Earnings Transparency Research Articles

The Effect of Corporate Sustainable Management on the Relationship between Cost Stickiness and Earnings Transparency

This study empirically analyzes the relationship between cost stickiness and earnings transparency. Additionally, this study examines the effect of corporate sustainable management (CSM) on the relationship between cost stickiness and earnings transparency. The evaluation scores of Korea Corporate Governance Service (KCGS) are employed to measure CSM activities. The empirical results show that the relationship between cost stickiness and earnings transparency is significant in the negative direction. This means that the more sticky the costs of a firm, the lower the earnings transparency of the firm. In addition, the relationship between the interaction variables of CSM and cost stickiness and earnings transparency is significant in the positive direction. This indicates that CSM activities act as a mechanism to mitigate the negative relationship between cost stickiness and earnings transparency. The findings of this study, which presented the effects of cost stickiness on earnings transparency and the fact that CSM activities act as a device to suppress the opportunistic cost behavior of managers, are expected to provide important implications to investors, external auditors, and supervisors.

Providing a model of earning transparency with emphasis on the criteria of the govermance system and performance: an artificial intelligence approach

The present study is aimed to present a model of earnings transparency with an artificial intelligence approach in companies listed on the Tehran Stock Exchange (TSE). For this purpose, the data of 167 companies during the years 2011 to 2018 were used to test the research hypotheses. Variable selection test performed using Lasso's artificial intelligence algorithm showed that among the criteria of the audit committee's independence management system, the non-executive managers ratio, gender diversity and among the performance criteria, the ratio of cash holding in the company, operating profit margin and accounts receivable ratio had the highest effect to explain the earnings transparency of companies and also to predict the earnings transparency of the companies in the next year, the LARS algorithm method was used. The results of prediction showed the high power of Lars artificial intelligence algorithm to predict the earnings transparency of the companies listed on Tse. Keywords: Earnings Transparency, Corporate governance and performance criteria, Artificial Intelligence Approach

The Cost (and Unbenefit) of Conscious Capitalism

This paper examines the costs and benefits of ‘stakeholder governance’ for shareholders and other stakeholders by using the adoption of constituency statutes as a quasi-exogenous shock to corporate governance. Constituency statutes permit board members to consider all stakeholder interests, relaxing fiduciary duty to only shareholders. Using a sample of U.S. publicly traded firms (1981-2010) and employing a difference-in-difference methodology, we find that the discretionary adoption of ‘stakeholder governance’ leads to managerial entrenchment and a reduction in institutional ownership and shareholder wealth with little to no ‘trade-off’ benefits to other stakeholders. As states adopted constituency statutes, signs of managerial entrenchment increased (proxied by significant declines in earnings transparency and jumps in CEO and Director compensation) as did harm to shareholder wealth and to governance through institutional ownership. At the same time, we do not observe potential ‘trade-off’ benefits to the non-shareholder stakeholders these statutes were intended to help; we find that labor, customers, and creditors only marginally benefited (if at all) from the introduction of these statutes. These results are robust to a battery of checks including the biasedness in the staggered DiD estimator.

Earnings Transparency, Cost of Debt and Cost of Equity: A Cross-Country Examination

This study evaluates the effect of earnings transparency on the cost of debt (Ki) and cost of equity (Ke). Previous literature has demonstrated that earnings transparency can reduce the Ke, especially in very well-developed stock markets. However, our main hypothesis is that this finding does not necessarily remain the same when considering the Ki. More specifically, this is because investors and creditors have different interests, concerns, and views about financial statements and accounting procedures. Using two proxies of earnings transparency, our findings support this conjecture, indicating that while an increase in earnings transparency reduces the Ke, this relationship does not keep that same impact on Ki. This study has implications for standard setters, debt holders and companies regarding the changes stemming from IFRS convergence, contributing to the prior literature which indicate that creditors and investors need different kind of information due to the distinct decision-making process.

