated by capitalized R&D, different from real earning earnings management triggered by expense R&D, which cuts down R&D expense directly to beautify the earnings performance, adjust the proportion of research and development. Therefore, such a preference to capitalize R&D turns the corporation to deal with accrual earnings management instead of real earnings management.

Joint Analysis of Corporate Decisions on Timing and Medium of Earnings Announcements: Evidence from Korea

ABSTRACT This study comprehensively investigates the management’s strategic behaviors in determining the timing and the disclosure medium for earnings announcements, utilizing the empirical setting in Korea. This study finds that firms tend to release bad earnings news on a delayed basis, without voluntary disclosure of preliminary earnings, on Friday or weekdays just before a holiday and during after-market hours, respectively. More importantly, firms employ multiple earnings announcement strategies jointly in a way to increase the number of strategies to hide earnings news as the earnings performance deteriorates. Further, there is evidence that the earnings announcement strategies are generally effective in avoiding or attracting the market attention as anticipated. Overall, this study provides new evidence supporting the managerial opportunism in earnings announcements by demonstrating that firm managers deliberately organize multiple options for announcements to maximize the possibility of adjusting the market attention for their purposes.

Financial Constraints and Corporate Environmental Policies

This paper documents evidence that financial constraints increase firms' toxic emissions given that firms actively trade off abatement costs against potential legal liabilities. Exploring three quasi-natural experiments in which firms' financial resources are likely exogenously impacted, we find that relaxing financial constraints reduces U.S. public firms' toxic releases. The effects of financial constraints on toxic releases are amplified when regulatory enforcement weakens and when myopic managers emphasize short-term earnings performance. Overall, our evidence highlights the real effects of financial constraints in the form of environmental pollution, which is a costly negative externality imposed on society and public health.

Earnings Management and Performance of IPO Firms: Evidence from India

Disclosure through corporate annual reports is intended to enhance transparency and reduce information asymmetry during public issues. Ritter (1991) revealed that there is something fishy in the financial reports of the companies coming out with public issues. Earnings management has been recognised as a foremost contributor to such misleading financial reports. The short term overperformance of initial public offerings (IPO) of companies increases the expectations of potential investors and leads to a subsequent decline of performance in long run leaving the investors in distraught. The observed phenomenon is omnipresent and thus affects the investors across the globe. The present article empirically investigates the presence of earnings management in IPOs in India. The study is based on Modified Jones Model, the best known model to measure accruals earnings management. Preliminary results exhibit that earnings management in Indian IPOs is much higher than in developed countries. The study further discovers that the earnings performance of IPO companies is abnormally higher in IPO year as compared with post-offer period. Both the results taken together reinforce that post-issue earnings performance is a derivation of issue year earnings management in India.

Earnings Shortfalls and Strategic Profit Allocations in Segment Reporting

SYNOPSIS I examine whether firms strategically classify earnings components when reporting bad earnings news. Specifically, I examine whether firms reporting small earnings shortfalls allocate profits across their business segments in a manner that understates the future implications and within-firm drivers of disappointing earnings performance. I find that firms reporting small earnings shortfalls transfer profits toward segments in which profit rates are more informative for firm value and away from segments that operate in industries with higher frequencies of bad earnings news. In addition, I find that shortfall shifting initially tempers negative market responses to shortfall news, but pricing effects reverse in the months following shortfall announcements. My findings suggest that firms strategically classify earnings components when reporting small earnings shortfalls and that strategic classifications temporarily affect the pricing of shortfall news. Data Availability: Data are available from public sources identified in this paper.

Tone Concavity around Expected Earnings

ABSTRACT We examine whether the relationship between managerial tone and earnings performance depends on the performance of the firm relative to earnings expectations. Using both annual changes in earnings and the difference between realized earnings and analyst consensus forecasts, we find evidence of “tone concavity” around earnings expectations. Specifically, the covariance between managerial tone and earnings performance is positive when earnings are below expectations, but negative when earnings meet or exceed expectations. We interpret our results to suggest that managers downplay positive changes in earnings to attenuate future growth expectations. We also find that tone concavity is significantly attenuated by managers' career concerns and accounting conservatism, but unrelated to litigation risk. Our results indicate that the effect of earnings performance on disclosure tone is complex and reflects managers' incentives to manage expectations.

Refinement of the FCF motive for stock repurchases

PurposeThe purpose of this paper is to investigate factors that influence the free cash flow (FCF) motive for stock repurchases. Specifically, it examines whether the positive association between FCF and open-market repurchases is partially driven by abnormal cash flows, and whether external analyst monitor and financial crisis influence the association.Design/methodology/approachThe study employs a tobit regression model to test the hypotheses.FindingsFirst, the results suggest that the positive association between FCF and stock repurchases is partially driven by abnormal cash flows. Second, the association between pre-managed FCF and stock repurchases is strengthened as more analyst following the firms. Third, firms repurchase less when they report more negative abnormal cash flows, and that tendency is more pronounced during the 2008 financial crisis period. Further analysis shows that during the crisis period, the effect of negative abnormal cash flows on operating performance gets stronger.Originality/valueThe study makes several contributions to the literature. This paper is the first to show that managers use abnormal cash flows to fulfill the share buy-backs. In addition, it shows that analysts provide effective external monitoring by strengthening the association between pre-managed FCF and repurchases. Furthermore, it finds that firms adjust their strategy in times of financial crisis period in response to the increased risk. Finally, it contributes to the earnings management literature by showing the differential effects of accruals management and cash flow management on earnings performance.

Tone Conservatism

We examine whether the relationship between managerial tone and earnings performance depends on the performance of the firm relative to earnings expectations. Using both annual changes in earnings and the difference between realized earnings and analyst consensus forecasts, we find evidence of “tone concavity” around earnings expectations. Specifically, the covariance between managerial tone and earnings performance is positive when earnings are below expectations, but negative when earnings meet or exceed expectations. We interpret our results to suggest that managers downplay positive changes in earnings to attenuate future growth expectations. We also find that tone concavity is significantly attenuated by managers’ career concerns and accounting conservatism, but unrelated to litigation risk. Our results indicate that the effect of earnings performance on disclosure tone is complex and reflects managers’ incentives to manage expectations.

Malaysian Listed Firm’s Tax Avoidance: Another Earnings Management Strategy?

This study examines the role of tax avoidance on firm’s earnings management for a sample of 149 listed public firms in Malaysia over 2009 – 2013. Beneish M-score is used to measure the earnings management and effective tax rate to measure the tax avoidance. After controlling firm size, growth, leverage and profitability, the result shows that only two variables which tax avoidance and growth are positively significant towards the earnings management. The result implies that firms may manage their earning to enjoy tax advantages. Moreover, management in growth firms tend engages better earnings performance and thus it may affect the firm investment strategies.