Earnings Permanence Research Articles

Analysis Of Discretionary Accrual, Differences In Profits, Cash Flow And Fiscal Profits On Profits Persistence Of National Manufacturing Companies Listed In Indonesian Stock Exchange

This study examines the effects of cash flow, discretionary accruals, and accounting profit on the persistence of profits in manufacturing enterprises. Manufacturing firms registered on the Indonesian Stock Exchange make up the study's population. Purposive sampling was the technique employed for sample selection. Secondary data, specifically financial reports of manufacturing firms that have gone public and are listed on the IDX, is the type and source of data used in this study. Descriptive statistics and multiple regression are the statistical techniques used to examine data and test hypotheses. Profit persistence is significantly harmed by the discrepancy between accounting profit and fiscal profit, which serves as a stand-in for deferred tax expense. Earnings permanence is significantly harmed by discretionary accrual. Profit persistence is significantly influenced favorably by operating cash flow. We can draw the conclusion that a company's earnings will last longer the higher its operating cash flow.

이익지속성과 손해보험사의 배당정책

이익지속성과 손해보험사의 배당정책

이익의 지속성에 근거한 적정배당정책에 관한 연구

최근 국민연금을 비롯한 공적연기금과 자산운용사, 외국계 헤지펀드들의 주주행동주의에 따른 배당요구가 커지고 있는 상황에서 기업은 중장기적인 차원에서 기업가치제고를 위한 배당정책을 시급히 마련할 필요가 있다. 그럼에도 불구하고 아직까지 이에 대한 논의나 연구는 전무한 실정이다. 이에 본 연구는 과소배당이나 과다배당이 아닌 기업가치를 극대화 할 수 있는 적정배당정책의 수립을 어디서 출발할 것인지에 대한 실증적인 방안을 제시하였다는데 그 의의가 있다. 본 연구는 현금배당이 지속적인 이익에 의존한다는 주장과 현금배당이 기업가치 제고에 기여한다는 주장을 근거로 지속적인 이익에 근거한 현금배당이 기업가치에 미치는 영향을 분석하고자 한다. 이를 위해 베버리지-넬슨 방법으로 이익(E)을 지속적인 이익(EPERM)과 일시적인 이익(ETEMP)으로 분해하였다. 실증분석 결과 첫째, 지속적인 이익 대비 현금배당 비중(D/EPERM)이 증가할수록 기업가치는 유의적으로 증가하였다. 둘째, 지속적인 이익 대비 현금배당비중(D/EPERM)과 기업가치가 역U자 형태의 비선형적인 관계임을 발견하여 적정배당수준의 도출이 가능함을 보여주었다. 이러한 실증결과는 국내 기업들에게 이익의 지속성을 고려한 적정배당정책의 실현이 기업가치 제고에 필요하며, 기관투자자들에게는 미시적인 차원에서 기업의 적정배당수준에 대한 모니터링 역할이 주주가치 향상에 기여할 수 있음을 시사한다.

Predicting Operating Cash Flows and Earnings Using the Direct Method Compared to the Indirect Method Statement of Cash Flows

This study assesses whether the direct method incrementally predicts future operating cash flow and earnings beyond the indirect method. Using a sample of Australian listed companies reporting under International Accounting Standards, results indicate that the direct method predicts future operating cash flows with greater accuracy than the indirect method. Direct method disclosure is incrementally useful for predicting earnings when companies experience low earnings permanence. Findings show that users cannot re-create or estimate direct method line items accurately with mean absolute percentage errors above 3 percent outside the upper 25th percentile for cash receipts from customer and cash payments to suppliers. In fact, estimated direct method line items provide less predictive accuracy for earnings and operating cash flow than an aggregate operating cash flow measure, after controlling for accruals. This result also holds after I truncate estimation errors for direct method disclosures to the upper 90th and 75th percentiles.

The value relevance of earnings levels in the return-earnings relation

Purpose – Prior studies provide mixed propositions on whether earnings levels or earnings changes provide the better explanatory power for variations of stock returns and whether the time-series behavior of earnings affects the value relevance of both earnings variables. This paper aims to compare the value relevance of earnings levels with that of earnings changes in the return-earnings relations. Design/methodology/approach – The unobservable components model is used to estimate permanent and transitory components of earnings. Findings – The finding shows that the proxy ability of earnings changes for unexpected earnings is sensitive to a firm's time-series earnings permanence property and is unstable and noisy when earnings contain predominantly transitory components, but that of earnings levels is not. The results support earnings levels are a stable and better value relevant proxy in the return-earnings relations. Research limitations/implications – The findings imply that the valuation role of earnings levels is important in the research relating to earnings components, earnings innovations, and equity valuation, especially when earnings permanence is of interest. Practical implications – The results provide a new understanding on the role of earnings levels in many business decisions such as executive compensations, institutional investment and conservative accounting where they often involve the choice of using levels and/or changes of earnings variables in making decisions. Originality/value – The paper contributes to the accounting literature by providing a new insight into the valuation role of earnings levels in the return-earnings relations. The stable value relevance of earnings levels also has important implications, especially for studies that use only earnings levels to assess earnings quality and earnings attributes.