Earnings quality and crash risk in China: an integrated analysis

PurposeThe authors provide a comprehensive empirical examination on the impact of earnings quality on stock price crash risk in China.Design/methodology/approachThe authors acknowledge and distinguish two-dimensional proxies for earnings quality – accounting-based (earnings management degree) and market-based (earnings transparency) known in accounting and finance literature.FindingsThe authors find that both generally indicate that better earnings quality is associated with less crashes. However, extremely high earnings transparency interacted with insider trading profit can also actually exacerbate stock price crashes.Originality/valueThis study is the first to highlight the pertinence of accounting-based measures to proxy for earnings quality in a fast-growing emerging market environment such as China.

Earnings Transparency and Financial Analysts’ Target Price Forecasts

This paper examines the effect of earnings transparency on analysts’ target price forecast properties. The issuance of target price forecasts by financial analysts is a very recent event and target price forecasts are regarded as the most summarized and explicit estimate of the postulated future value of the firm.The sample consists of financial analysts’ forecasts of annual target price issued for firms listed on U.S. stock exchanges from 2001 to 2017. We measure each firm’s earnings transparency as the contemporaneous co-movement between firm’s earnings and change in earnings and stock returns, consisting in industry-specific and -neutral components in earnings-returns relation.Our results show that target price forecasts for more transparent earnings are less biased and more tend to attain the actual stock prices. These results demonstrate that earnings transparency is positively related with analysts’ target price forecasts. Our empirical results corroborate that more transparent accounting information help the market participants in forming more accurate and attainable forecasts. Our study extends the body of research studying the relation between analysts’ forecast properties and the usefulness of accounting information by investigation target price forecasts.

Does earnings transparency affect corporate payout decisions?

PurposeThe paper examines how earnings transparency affects dividend payouts for Indian firms. The authors also explore the channels through which earnings transparency affects dividend payouts.Design/methodology/approachThe authors employ panel data estimation with fixed effects to examine the role of earnings transparency on dividend payouts. The authors also use path analysis to explore causation. The paper uses a sample of more than 2000 Indian listed firms, over the period 2001–2016.FindingsThe authors report that firms showing grater earning transparency pay more cash dividend. Their results do not support the signaling hypothesis about the dividend. However, these results provide explicit support to the theory that corporate dividend policy is an outcome of information asymmetry. Moreover, the path analysis reveals the effect of earnings transparency on corporate payout through the financial constraint channel. The results are robust to idiosyncratic controls; alternate measures of payout; alternate models; endogeneity concerns; and the alternate channel of returning money to stockholders.Practical implicationsManagers should also examine earnings transparency while formulating an adequate dividend policy for their firms. This study also helps investors to identify dividend-paying stocks.Originality/valueThis study particularly contributes to the literature examining the effect of earnings quality on dividend payouts through its effect on financial constraints. We, therefore, connect two streams of research that contemplate the relation between accounting-based information variables and dividend payouts and the relationship between financial constraints and dividend payouts. Moreover, using path analysis uniquely, the authors provide evidence on the relative importance of both the direct and the indirect link.

Corporate Sustainability Management, Earnings Transparency, and Chaebols

This study examines the association of corporate sustainability management with earnings transparency. Based on previous studies that indicate that sustainability management activities reduce earnings management and corporate risk and increase a firm’s value, this study predicts that the firms with effective sustainability management will have a high earnings transparency. In addition, this study examines the differential effect of corporate sustainability management on earnings transparency according to whether or not a firm belongs to a chaebol. We use Environmental, Social, and Governance (ESG) ratings of the Korean Corporate Governance Service (KCGS) as a proxy for corporate sustainability management and apply the method of Cheng and Subramanyam (2008) to measure earnings transparency. The empirical results show that there is a significant positive relationship between corporate sustainability management and earnings transparency. Furthermore, the association between corporate sustainability management and earnings transparency is more negative for firms belonging to a chaebol. These results indirectly show that firms belonging to a chaebol have a lower level of information asymmetry than firms not belonging to a chaebol. This study focuses on corporate sustainability management as a determinant of earnings transparency, and is useful for examining the effect of belonging to a chaebol on the relationship between sustainability management and earnings transparency. Our results are expected to provide important implications not only for managers, but also for investors and regulators.

