Timeliness Of Earnings Research Articles

Strategic emphasis and accounting conservatism

PurposeThe authors examine how a firm's strategic emphasis (SE) on value appropriation (VA) over value creation (VC) is associated with accounting conservatism.Design/methodology/approachTo examine the effect of SE on a firm's adoption of conservative accounting practice, the authors measure SE as advertising expenses minus research and development (R&D) expenses scaled by total assets. The authors rely on the asymmetric timeliness of earnings from Basu (1997) to measure conditional conservatism and investigate how the incremental sensitivity of earnings to negative stock returns varies with the SE.FindingsSE on VA over VC is found to be positively related to accounting conservatism since they want to deter entrants (i.e. competition adjustment) and to accommodate the tighter monitoring over the financial reporting system from stakeholders (i.e. risk adjustment). This argument is also supported by the additional cross-sectional tests based on the different level of market competition and external monitoring environment. In addition, the positive association between SE on VA over VC and accounting conservatism is less pronounced when managerial overconfidence is high.Research limitations/implicationsImplication is that two important decisions (i.e. SE and accounting conservatism) are related with each other since both are to create competitive advantage and to maintain financial stability for a firm, and the relation differs by managerial characteristics.Originality/valueThis study highlights the differential roles of SE in shaping the conservatism in financial reporting and the importance of overconfidence in driving conservative accounting.

Managers' narcissism, earning quality, and bankruptcy risk

Purpose: This study was conducted with the aim of investigating the effect of narcissism in managers on profit quality and bankruptcy risk. Design/methodology/approach: The present study is applied in terms of purpose and is in positive accounting research. The research data were also collected based on information from sample companies selected by the systematic elimination sampling method. Based on this, 177 companies were selected over ten years, from 2012 to 2021. The research data were extracted annually from Rahavard Novin 3 software. After performing calculations in EXCEL software to enter the relations and hypotheses of the research, they were entered into Eviews software .Findings: The results of the research hypotheses test showed that managers' narcissism significantly affects earnings stability, earnings predictability, earnings relevance, earnings timeliness, and bankruptcy risk. We also found that narcissistic managers could have two positive and negative dimensions and the presence of these managers in the organization increases the quality of earnings but also the risk of bankruptcy.Academic contributions: There is a contribution to the development of knowledge related to the effect of managers' narcissism on the profitability and bankruptcy of organizations. Practical contributions: The presence of narcissistic managers in the organization can have two positive and negative dimensions, and narcissistic characteristics may neutralize their creative talent for the organization.

The IFRS adoption, accounting quality, and banking performance: An evaluation of susceptibilities and financial stability in developing economies

International Financial Reporting Standards (IFRS) ’s adoption increased attention to International Accounting Standard Regulations worldwide. It has opened the door for empirical analysis having different perceptions of mandatory IFRS adoption. This paper’s main objective is to examine the impact of accounting quality and IFRS adoption on Pakistan’s banking sector efficiency. We have employed the Malmquist productivity index, Roychowdhury’s Earnings Management, and modified learner index to conduct the empirical analysis. The results mean how much banking sector efficiency is affected by accounting quality and IFRS adoption. The results demonstrate that the banking sector efficiency significantly increases through accounting quality and IFRS. Furthermore, it can be seen that the foreign banks’ efficiency in Pakistan is less than other banks compared to public or private banks. Additionally, more earnings timeliness has been noted in large banks than medium and small banks in Pakistan. Preferably, the practice of quality accounting relies on disclosed information through financial statements. In contrast, the organizations may evade the losses once the information quality is precise and appropriate. The study provides valuable information to managers and other stakeholders.

Understanding How the Effects of Conditional Conservatism Measurement Bias Vary with the Research Context

We re-examine previous seminal studies on conditional conservatism (CC) that apply the asymmetric timeliness (AT) measure of Basu [(1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24(1), 3–37. https://doi.org/10.1016/S0165-4101(97)00014-1] and compare the outcomes with those based on the modified AT (MAT) measure of Badia et al. [(2021). Debiasing the measurement of conditional conservatism. Journal of Accounting Research, 59(4), 1221–1259. https://doi.org/10.1111/1475-679X.12366] and the spread in conditional variances (SCV) measure of Dutta and Patatoukas [(2017). Identifying conditional conservatism in financial accounting data: Theory and evidence. The Accounting Review, 92(4), 191–216. https://doi.org/10.2308/accr-51640]. Our conclusions are threefold. First, all three measures yield similar inferences in interrupted time-series settings that examine the change in CC following a policy mandate. Second, the inferences drawn from the AT measure in studies that model the determinants of CC based on cross-sectional settings are more sensitive to test specifications and research designs. Third, across the three measures, MAT shows the best empirical performance in terms of aligning with existing theories while being less affected by AT bias.