The value relevance of earnings and cash flows: the Tunisian stock market evidence

This study examines the value-relevance of three performance measures: earnings, cash flows from operations (CFO) and funds flows from operations (FFO). It addresses three questions. First, do accounting earnings and cash flows data have information content? Second, does accounting earnings (cash flows) have incremental information content over cash flows (earnings)? Third, does the incremental information content of cash flows (earnings) increases (decreases) with a decrease in the permanence of earnings? The empirical findings are consistent with: 1) all three performance measures having explanatory power for returns individually and earnings performing better than cash flows in explaining security price variation; 2) earnings having incremental information content beyond CFO and FFO; 3) CFO having incremental information content beyond earnings; 4) FFO having no incremental information content over earnings. Results do not however support any increase in the incremental information content of cash flow...

The Value Relevance of Earnings and Cash Flows: Empirical Evidence for Tunisian Stock Market

This study examines the value-relevance of three performance measures: earnings, cash flows from operations (CFO) and funds flows from operations (FFO). It addresses three questions. First, do accounting earnings and cash flows data have information content? Second, does accounting earnings (cash flows) have incremental information content over cash flows (earnings)? Third, does the incremental information content of cash flows increases and the incremental information content of earnings decreases with a decrease in the permanence of earnings? Based on tests of association between security returns and these fundamental variables, a pattern of consistent results emerges. All three performance measures have explanatory power for returns individually. Results are also consistent with earnings performing better than FFO and CFO in explaining security price variation and suggest that accruals as a whole convey relevant information about changes in firm value. In relation to the incremental information content of these variables, results are consistent with (i) earnings having incremental information content beyond CFO and FFO, and (ii) CFO having incremental information content in addition to that contained in earnings and (iii) FFO having no incremental information content over earnings. While results of the study don’t support any increase in the incremental information content of cash flows in presence of transitory items in earnings, they however provide evidence on investors’ rationality since they show that the permanent component of earnings is more valued by the market than the transitory component.

Value Relevance of Earnings and Cash Flows from Operations: Effects of Earnings Permanence, Growth and Firm Size in Tunisian Stock Exchange

The purpose of this study is to examine the information content of accounting earnings and CFO to explain security returns in Tunisian Stock Exchange through the study of their response coefficients and the explanatory power of regression models in the period of 1997 - 2001 (an application of a New Accounting System of Companies). We hypothesis that (i) earnings (CFO) have an incremental information content beyond CFO (earnings) when the two variables are jointly used in return regression, (ii) the response of returns to CFO (earnings) increases (decreases) when earnings is transitory, (iii) security returns response to both earnings and (CFO) will be higher (lower) for high (low) growth firms and (iv) the security returns response to accounting earnings (CFO) are weaker (higher) for large (small) firms. We have introduced market-to-book ratio and market value of equity as additional variables in regression models and as proxies of growth and firm size. Results can not affirm that CFO plays a more important role in marketplace when earnings are transitory. Results in relation to earnings growth and firm size hypothesis show that CFO can join Market-to-Book ratio and market value of equity as proxy of risk.

Estimating the Value Added by Big 8/6/5 Auditors Using Earnings and Cash Response Coefficients

This paper estimates the value added by Big 8/6/5 auditors after controlling for the permanent and non‐permanent impact of earnings and cash flows using linear and nonlinear (arctan) regression models. The linear model shows significant value added for industrial firms that utilise Big 8/6/5 auditors; while an arctan model shows that large auditors value‐add by attesting to the permanence of earnings for large firms. We demonstrate that refinements to the audit research can be made by using response coefficients to filter out the different timing components inherent in earnings and cash flows.

Pengaruh Faktor Kontekstual Terhadap Kegunaan Earnings dan Arus Kas Operasi dalam Menjelaskan Return Saham

The objective of this research is to examine the incremental information content of earnings and cash flows from operation using a research methodology which explicitly incorporates contextual factors (earnings permanence, growth and firm size) that may add to an understanding of the relative usefulness of cash flows and earnings in explaining stock returns. As much as 516 manufacturing firms listed in the Jakarta Stock Exchange (BEJ) were taken as a sample using a purposive sampling method. This study uses the current level of earnings (operating cash flows) and the change in earnings (operating cash flows). The results show that, for change variable, the earnings response coefficient is related to earnings permanence and growth and that the cash flow response coefficient is related to firm size. For change and level variable, the earnings response coefficient is related to earnings permanence and growth and that the cash flows response coefficient is related to earnings permanence, growth and firm size. This study also indicates that cash flows from operations is important in explaining security returns in the following year and show that both earnings changes and levels have explanatory power when they are included simultaneously in a regression model of abnormal returns on earnings. This evidence is consistent with Easton and Haris (1991).

