Earnings Uncertainty Research Articles

To Bequeath, or Not to Bequeath? On Labour Income Risk and Top Wealth Concentration

Abstract Recent theoretical advances suggest that capital income risk, rather than earnings uncertainty, is the key determinant of fat-tailed behavior of stationary wealth distributions. I provide novel insights into this issue by studying an incomplete market model with general time and state separable preferences, where parental altruism and unobservable idiosyncratic shocks engender non-linear bequest rules. I analytically pin down conditions on the preference structure and other model’s primitives under which optimal bequest behavior hinders intergenerational wealth transmission for any degree of capital income risk, causing the dynamics of wealth to converge to a unique (stationary) distribution with thin tails. These results imply, in particular, that (i) the stochastic properties of labour income risk (as shaped by, e.g. fiscal policies) may play a role in defining the structure of the upper tail of the limiting distribution of wealth, and that (ii) matching empirically documented fat tails with choice theoretic frameworks of wealth dynamics requires joint restrictions on preferences and calibrated earnings processes to be met.

Environmental legal institutions and management earnings forecasts: Evidence from the establishment of environmental courts in China

This paper investigates whether and how managers of highly polluting firms adjust their earnings forecast behaviors in response to the introduction of environmental legal institutions. Using the establishment of environmental courts in China as a quasi-natural experiment, our triple difference-in-differences (DID) estimation shows that environmental courts significantly increase the likelihood of management earnings forecasts for highly polluting firms, compared to non-highly polluting firms. This association becomes more pronounced for firms with stronger monitoring power, higher environmental litigation risk, and greater earnings uncertainty. Additionally, we show that highly polluting firms improve the precision and accuracy of their management earnings forecasts following the establishment of environmental courts. Furthermore, we provide evidence that our results do not support the opportunistic perspective that suggests managers strategically issue more positive earnings forecasts to inflate stakeholders' expectations subsequent to the implementation of environmental courts. Overall, our research indicates that environmental legal institutions make firms with greater environmental concerns to provide more forward-looking information, thereby alleviating stakeholders’ apprehensions regarding future profitability prospects.

Does lowball guidance work? An analysis of firms that consistently beat their guidance by large margins

Lowball guidance is the practice of firm managers issuing overly cautious guidance that is later exceeded by a large margin upon earnings announcement. In this study, we examine this practice at the episode level, where a firm engages in it over multiple consecutive quarters. Using a control sample of firms that exhibited episodes of meet or small beats, we draw inferences specific to lowball guidance episodes. We assess their prevalence in a broad sample of firms and provide evidence related to two explanations of lowball guidance episodes: firms' earnings uncertainty, and to a lesser extent, firms’ attempt to appease sell-side analysts and institutional investors. Stock return tests suggest that there are short-term capital market benefits to lowball guidance episodes, but the benefits dissipate eventually. Our results indicate that episodes of lowball guidance likely appeal to certain types of market participants in the short term, but they are not sustainable.

The role of risk management committee between risk-taking behavior and companies’ performance

PurposeThis research aims to examine the moderating role of the existence of risk management committee between risk-taking behavior and companies’ performance.Design/methodology/approachResearch sample includes 383 manufacturing company-year that listed on the Indonesian Stock Exchange period of 2017–2020. The risk-taking behavior includes the use of leverage, capital intensity, research and development intensity, and earnings uncertainty. The hypothesis test uses company fixed-effect regression.FindingsThe result shows that risk management committee moderates the effect of risk-taking behavior on companies’ performance. This research also finds the similar result when risk management committee and risk-taking behavior are examined on the future performance. In the further analysis, the result also finds that the expertise of risk management committee moderates the effect of risk-taking behavior on companies’ performance.Originality/valueThis research contributes to fill the previous gap of risk-taking behavior and companies’ performance by considering the existence of risk management committee to promote oversight role on risk-taking behavior. This research also contributes to give new evidence in Indonesia about the role of risk management committee to improve the benefits or to reduce the costs of risk-taking behavior.

ANALYSTS’ DISAGREEMENT, SELF-SELECTION, AND STOCK RETURNS

Two ex-ante variables are introduced to characterize the analysts’ biased behavior, namely the analysts’ disagreement and self-selection in analysts’ earnings forecasts. The study investigates the impact of the analysts’ disagreement and self-selection on the stock returns. A theoretical analysis derives how the stock returns are correlated with the two variables. There are two channels through which the stocks are priced according to the analysts’ disagreement. The first one is the risk channel as the analysts’ disagreement is associated with earnings uncertainty. The stock price will be discounted before the actual earnings announcement. The second one is the optimistic bias channel. The optimistic bias channel means that the stock is overpriced if the investors do not correct the analysts’ bias. The self-selection is negatively correlated with the stock return through the optimistic bias channel as more self-selection means more optimistic bias as low forecasting values are not revealed. The empirical analysis using data from the Chinese stock market supports the theoretical conclusion.