Does earnings quality impact firms’ performance? The case of Portuguese SMEs from the mold sector

PurposeThis study aims to study the impact of earnings quality on firms’ financial performance.Design/methodology/approachAn unbalanced panel data of 237 small- and medium-sized Portuguese companies from the mold industry, using 2010–2018 yearly data was analyzed. While most studies focus only on earnings management when assessing earnings quality, in this study six proxies for earnings quality are used, namely, accruals quality (a proxy for earnings management), earnings persistence, earnings predictability, earnings smoothness, earnings timeliness and earnings conservatism. Moreover, two proxies of financial performance are considered, the return on assets and the economic value added. An econometric model was estimated using either a fixed-effects or a random-effects specification to account for the individual firm-specific effects and ensure heteroscedasticity corrected estimates.FindingsThe results show that managers must be concerned with the quality of reported earnings, as it can affect positively firms’ financial performance, especially regarding accruals quality. Persistence, predictability, smoothness, timeliness and conservatism are shown not to exert significant influence on financial performance in the sample.Research limitations/implicationsThis work contributes not only as a literature review on these thematic but also to firms’ managers and stakeholders, who have information that helps them select strategies that guarantee earnings quality and improve firms’ financial performance.Originality/valueThis study proposed an econometric model that studies the relationship between earnings quality (using several proxies for it) and financial performance that can be applied to all companies.

Busy boards and accounting conservatism – an Australian perspective

PurposeThis paper aims to examine the association between busy directors on corporate boards and accounting conservatism.Design/methodology/approachThe authors use a sample of 500 firms listed on the Australian Security Exchange from 2004 to 2019. The busyness of non-executive directors is proxied by three indicators. For accounting conservatism, the authors use both conditional and unconditional accounting conservatism via asymmetric timeliness of earnings, accrual-based loss recognition, cumulative total accruals and book-to-market ratio. The authors cluster the standard errors at the firm level to compensate for potential residuals’ dependency and heteroscedasticity, in addition to analysing the main models using year and industry fixed effects (Petersen, 2009). Separately, the authors look at the impact of female busy directors on firms’ adoption of conservative accounting methods. Both propensity score matching analyses and Heckman (1979) two-stage approach systematically address endogeneity issues.FindingsThe presence of busy directors on boards leads to greater unconditional conservatism and less conditional conservatism. The relationships between busy female directors with both conditional and unconditional conservatism remain consistent with the main findings.Practical implicationsThis paper provides useful insights for shareholders, regulators and accounting standards setters to better evaluate busy directors’ effectiveness in monitoring firms’ financial reporting quality. Directors and the companies themselves can refer to the authors’ findings to decide the best structure for their boards and committees, considering their specific monitoring requirements. Given that no mandatory restriction has been legislated, improved policies or new ones will ensure that busy directors can effectively fulfil their duties.Originality/valueThis research contributes to the broader research theme by examining the influence of directors’ quality on financial reporting conservatism. It also contributes to the ongoing debate in the corporate finance literature regarding the experience and busyness hypotheses of directors with multiple directorships. Additionally, this research adds value to gender diversity research by finding evidence that female busy directors follow the same pattern of reporting conservatism as male busy directors.

The effect of sustainability reporting on corporate value with earnings quality as mediating variable

The purpose of this research was to examine the effect of sustainability reporting economic, environment, and social aspect on corporate value mediated by earnings persistence, and earnings timeliness. This research used purposive sampling method that was the selected samples that meet predetermined criteria, so the number of samples that meet the criteria was 16 companies for each period from the entire population of non-financial companies listed on the Indonesia Stock Exchange in 2016 – 2019. The data analytical method used in this research was path analysis and mediation hypothesis analysed by using sobel test. The result of analysis shows that sustainability reporting economic aspect has negative but not significant, environment aspect has negative and significant, and social aspect has positive and significant relationship on the earnings persistence. While sustainability reporting economic, environment, and social aspect have positive but not significant effect on the earnings timeliness. Then, sustainability reporting economic aspect has positive but not significant relationship on the corporate value, environment and social aspect have negative and significant effect on the corporate value. Accordingly with earnings persistence has negative but not significant effect on corporate value. While earnings timeliness has positive and significant effect on the corporate value. This research also shows that earnings persistence and earnings timeliness do not mediate the effect of sustainability reporting economic, environment, and social aspect on corporate value.
 Keywords: sustainability reporting, earnings quality, corporate value