Corporate social responsibility and earnings transparency: Evidence from Korea

AbstractThe objective of this study was to investigate the association between corporate social responsibility (CSR) and earnings transparency of Korean companies. Transparency is one of key principles of CSR activities. We will focus on accounting transparency as accounting provides fundamental financial information about a company. Our results showed that companies with superior CSR activities had higher earnings transparency. This suggests that the more a company performs CSR, the more it gets trust from market participants on earnings information. We tested whether continuance of CSR commitments could affect the level of transparency. Our results revealed found that a company with a longer period of CSR activities had higher earnings transparency. This implies that CSR activities on ongoing‐basis encourage a company to disclose its information to outside stockholders in an open way.

Interest rate regulation, earnings transparency and capital structure: evidence from China

PurposeThe purpose of this paper is to use samples from Chinese-listed companies to investigate the effects of interest rate deregulation and earnings transparency on company’s capital structure in China over the period of 2003–2015. In particular, the authors study the link between state-owned enterprises (SOEs), economic growth targets and marketization in China’s unique institutional context.Design/methodology/approachBased on the methodology of quantitative analysis, the authors use baseline and cluster analysis for all samples with full set of controls, for robustness tests of alternative proxy of interest rate control by using a cluster analysis at the firm level, regarding endogeneity tests conducted fixed effect model with adding instrument variables (IV), two-period factors regression method via IV and system generalized method of moments for dynamic analysis.FindingsThe results show that earnings transparency increases firm leverage and the additional tests suggest that such an effect takes place via a mechanism by reducing the cost of debt finance. However, information transparency could moderate the effects of interest rate deregulation on corporate capital structure. In addition, it finds that SOEs are less sensitive toward the changes of interest rates in China because lending to SOEs is policy-oriented and lacks of market evaluation of business risk. Government control is conducive to enhancing the transparency of the whole industry; however, market-oriented reform is conducive to enhancing the transparency of the company’s own information.Research limitations/implicationsThe paper makes contribution to the relationship between earnings disclosure quality and capital structure in the Chinese unique institutional context, such as taking the progressive interest rate reform, SOES, different economic growth target and different marketization level in each province of China. The authors suggest that investors will pay more attention to the company’s own unique information transparency in the provinces with a high degree of marketization. As a potential direction for future research, the authors will investigate how the earnings transparency has impact on capital structure, and how such impact would depend on the transparency of specific business, the cap of foreign shareholding and the convenience of investment.Practical implicationsThis research would be the target of banking market reform in order to bring a fair financing environment for all businesses in China. It implies that current experiment of interest rate liberalization in China is not as efficient as it could be in allocating funds across all businesses. State banks, SOEs and local governments are still the biggest players on both the demand and supply sides of the Chinese credit markets.Social implicationsThe social implication of this paper lies in the fact that first, it provides additional evidence on the effect of market-oriented reforms through how the information transparency interacts with the financial decisions making of corporations. Second, it offers policy implication to banking market deregulation in China.Originality/valueThe paper makes contribution to the relationship between earnings disclosure quality and capital structure in the Chinese unique institutional context. This research tests the existing literature, such as Francis et al. (2004) and Zhang and Lu (2007), and suggests that informationally transparent firms have a higher debt ratio and lower effective interest costs on bank loans. In addition, this paper further explores the role played by interest rate deregulation in corporate finance, and in turn market fund allocation. This paper sheds new light on information transparency and explores the relationship between earnings disclosure quality and debt financing behaviors of Chinese publicly listed companies over the period of 2003–2015.