Does cost-inefficiency in Islamic banking matter for earnings uncertainty?

PurposeThis paper aims to investigate a fundamental research question of whether the Islamic banking business model makes corporate earnings more uncertain. This question arises because prior research shows that Islamic banks do well in loan performance but incur more operational costs than conventional banks, indicating the systemic limitation of Islamic banks in business risk management.Design/methodology/approachThe study used a sample of banks to conduct the panel regression analysis with 15 years of data for 532 banks (129 Islamic and 403 conventional) from 23 Muslim countries across the world. The authors estimate earnings uncertainty in two ways: the spread and standard deviation of the country-adjusted return over the sample period and applied the difference-in-difference approach interacting cost to income ratio with the Islamic bank dummy, checking if Islamic bank’s high operational costs contribute to more earning uncertainty.FindingsIslamic banks’ returns on assets are significantly more uncertain than conventional banks due to higher operational costs. Consistent with earlier evidence, the study also finds that Islamic banks generally have fewer nonperforming loans than conventional banks. The authors conclude that Islamic banks trade-off between reducing credit risk and escalating business risk.Originality/valueThis study documents that the Islamic banking model helps build a safer asset portfolio but gives rise to the uncertainty of corporate earnings. Therefore, the choice between Islamic and conventional banking models involves a trade-off between credit and business risks. It is a new finding that we add to the literature body on Islamic finance.

Carbon risk and dividend policy: Evidence from China

Using a large sample of Chinese listed industrial firms from 2009 to 2019, this study investigates the effect of firm-level carbon risk on dividend policy. We find that carbon risk has a significant and negative impact on a firm's dividend payout level. We also find that when firms' capability in innovation is stronger, the degree of earnings uncertainty is higher, a firm belongs to high‑carbon industries, the negative relationship between carbon risk and dividend payout level is more significant. Furthermore, financial constraints and cash holdings are two underlying channels through which carbon risk affects cash dividend payouts. Our findings remain consistent across several robustness checks.

Weathering information disruption: Typhoon strikes and analysts’ forecast dispersion

This study exploits typhoon strikes as a type of exogenous shock and examines the effects of extreme weather events on information production in financial markets. Using historical typhoon information in China, we find that analysts’ forecast dispersion soars significantly when typhoons are near or land in the city in which the firm's headquarter is located. In support of the information disruption mechanism, typhoon strikes have more substantial effects on exacerbating information uncertainty and reduce site visits to firms. An alternative explanation of earnings uncertainty is excluded. Our findings contribute to research on climate-induced adverse effects related to information acquisition costs.

Information uncertainty of fiscal year end quarter earnings

PurposeThe purpose of this study is to investigate whether within the same firm, earnings risk is exacerbated in the fiscal year end (FYE) quarters relative to that of other quarters, more importantly, if this type of earnings risk is unique. Further, the authors discuss solutions to mitigate this type of information risk.Design/methodology/approachThis study provides evidence that the information risk associated with FYE quarter earnings cannot be explained by other identified risk factors. Solutions to mitigate this risk include strong corporate governance and a more streamlined financial reporting structure.FindingsThe paper shows that there is significantly lower earnings response coefficient for FYE quarters than for non-FYE quarters (1984–2015). Furthermore, strong corporate governance and a more streamlined financial reporting structure, either by firms willingly reducing the usage of extraordinary item reporting or by FASB codification changes such as FASB 145, can help mitigate this type of information uncertainty.Research limitations/implicationsThis study explains that the causes of the exacerbated information risk associated with FYE quarter earnings identified in prior literature, namely, the “integral explanation” and “manipulation explanation,” are not mutually exclusive. Therefore, the authors deem it futile to disentangle the two. Instead, the authors offer two possible solutions.