Mediating Effects of Accounting Conservatism on The Relationship Between Corporate Governance and Cost of Capital

Mediating Effects of Accounting Conservatism on The Relationship Between Corporate Governance and Cost of Capital

The effects of state ownership and tax rate cuts on accounting conservatism: evidence from Vietnam

PurposeThe purpose of this paper is to examine the joint effects of state ownership and tax rate cuts on accounting conservatism, considering the different levels of foreign ownership in the context of Vietnam.Design/methodology/approachThe paper uses ordinary least squares regressions and a data set of 405 firms covering the period 2007 to 2019. The manuscript uses three measures of accounting conservatism: Basu’s 1997 timeliness of earnings, Basu’s 1997 earnings persistence and the book-to-market ratio.FindingsState-owned enterprises (SOEs) adopt less accounting conservatism than non-SOEs; however, the result is only robust in firms with foreign ownership being lower than the foreign ownership median. Firms increase accounting conservatism in the year immediately prior to the year that the tax rate cuts become effective. An SOE possesses an unusual conflict both as a taxpayer and in having its controlling interest held by the government, which is both a tax creator and a tax collector. Interestingly, the increase in accounting conservatism prior to the year of the tax rate cuts is more pronounced for non-SOEs than SOEs.Practical implicationsThis research is beneficial to investors and policymakers where the government is both the taxpayer and tax collector and in emerging markets where foreign investment is local firms’ important financing.Originality/valueTo the best knowledge, this study is the first in examining the joint effects of state control and tax rate cuts on accounting conservatism.

Long-term performance following share repurchase, signaling costs and accounting transparency: Korean evidence

Purpose Existing studies show that firms may have an incentive to use share repurchases opportunistically, thereby taking advantage of market participants’ confirmation bias that share repurchase is a signal of undervaluation. This study aims to investigate whether signaling costs and accounting transparency can serve as tools to identify opportunistic share repurchases. Design/methodology/approach The authors measure signaling costs by using two share repurchase methods (direct and indirect share repurchase) with different share repurchase costs, and measure accounting transparency using the history of earnings timeliness. The authors further measure long-term performance following share repurchases using operating performance and stock returns. Lastly, the authors compare the long-term performances between the groups defined by share repurchase method and earnings timeliness level. Findings The authors find that indirect share repurchase firms with a history of poor earnings timeliness experience unfavorable long-term performance, while other share repurchase firms do not. This finding reinforces the view that some share repurchases may be driven by managerial opportunism. In particular, when firms with a history of poor earnings-reporting behavior choose a low-cost repurchase method, their share repurchases may be motivated by managerial opportunism. Originality/value The findings suggest that past earnings timeliness and the signaling costs of a repurchase together are useful predictors of false signaling. Moreover, they suggest that investors can – at least in part – predict opportunistic share repurchases by using signaling costs and accounting transparency.

Do high-quality standards ensure higher accounting quality? A study in India

Purpose The study aims to investigate the impact of International Financial Reporting Standards (IFRS)-converged standards (Indian Accounting Standards (INAS)) on the accounting quality of Indian firms. The phased manner approach of implementing INAS provides us a unique setting to investigate the issue in India. Design/methodology/approach The study used difference-in-difference (DiD) methodology, where the accounting quality is compared between test firms and benchmark firms during the pre-and post-INAS adoption period. Accounting quality is operationalized through four different constructs, namely, earnings smoothing, discretionary accruals, earnings timeliness and value relevance of earnings. Findings The findings deduced from the empirical results demonstrate that accounting quality has been significantly reduced after the adoption of INAS. In particular, results show that the degree of earnings smoothing, and the magnitude of discretionary accruals have been increased among test firms in the post-adoption year. Besides, findings provide evidence that timely recognition of losses and value relevance of earnings has been reduced for test firms relative to benchmark firms after the adoption of INAS. Practical implications The results suggest that the mere adoption of high-quality standards does not ensure higher accounting quality in countries with a weaker enforcement mechanism. Hence, stringent enforcement mechanisms are needed to ensure full compliance with accounting standards. This study serves as a case study for other emerging countries that are in the process of IFRS convergence and make them aware of the unintended consequences of IFRS adoption. Originality/value Indian authorities implemented INAS in a phased manner that provides a unique setting to use DiD methodology. DiD helps to control the impact of concurrent economic shocks, while examining the impact of the particular regulatory shock. Besides, this is the first attempt to investigate the impact of INAS on the accounting quality of Indian firms.

