Earnings Volatility Research Articles

The Impact of International Financial Reporting Standards on Corporate Governance, Board Size and Income Smoothing in the Nigerian Financial Market

Income smoothing as an accounting technique is an earnings management method that has recently piqued the interest of company boards of directors, accountants, and accounting researchers. Income smoothing is the application of financial reporting principles and standards to level out earnings volatility. This paper focussed on the theoretical investigation of the impact of the International Financial Reporting Standard on corporate governance and income smoothing. This study theoretically examined the link between board size and income smoothing, with an emphasis on the intervening effect of International Financial Reporting Standards (IFRS). This paper covers a period of 2003 to 2023 and which focussed on the Nigerian Financial Market. In this study, a systematic literature review (SLR) was performed, and the research revealed crucial impact of the International Financial Reporting Standard on corporate governance and income smoothing. The SLR was performed using a sample of 100 research articles chosen from a pool of 400 papers obtained from Scopus, Web of Science, Google Scholar, ABS journal and, among other sources. Following the findings of the many research evaluated, the study discovered significant divergence and inconsistency in the results, indicating that corporate governance has either a positive or negative association with income smoothing.

The Influence of earnings volatility on the relationship between leverage and classifications shifting earnings management: An Entrepreneurial view

This study investigates the relationship between leverage and classifications shifting earnings management and how this relationship is influenced by earnings volatility. To achieve the research objective, this study takes the sample of Pakistani non-financial firms listed in Pakistan Stock Exchange for the period of 2004 to 2018. This study discusses the relationship between leverage and classifications shifting earnings management, especially with the interaction of earnings volatility. The study is supported with the Agency Theory and Positive Accounting Theory using the two-step system Generalized Method of Moment (SYS-GMM) dynamic panel estimators. The leverage is measured by using long term debt, short term debt and total debt while earnings volatility captured the measurement of business risk and for the measurement of classifications shifting is used as earnings management. To capture the classifications shifting, McVey model is used that measures the core earnings. Firstly, the study examines the relationship between leverage and classifications shifting earnings management and after that how earnings volatility influences that relationship. The results showed that relationship between classifications shifting and leverage and is positive but when an interaction term is used as earnings volatility it shows negative relationship between classifications shifting and leverage. So when the firm needs debt in the shape of leverage, it misclassifies the core earnings in the income statement but when there are fluctuations in the earnings like earnings volatility of firm it avoids to use classifications shifting due to professional assessment of the financial institutes and brokers of financial markets. So, in the entrepreneurial firms the managers avoid to use earnings management because these managers keep and show the true financial representations of financial statements.

Structured XVAs: Diffusive Portfolios

In this paper, a continuous-time, structural model of a dealer-bank is presented to derive fair value equations for credit-risky financial products that are not perfectly hedged. The impact these contracts has on the dealer-bank's earnings volatility and, consequently, their solvency and financing costs, is taken into account. Explicit relationships between credit, debit, funding, and capital valuation adjustments (CVA, DVA, FVA, and KVA, respectively) are established, highlighting the interdependencies between unhedged credit risk and financing adjustments. To illustrate the practical application of the model, several straightforward numerical examples are provided.

The Effect of The Audit Committee, Auditor Industry Specialization, Earnings Volatility on Audit Report Lag With Company Size as A Moderation Variable

This study aims to examine the effect of Audit Committee, Auditor Industry Specialization, Earnings Volatility on Audit Report Lag with Company Size as a Moderating Variable. This study uses secondary data obtained from financial reports and annual reports. The research population is companies in the Properties and Real Estate sector listed on the Indonesia Stock Exchange (BEI) for the period 2018 - 2022. The data collection method in this study was purposive sampling. The sample that met the criteria was 104 company data for 2018 - 2022. The data analysis method used was a quantitative data analysis method using SPSS version 27 to process the data using multiple linear analysis.The results obtained from this study are that the influence of the audit committee has no effect on Audit Report Lag. Auditor Industry Specialization has no effect on Audit Report Lag. Earnings Volatility has a positive effect on Audit Report Lag. Company size is unable to strengthen the effect of audit committee on Audit Report Lag. Company size is unable to strengthen the effect of Auditor Industry Specialization on Audit Report Lag. Company size is able to weaken the effect of Earnings volatility towards Audit Report Lag