The Effect of Earnings Volatility on Stock Price Delay

In this study, I examine the relation between earnings volatility and stock price response delay. I study the effect of the uncertainty of earnings and their components on the stock price response to value-relevant information. For more volatile earnings and earnings components, it is more complex for investors to reliably understand and impound information into stock prices. When earnings and components provide opaque and uncertain information about the future cash flows, I expect that investors are more divergent in their interpretations and delayed in arriving at their future cash flow estimates. To measure firms’ response to value-relevant information, I adopt a parsimonious measure of stock price response to information developed by Hou and Moskowitz (2005). I use five-year rolling standard deviations of earnings and components for earnings and components volatility measures. As an additional earnings volatility measure, I adopt the degree to which earnings volatility deviates from cash flow volatility. My study demonstrates that earnings volatility negatively affects stock price response to information. As I hypothesize, the more volatile earnings and components are, the more delayed the market reacts to value-relevant information. Among earnings and their components, the effect of cash flow volatility is the most influential.

Executive cues of organizational virtue and market performance: Creating value during times of earnings uncertainty

AbstractThis study investigates whether cues of organizational virtue (conscientiousness, courage, empathy, integrity, warmth, and zeal) sent by top managers can create market value in the context of post‐earnings announcement conference calls and earnings uncertainty. We contend that executive cues of organizational virtue embedded within earnings conference calls can mitigate shareholders' reactions to earnings surprises and use textual analysis to test for the effect of organizational virtue cues on market performance in a longitudinal sample of 1920 firm‐quarter observations. The results suggest that cues of conscientiousness, courage, and zeal are capable of adding back firm value after the posting of earnings surprises, while empathy worsens the market's reaction to earnings surprises. Integrity and warmth were not found to have an effect.

Pandemic Effect on Analyst Forecast Dispersion: Earnings Uncertainty or Information Lockdown?

ABSTRACT This study examines the COVID-19 pandemic effect on financial analysts’ forecast dispersion. Using public data on Chinese listed companies, we find that the unexpected inter-area mobility restrictions imposed due to COVID-19 significantly increase analysts’ forecast dispersion for firms in pandemic-exposed zones. The mechanism analysis shows that analysts’ site visits and face-to-face communication with target firms dramatically decrease during the COVID-19 pandemic, supporting the information lockdown hypothesis. The study also hypothetically discusses and empirically excludes earnings uncertainty explanations. Our findings add new insights to the emerging literature on the indirect economic costs of COVID-19.

Does voluntary balance sheet disclosure mitigate post-earnings-announcement drift?

Theory suggests that balance sheet information such as total assets, total equity, or total liabilities complements earnings information in helping investors assess a firm’s profitability and estimate earnings growth. The voluntary disclosure of balance sheet information at earnings announcement could help investors gather and process this information at a lower cost. We therefore predict that voluntary balance sheet disclosure at the time of an earnings announcement helps investors promptly understand the implication of current earnings news for future earnings and subsequently reduces post-earnings-announcement drift (PEAD). Consistent with these predictions, our results show that when firms provide voluntary balance sheet disclosures, the earnings response coefficient in the event window is significantly higher and the corresponding PEAD is significantly lower. We further find that the impact of voluntary balance sheet disclosure on PEAD is more pronounced when the magnitude of balance sheet value surprise is larger, when balance sheet value is more informative about future earnings, when earnings uncertainty is higher, or when information cost is higher, consistent with our conjectures that helping investors to better understand future earnings performance and lowering information costs are key mechanisms underlying the effect of voluntary balance sheet disclosure on PEAD.

Moral foundations and financial performance: the effect of moral cues during times of earnings uncertainty

PurposeThis paper aims to investigate whether cues of morality can mitigate stock sell-offs in the face of earnings uncertainty prior to earnings conference calls and draws on moral foundations theory to study the effect of universal moral cues (harm/care and fairness/reciprocity rhetoric) and primarily conservative moral cues (ingroup/loyalty, authority/respect and purity/sanctity rhetoric) on market performance.Design/methodology/approachThe study relies on a longitudinal data set of 1,920 firm-quarter observations corresponding to calls held by firms listed on the S&P 500 in 2015 and relies on computer-assisted-text-analysis and event-study methodology to test hypotheses.FindingsThe results suggest that cues of universal moral foundations have a mitigating effect on stock sell-offs and are able to create firm value; while cues primarily conservative moral foundations are not found to have an effect on market performance.Originality/valueThis investigation highlights why earnings conference calls may serve as a valuable tool for communicating a firm’s moral inclination and why universal morality may appeal to a wider range of shareholders than primarily conservative morality.