The Effect of Earnings Permanence, Growth, and Firm Size on the Usefulness of Cash Flows and Earnings in Explaining Security Returns: Empirical Evidence for the UK

This paper examines the relative information content of earnings and cash flows for security returns using a methodology incorporating contextual factors which may affect earnings and cash flow response coefficients. For our UK dataset, we provide evidence that the earnings coefficient is related to earnings permanence, growth and firm size and that the cash flow coefficient may be related to growth. Although our results emphasise the value relevance of earnings, they also suggest that both contemporaneous and prior period cash flow are positively related to security returns and that market‐to‐book and market value of equity have predictive power for returns.

Valuation Implications of Investment Opportunities and Earnings Permanence

This study investigates the value-relevance of accounting earnings in the presence of investment (growth) opportunities after making two theoretical and methodological research design refinements. First, we test for the incremental effect of growth on firms’ earnings response coefficients after controlling for the extent of transitory earnings under the assumption that the value-relevance of earnings with respect to growth should be stronger when earnings are more permanent. Second, we perform comprehensive factor analysis using market-based and accounting-based measures to construct a composite proxy for investment opportunities. We find that firms’ investment opportunities and the relative permanence of current earnings affect the value-relevance of those earnings. Additionally, we find that the interaction between permanent earnings and investment opportunities produces an even stronger price response to earnings.

An Analysis of Historical and Future‐Oriented Information in Accounting‐Based Security Valuation Models*

AbstractThe Ohlson (1995) and Feltham and Ohlson (1995) valuation model provides a rigorous framework for summarizing the information in expected future earnings and book values. However, the model provides little guidance on selecting an empirical proxy for expected future earnings. We examine whether and under what circumstances historical earnings and analyst earnings forecasts offer comparable explanation of security prices. This issue is of particular interest because analyst forecasts are less readily available than historical data. Under appropriate circumstances, historical data may allow wider use of the Feltham‐Ohlson valuation model by researchers and investors. A related issue is the incremental explanatory power of historical earnings and realized future earnings (perfect‐foresight forecasts) for security prices beyond analyst forecasts. If historical earnings are incrementally informative, that would suggest that analyst forecasts do not fully reflect price‐relevant information in past earnings. If future earnings are incrementally informative, that would suggest that security prices reflect investors' implicit earnings forecasts beyond analyst forecasts.We examine these issues using a historical model (based on past earnings), a perfect‐foresight model (based on realized future earnings), and a forecast model (based on Value Line earnings forecasts). All three models provide significant explanatory power for security prices, and each set of earnings data provides incremental explanatory power for prices when used with the other sets of earnings data. We estimate the models separately for firms with moderate and extreme earnings‐to‐price (E/P) ratios, a proxy for earnings permanence. For moderate‐E/P firms, the historical model's explanatory power exceeds that of the perfect foresight model, and is indistinguishable from that of the analyst forecast model. In contrast, for extreme‐E/P firms, the perfect‐foresight model offers greater explanatory power than the historical model, but lower explanatory power than analyst forecasts.Our results suggest that financial analysts' forecasting efforts are best focused on firms whose earnings contain large temporary components (extreme E/P firms). However, in general, both historical data and analyst forecasts are complementary information sources for security valuation.

Dividend policy and permanence of earnings

We examine managers’ adjustment of dividends to information about earnings. We base our analysis on a ‘permanent earnings’ model of dividend behavior, which implies that dividends are changed primarily in response to permanent changes in earnings; transitory earnings changes have little or no effect on dividends. Within the permanent earnings framework, the permanent component of earnings may be the predominant factor affecting dividend payouts, or it may be one of the important factors affecting dividends. In the former case earnings and dividends are co-integrated; in the latter they are not.

Earnings Permanence and the Incremental Information Content of Cash Flows from Operations

This paper investigates whether the incremental information content of cash flows from operations increases when earnings are transitory. We suggest that when the valuation implications of earnings are limited by the presence of transitory items, cash flows from operations disclosures may play a larger role as an additional value signal. We measure transitory items using earnings change scaled by beginning-of-period price (Ali [1994]) and the earnings-to-price ratio (Ou and Penman [1989] and Ali and Zarowin [1992]). Our analysis suggests that the incremental information content of accounting earnings decreases, and the incremental information content of cash flows from operations increases, with a decrease in the permanence of earnings.