Fair value and mispricing: how domestic earnings transparency of listed firms leads to global financial stability

Fair value and mispricing: how domestic earnings transparency of listed firms leads to global financial stability

감사투입시간과 감사품질 및 이익투명성

감사투입시간과 감사품질 및 이익투명성

THE EFFECT OF EARNINGS PERSISTENCE AND EARNINGS TRANSPARENCY ON COMPANY PERFORMANCE WITH CORPORATE GOVERNANCE AS MODERATING VARIABLE (Empirical Study in Manufacturing Company that Listed in Indonesia Stock Exchange in 2014-2016)

ABSTRACTEarnings persistence and earnings transparency are an important factors in company performance. The quality of financial statement will differentiate performance between one company to another. The research purposed to analyze the effect of earnings persistence and earnings transparency on the company performance. In addition, the research purposed to analyze corporate governance as a moderating variable can strengthens the effect between earnings persistence and earnings transparency on company performance. This research using sample of 363 firms-year in 2014-2016 and applying panel data analysis. The results show that earnings persistence variable has a positive significant effect on the company performance. Earning transparency also has a positive significant effect on company performance. For corporate governance as a moderation variable strengthens the effect between earnings persistence and earning transparency to the company performance. Size and age also have a positive significant effect on company performance. Keywords: earnings persistence; earnings transparency; company performance; corporate governance.

Fair value and mispricing: how domestic earnings transparency of listed firms leads to global financial stability

Corporate governance and earning transparency have gained the abundant attention of accounting researchers worldwide. Based on the A-share listed companies in Shanghai and Shenzhen stock markets from 2001 to 2016, this study explores the impact of earnings transparency and changes in fair value of the 2017 China's new edition of accounting standard on stock mispricing. The results show that: (1) earnings transparency is negatively correlated with stock mispricing, and the higher the transparency of earnings disclosed in financial statements, the lower the level of stock mispricing; (2) the new accounting standards introduced in 2007 follow up the trend of the unification of global accounting standards, and the new accounting standards can moderate the effect of earnings transparency on stock market mispricing; (3) one of the changes directly related to accounting earnings in the new accounting standards is the presentation of changes in fair value gains and losses which influences global financial stability. The change leads to a recalculation of earnings and earnings transparency in accordance with the new accounting standards. The study finds that earnings transparency is more effective in lowering the level of stock mispricing after deducting changes in fair value gains and losses.

The Effect of Earnings Transparency on Firm Value

The Effect of Earnings Transparency on Firm Value

이익투명성이 재무분석가의 정보환경에 미치는 영향: 이익 예측정확성 및 정보활용도를 중심으로

이익투명성이 재무분석가의 정보환경에 미치는 영향: 이익 예측정확성 및 정보활용도를 중심으로

Accounting Standards, Earnings Transparency and Audit Fees: Convergence with IFRS in China

AbstractThis study investigates the effect of China's new accounting standards (which converged with International Financial Reporting Standards (IFRS) in 2007) on a new market‐based attribute of earnings quality – earnings transparency (defined as the explanatory power of the returns–earnings relation at firm level) – and their association with audit pricing. Using China's listed companies from 2001 to 2012 as a sample, we find that the adoption of China's new accounting standards, specifically the introduction of fair value measurement and the change in the accounting treatment of minority interest income, increases earnings transparency. We also find that earnings transparency negatively impacts audit fees, and the adoption of new accounting standards attenuates the negative association between earnings transparency and audit fees. This study has implications for standard setters, auditors and managers regarding the change in the information environment of investors resulting from IFRS convergence in China from a new perspective.

Mandatory Adoption Of IFRS And Earnings Transparency In Korea

We investigate the relation between mandatory adoption of IFRS (International Financial Reporting Standards) and earnings transparency in Korea. We define transparency of earnings as how well it explains a firm value. Financial reporting mitigates information risks of the firm by lessening information asymmetry between insiders and outsiders of a firm. If accounting information produced after adopting IFRS better explains a firm value, then, it will reduce information asymmetry and information risks of the firm, resulting in enhancement of earnings transparency. We measure earnings transparency based on Barth, Konchitchki, and Landsman et al. (2013) and Cheng and Subramanyam (2008). 
 The sample is 2,276 which are listed on Korea stock exchange over 2008-2014. The empirical result shows adopting IFRS is significantly positive with earnings transparency, which means it mitigates information asymmetry, enhancing earnings transparency in Korea.
 Our study is distinguished from prior studies because we empirically examine influence of adopting IFRS on earnings transparency of Korea. Our result implies adopting IFRS contributes to higher earnings transparency which helps market participants make decisions.