Internal Determinants of Capital Structure of Islamic Banks: Evidence from the Middle East

This study aimed to determine the factors affecting the capital structure of Islamic banks for a sample of the Middle East for the period 2011-2021. The study used a panel data method by pooling ordinary least squares, fixed effects, and random effects to determine the relationship between book leverage and internal variables such as profitability, size, non-debt tax shield, growth opportunity, tangibility, liquidity, and earnings volatility. The descriptive statistics indicate that Islamic banks are highly leveraged. The results of regression showed that the impact of profitability, size, and growth opportunity is positive on book leverage. In contrast, the results indicated a negative impact of non-debt tax shield and liquidity on book leverage. The results also showed no impact of tangibility and earnings volatility on book leverage. Based on the results, Islamic banks in the Middle East enjoy a special method of choosing capital structure depending on their competitive advantage derived from the concentration of a large proportion of Muslim people dealing with them. Nevertheless, the management of Islamic banks must take the mentioned variables into consideration.

The relationship between earnings volatility and corporate risk disclosures

The relationship between earnings volatility and corporate risk disclosures

Determinants of Capital Structure in the Banking Sector: Lessons from the Western Balkans

The study examines the capital structure of the Western Balkan banking industry across the period 2015 - 2020. Forty-seven of the total Western Balkan-based commercial banks were included in the study. By constructing a balanced panel, this study uses pooled ordinary least squares, fixed and random effects regressions, to assess the relationship between bank book leverage as the dependent variable and the set of bank-specific explanatory variables that include profitability, leverage ratio, bank size, earnings volatility, collateral, growth opportunities, and liquidity. The study shows a significant positive relationship between profitability and book leverage for the period studied. In contrast, leverage ratio, earnings volatility, collateral, growth, and liquidity significantly negatively impact the book leverage of Western Balkan banks. An extensive and comparative study of banks operating in Western and Eastern Balkan countries is recommended. The findings have practical implications for bank executives. They will assist them in identifying the bank-specific factors that influence the capital structure and selecting values that promote optimal capital structure. The findings of this study can help regulators develop an effective prudential framework. This study opens up new avenues for further research in this area for academics, researchers, and analysts.

<b>The Influence of Earnings Volatility on the Association among Leverage and Real Earnings Management</b>

The association between leverage (LEV) and Real Earnings Management (REM), as well as how the volatility of earnings affects this relationship, are examined in this paper. The study sample comprises all non-financial companies listed on the Pakistan Stock Exchange from 2004 to 2018. Due to the endogeneity issue between the variables and the two-step system Generalized Method of Moment (SYS-GMM) dynamic panel estimator, business risk will be used as an interaction term in the hypothetical model to examine the association between LEV and REM. The model will be further elaborated using agency theory and positive accounting theory. After examining the connection between LEV and REM, the study will examine how business risk affects earnings volatility for the Pakistan Stock Exchange.

Determinants of the Capital Structure of the Oil and Gas Industry in Malaysia: The Moderating Role of Earnings Volatility

This paper examines the relationship between firm-specific factors and the capital structure of the oil and gas (O&G) industry in Malaysia.. In addition, this paper adds to the literature by investigating the moderating effect of earnings volatility on the relationship between firm-specific factors and capital structure. Random effect models with cluster-robust standard errors were used to analyze this relationship. Using the secondary data from 30 O&G firms listed on the main market of Bursa Malaysia collected between 2010 and 2019 (10 years), the results show that profitability, asset tangibility, liquidity, and firm size significantly impact the capital structure of the O&G industry in Malaysia. However, growth opportunities, non-debt tax shields, and firm age had no significant impact. In addition to this, earnings volatility significantly moderated the relationship between asset tangibility and leverage. In short, when earnings volatility acts as a moderating variable, the relationship between asset tangibility, which is otherwise positive without moderation, turns negative. This study is useful for policymakers in the O&G industry in Malaysia and will help their managers to decide on capital structure for sustainable growth.