Debiasing the Measurement of Conditional Conservatism

ABSTRACTBasu's [“The Conservatism Principle and the Asymmetric Timeliness of Earnings.” Journal of Accounting and Economics 24 (1997): 3–37] measurement of conditional conservatism as the asymmetric timeliness of earnings underlies hundreds of studies. However, many subsequent studies cast doubt on the extent to which Basu's measure captures conditional conservatism versus statistical biases or alternative constructs (collectively, “biases”), thereby questioning the validity of the inferences that empirical researchers draw from analyses using the measure. We modify Basu's measure in four simple ways to remove these biases. Our key modification is the inclusion of interactive controls for return variance, a volatility proxy that captures Patatoukas and Thomas’ [“More Evidence of Bias in Differential Timeliness Estimates of Conditional Conservatism.” The Accounting Review 86 (2011): 1765–1794] return variance effect and various sources of economic optionality and adjustment costs. This inclusion captures volatility‐related effects on both the level of earnings and the sensitivity of earnings to returns, and it allows the magnitudes of these effects to vary with the sign of returns. We conduct validation analyses using placebo‐dependent variables, synthetic returns, and nonconditionally conservative earnings components that show our modified Basu measure is largely free of known biases. We further show that our measure is associated with contracting and other economic variables as predicted by theory. Our findings suggest that researchers can rely on our modified Basu measure to identify the determinants and effects of conditional conservatism.

Debiasing the Measurement of Conditional Conservatism

Basu's [“The Conservatism Principle and the Asymmetric Timeliness of Earnings.” Journal of Accounting and Economics 24 (1997): 3–37] measurement of conditional conservatism as the asymmetric timeliness of earnings underlies hundreds of studies. However, many subsequent studies cast doubt on the extent to which Basu's measure captures conditional conservatism versus statistical biases or alternative constructs (collectively, “biases”), thereby questioning the validity of the inferences that empirical researchers draw from analyses using the measure. We modify Basu's measure in four simple ways to remove these biases. Our key modification is the inclusion of interactive controls for return variance, a volatility proxy that captures Patatoukas and Thomas’ [“More Evidence of Bias in Differential Timeliness Estimates of Conditional Conservatism.” The Accounting Review 86 (2011): 1765–1794] return variance effect and various sources of economic optionality and adjustment costs. This inclusion captures volatility-related effects on both the level of earnings and the sensitivity of earnings to returns, and it allows the magnitudes of these effects to vary with the sign of returns. We conduct validation analyses using placebo-dependent variables, synthetic returns, and nonconditionally conservative earnings components that show our modified Basu measure is largely free of known biases. We further show that our measure is associated with contracting and other economic variables as predicted by theory. Our findings suggest that researchers can rely on our modified Basu measure to identify the determinants and effects of conditional conservatism.

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.

The evaluation of efficiency and value addition of IFRS endorsement towards earnings timeliness disclosure

AbstractMeasurement of accounting information under International Financial Reporting Standards (IFRS) plays an important role in the determination of earnings timeliness information and investor's decision making. This study assessed the compulsory acceptance of IFRS adoption. The study also measures the efficiency of Pakistani banking sector. We employed data envelopment analysis, SVAR and regression methods to measure Pakistani banks efficiency. The results show that the mandatory adoption of IFRS has increased earnings timeliness of information in all banks. The assessment of cumulative effect on banks by incorporating single weighted index value (ET index) reveals that IFRS increased timely profit and loss realization of banks. Comparatively the bank‐wise estimation of earning timeliness indices shows that IFRS does not shows a significant impact on earnings timeliness of commercial and specialized banks. Finally, the evaluation of IFRS policy shocks shows that earnings timeliness and stock returns are positively responding to change in reporting policy. Furthermore, we anticipate policy change to overcome the gap between asymmetrical earnings exposure and value relevancy of investors decision.