Director Industry Expertise and Voluntary Corporate Disclosure

We examine if firms with directors with related industry expertise (DRIs), or directors that are supply chain partners, exhibit a greater propensity to forecast earnings, and improve the specificity and accuracy of forecasts. Using instrumental variables to mitigate endogeneity, we find that DRIs and supply chain partners possess unique insights which improve managerial forecasts especially when there is greater earnings uncertainty (innovations along the supply chain, poor performance, operating in volatile industries). We use director deaths as exogenous shocks to board composition and confirm results. Results indicate that DRIs play an informational role in enhancing voluntary disclosures and improving corporate transparency.

Network Structure and Performance

AbstractWe develop a theory that links individuals’ network structure to their productivity and earnings. While a higher degree leads to better access to information, more clustering leads to higher peer pressure. Both information and peer pressure affect effort in a model of team production, with each being beneficial in a different environment. We find that information is particularly valuable under high uncertainty, whereas peer pressure is more valuable in the opposite case. We apply our theory to gender disparities in performance. We document the novel fact that men establish more connections (a higher degree) whereas women possess denser networks (a higher clustering coefficient). We therefore expect men to outperform women in jobs that are characterised by high uncertainty in project outcomes and earnings. We provide suggestive evidence that supports our predictions.

Does the Business Press Influence Equity Investors’ Perception of Big 4 Audit Quality?

We investigate whether the business press influences equity investors’ perception of the credibility of the Big 4 for providing high-quality audits. We find that the extent of audit-related negative business press coverage of a Big 4 is associated with lower earnings response coefficients (ERC) for clients, negative client abnormal returns on the days of the news release, and a higher percentage of votes against auditor ratification. Importantly, these results are robust to controlling for other information sources such as client news, audit quality indicators (restatements and auditor litigation), and regulator press releases. Also, the extent of Big 4 negative business press coverage is associated with a lower probability of gaining new clients and a greater probability of client misstatements, suggesting that coverage is diagnostic of audit quality. The effects for ERCs and abnormal returns are concentrated in clients with low dedicated institutional ownership and high earnings uncertainty. Overall, this evidence is consistent with the business press influencing investors’ perception of Big 4 audit quality.

The macroeconomic impact of oil earnings uncertainty: New evidence from analyst forecasts

We develop measures of oil earnings uncertainty (OEU) using analyst forecasts drawn from a large firm-level dataset. OEU is related to future economic downturns, so some OEU measures may serve to forecast future downturns. An increase in OEU also has adverse effects on the US oil sector. The results are robust to conditioning on aggregate uncertainty. At the same time, OEU is related to increases in stock prices – unlike aggregate uncertainty, which has the opposite effect. OEU is thus an independent influence on both the oil industry and on economic aggregates.

The Higher Moments of Future Earnings

ABSTRACTWe evaluate whether reported accounting numbers are informative about earnings uncertainty and whether earnings uncertainty is priced. We use quantile regressions to forecast the standard deviation, skewness, and kurtosis of future earnings. These three moments are important measures of earnings uncertainty because they reflect the size of the average deviation from expected earnings and the amount of extreme upside potential, extreme downside risk, or both. We develop a novel approach for evaluating the reliability of our forecasts and we show that they are reliable. We also document that: (1) equity prices are increasing (decreasing) in the standard deviation and skewness (kurtosis) of lead return on equity and (2) credit spreads are increasing (decreasing) in the standard deviation and kurtosis (skewness) of lead return on assets. Our results indicate that historical financial statements are informative about earnings uncertainty and that earnings uncertainty is priced.Data Availability: Data are available from the public sources cited in the text.JEL Classifications: C21; C53; G17; M41.

Education towards Entrepreneurial Careers in a Czech College: An Empirical Study

The article presents the results of research into entrepreneurship education in economic and non-economic study programmes of the College of Polytechnics Jihlava (n = 104). The College represents a regional public college of professional orientation in the Vysocina Region, where the business potential is relatively high. Significant differences in attitudes concerning entrepreneurship among students of economic and non-economic programmes have not been proven. As well the correlation between attitudes (interest in conducting business, having preconceptions to start a business and subjective evaluation of one's own ideas) and the students' knowledge of entrepreneurship was not significantly demonstrated. Despite these insignificant differences, there have been links in students’ attitudes. Students of both programmes have a great interest in doing business even at the cost of having preconception to start a business. Above all, the high risk and uncertainty of business earnings are perceived very negatively. They also admit that they do not have enough knowledge and are thus afraid of starting a business, even though they have their own business ideas. Therefore, it is desirable to focus on new platforms for the development of entrepreneurship education and thus support the potential of students.