Earnings Transparency and Investments Efficiency

본 연구는 2002년부터 2014년까지 유가증권 시장에 상장된 6,827개 기업을 대상으로 이익투명성과 투자효율성 간의 관계를 실증 분석하였다. 선행연구는 회계정보의 품질이 높을수록 자본조달비용이 감소하며, 경영자의 기회주의적인 행위를 억제하는 매커니즘으로 작동하여 투자효율성을 높이는 것으로 보고한다. 따라서 이익투명성이 높을수록 정보비대칭 문제는 감소하고, 이로 인해 경영자를 통제하는 비용이 낮아져 투자효율성이 향상될 것으로 예측하였다. 이익투명성은 Barth etal.(2013)과 Cheng and Subramanyam(2008)에서 제시한 방법으로 측정하였고, 투자효율성은 Chenet al.(2011)의 방법으로 측정하였다. 분석결과는 다음과 같다. 첫째, 이익투명성이 투자효율성에 미치는 영향은 양(+)의 방향으로 유의하였다. 이는 회계정보를 제공하는 기업의 이익정보가 투명할수록 기업의 투자효율성이 좋아진다는 것을 의미한다. 둘째, 표본을 과대투자와 과소투자로 나누어 각각 분석한 결과 , 과소투자의 표본에서만 이익투명성과 투자효율성 간의 관계는 통계적으로 유의한 양(+)의 방향성을 나타냈다. 이는 과소투자의 경우에만 이익투명성이 높을수록 기업 투자행위는 효율적으로 진행된다고 할 수 있다.This study empirically analyzes the effect of earnings transparency on investments efficiency in Korea, using a sample of 6,827 firm-years from 2002 to 2014. Earnings transparency is measured using Barth et al. (2013) and Cheng and Subramanyam (2008) and is defined as how well it explains a firm value. Transparent firms may provide high quality information and better describe the economic value of a firm (Bushman and Smith 2003; Park et al. 2014). Investments efficiency can be regarded as an effective investment activity by reducing or increasing the amount of future investments in a situation where firms are likely to over- or under-invest. Prior research documents that financial accounting quality can improve investments efficiency by mitigating information asymmetry between investors and managers (Biddle and Hilary 2006; McNichols and Stubben 2008; Biddle at al. 2009). Investors in firms with high earnings transparency could monitor managerial decisions more effectively because their financial statements are comparable across the peers in the same industry and year (Bushman and Smith 2001; Biddle et al. 2009). Thus, we expect that managers opportunistic behaviors such as over- or under-investments may decrease in firms with high transparent earnings. investments efficiency is measured by using Chen et al. (2011). The results of this study show that earnings transparency is positively and significantly associated with investments efficiency. In addition, when investments is divided into over- and under-investments, the result is only consistent with the case of under-investments, implying that higher earnings transparency reduces only under-investments. We expand the prior literature on earnings transparency. This study provides insight for future research in areas such as capital market and corporate governance by showing the relation between earnings transparency and corporate investments decisions.

Shadows in the Sun: Crash risk behind Earnings Transparency

Abstract Prior studies suggest that earnings and non-earnings information can be complementary to each other (Lundholm, 1988). Given the co-existence of both components, a lack of non-earnings information can end up boosting earnings explanatory power on returns in certain circumstances, producing spuriously high earnings transparency ( ET ) in Barth et al. (2013). This scenario is plausible when insiders are motivated to exploit their information advantage and discretionarily alter non-mandatory disclosure strategy. Conditional on higher insider trading profit, we uncover a positive relation between the firm-specific earnings transparency and crash risk. In addition, the above relation is more pronounced with respect to selling and profitable insider transactions. Overall, we demonstrate a potential dark side of high earnings explanatory power on stock returns, conditional on higher likelihood of non-earnings information hoarding.