Timeliness and persistence of conservative earnings in an emerging market

PurposeThe asymmetric effect of conservatism on earnings and its other components serves as a contrivance to incorporate transparency and timeliness in financial reporting. This study aims to explore cash flow-return association, which provides insight into the accruals’ contribution that traverses through conservatism-earnings persistence liaison and its associated effects on stock returns.Design/methodology/approachThe study used asymmetric timeliness (AT) model and two firm-year measures, namely, C-Score and conservatism ratio, to capture conservatism. The firm-year measures of conservatism, in addition to the AT measure, facilitate a better understanding of the persistence of reported earnings that branch out the study from the existing literature. Further, the study used panel regression analysis to evaluate the timeliness and persistence of earnings under the conservative approach with a sample of Indian corporate data from 2000 to 2017.FindingsThe findings of the study reveal that conservative earnings are less persistent and the accruals recognize bad news timelier than good news. The unfavorable change in earnings shows a lower earnings response coefficient in contrast to favorable earnings variations. However, the appropriate loss recognition nature of conservative reporting has little or no influence on stock returns in an emerging market such as India.Research limitations/implicationsAccounting conservatism is a captivating feature accounting information, especially pertinent to many decision-makers. Thus, the study has implications for the investors while evaluating the adverse and positive changes in accounting earnings; also, the results are helpful for the standard setters in ongoing debate related to accounting conservatism vs fair evaluation. The present study focuses exclusively on ex-post conservatism, while the ex post and ex ante conservatism are having a significant role in accounting practices. Future research on the differential effects of ex post and ex ante conservatism on accounting information in an emerging market, is worth promising.Originality/valueThe study reveals the first Indian evidence on accounting conservatism and earnings persistence relationship, which would bring a different dimension to investors’ perception in evaluating the characteristic variations of reported earnings. The findings add value to the accounting standard setters concerning the asymmetric verification as Indian Accounting standards are on the verge of convergence with International Financial Reporting Standards (IFRS).

Asymmetric Timeliness of Earnings Recognition and Overestimation of Accruals Quality

This study examines the relationship between the asymmetric timeliness of earnings recognition and accruals quality. Ball and Shivakumar (2006) provide evidence that the relationship between accruals and cash flows is distorted under the linear assumption. This study estimates new measures of accruals quality after including the asymmetric timeliness of earnings recognition in Dechow and Dichev’s (2002) model and compares these with Dechow and Dichev’s accruals quality. I decompose Dechow and Dichev’s accruals quality into (1) one component after controlling for asymmetric earnings timeliness, which is unexplained by asymmetric timeliness recognition, and (2) another component that is explained incrementally by asymmetric timeliness recognition beyond three consecutive-period operating cash flows. I examine the relationship between decomposed accruals quality and earnings forecast accuracy, cost of debts, and cost of equity. Empirical findings show accruals quality significantly improves after incorporating asymmetric timeliness of earnings recognition. The accruals quality component after incorporating asymmetric timeliness shows significant relationships with earnings forecast accuracy and cost of equity, while the other component does not. This study shows that accruals quality improves when estimated by allowing a non-linear relationship with asymmetric timeliness. This measure enables users to make better decisions when evaluating firms’ operating or financing activities. Key words: Accruals Quality; Asymmetric Timeliness of Earnings Recognition; Cost of Debts; Cost of Equity; Earnings Forecast Accuracy JEL Classification: G10, M40

Insider trading restrictions and earnings management

We study whether firms that voluntarily restrict insider trading have lower incentives for earnings management. Using a large sample of US firms, we measure these restrictions based on the extent to which insider transactions happen shortly after quarterly earnings announcements. We find that the adoption of insider trading restrictions is associated with a reduction of 9.92% in absolute discretionary accruals. Our findings are robust to controlling for changes in corporate governance, and we do not find evidence of a substitution effect between accruals and real earnings management, target beating or timeliness of loss recognition. Taken together, our results indicate that the voluntary adoption of blackout periods that limit insider trading improves the quality of financial reporting.

The relationship between “asymmetric timeliness of earnings” with “market to book value” as a conservative criterion

The relationship between “asymmetric timeliness of earnings” with “market to book value” as a conservative criterion

Effect of Accounting-based and Market-based Properties of Earnings Quality on Share Price of Listed Manufacturing Firms in Nigeria

Earnings quality has emerged as an issue of interest to investors, managers, analysts and other market participants in view of its association with share price and returns. This study investigated the effect of accounting and market based earnings quality properties on share price of listed manufacturing firms in Nigeria. Using some filters to arrive at an adjusted population of 20 out of 37 listed firms as at 31st December, 2013, panel data were extracted from the firms’ annual financial statements based on census approach for the period 2009 – 2013 to examine the effect of earnings quality properties represented by accruals quality, income smoothing, earnings variability, timeliness of earnings and earnings conservativism on share price. The result of the robust Ordinary Least Square (OLS) revealed that accruals quality and timeliness of earnings have significant inverse relationship with share price, while earnings variability has significant positive relationship with share price. The study further revealed that income smoothing and earnings conservativism have negative but insignificant association with share price of the firms. Based on the result, the study recommended among others that the Security and Exchange Commission (SEC) should continually subject the earnings of manufacturing sector to quality tests to insulate the investing public from possible rip off. Also, management of manufacturing firms should avoid undue earnings management practice by limiting their choice of accounting treatment alternatives to the provision of IFRS in order to improve financial information quality that will reduce information asymmetry and consequently lead to share price improvement.