TRENDS AND PERSPECTIVES IN CRYPTOCURRENCIES RECOGNITION ACCORDING TO INTERNATIONAL ACCOUNTING REGULATION

In this paper, the topic of accounting treatment of cryptocurrencies is examined through the lens of International Financial Reporting Standards (hereinafter: IFRS). An overview of the current body of research in this area is presented, along with recommendations for further improvements in cryptocurrency accounting records. This paper is based on a systematic review of scientific and professional literature as well as the current IFRS framework. Specifically, the systematic review is designed to investigate the issue of recognizing cryptocurrency and evaluate its confirmation and evidence in the available literature and IFRS framework. While crypto markets grew rapidly initially, they have enjoyed great investor interest over the past decade, despite the high risk and volatility of earnings, which raised the issue of institutional regulation of cryptocurrencies. The paper attempts to identify the most appropriate accounting treatment of cryptocurrency transactions under existing IFRS, as there is no specific regulation in place.

HOW FINANCIAL INFORMATION AFFECTS DIVIDEND POLICY TO ENCOURAGE THE INDONESIAN ECONOMIC SECTOR IN POST COVID-19 PANDEMIC

The purpose of this study is to obtain empirical evidence about the factors that influence dividend policy to encourage the post-Covid-19 pandemic Indonesian economic sector. The independent variables in this study are financial information which consists of company size, leverage, risk, free cash flow, diversification loss, earning volatility, and managerial ownership. This research is a quantitative explanatory approach using correlational design through Partial Least Square (PLS). Thirty out of forty-five liquid companies (LQ-45) listed in Indonesia Stock Exchange (IDX) were gathered especially before and during the pandemic from 2013 until 2020 with the following criteria: The firms that are listed on the Stock Exchange of Indonesia during the years 2013 until 2020 and financial statement data are available for the period of the study. These results show that risk and leverage have a negative impact on dividend policy, but other factors which are free cash flow, size of the company, loss from diversification, volatility of earnings, and managerial ownership had no impact on it.

HOW ASSET GROWTH, EARNINGS VOLATILITY, FIRM SIZE, AND LEVERAGE AFFECT STOCK PRICE VOLATILITY

The purpose of this study is to examine how asset growth, leverage, firm size, and earnings volatility affect stock price volatility. 30 LQ-45 enterprises that had been registered for three consecutive years, from 2018 to 2020, made up the study's sample. In this work, multiple regression analysis is used for hypothesis testing. E-views version 12 is the program used for data processing in this study. According to the study's findings, factors affecting firm size can affect stock price volatility, while factors affecting leverage, earnings volatility, and asset growth cannot.

The impact of cost stickiness on income smoothing: evidence from employment protection regulations

Prior literature suggests that cost stickiness increases the ex-ante volatility and reduces the predictability of earnings. We examine whether managers intentionally undo such consequences by dampening earnings volatility. Exploiting the staggered adoption of wrongful discharge laws as an exogenous instrument for cost stickiness, we document that cost stickiness increases managers’ income-smoothing activities. This response is more pronounced in firms whose earnings are more sensitive to labour costs than their industry peers are and in firms with stronger information-provision incentives. Additional analyses indicate that income smoothing improves sticky-cost firms’ earnings informativeness and that the identified impact of cost stickiness is primarily driven by labour costs. Our results suggest that labour regulations can influence managers’ financial reporting incentives via cost behaviour.

An Empirical Analysis of the Dynamics Influencing Bank Capital Structure in Africa

Financial institutions, particularly banks, have long grappled with the dilemma of structuring their capital optimally. This process, commonly referred to as capital structure decision-making, is of paramount importance, especially within the financial services sector, where strict regulations are imposed by reserve and central banks in alignment with global Basel guidelines. This study unveils the key factors that determine the capital structure choices of African banks, using panel data encompassing 45 listed banks across six nations that had embraced the Basel III Accord spanning the years 2010 to 2019. The study used the system-generalised moment methods (sys-GMM) estimator to fit the formulated panel data regression model. The study findings showed positive associations between ZSCORE, an indicator of bank financial stability, and net interest margin ratio (NIMR) with bank leverage (TCTE). In addition, the results revealed positive correlations between earnings volatility (EV), profitability (P), and risk (R) with bank leverage (TDCE). This suggests that profitable banks are inclined to favour debt financing, a phenomenon driven by their ability to comfortably service debt obligations with free cash flows. This study’s overarching conclusion underscores the dominant influence of the Liquidity Coverage Ratio (LCR) on African bank capital structures. Whether assessing traditional or Basel III-prescribed measures of bank leverage, LCR consistently emerged as the primary determinant. This finding is of significant relevance to bank executives and regulators, offering them essential insights for informed decision-making by considering striking a balance between equity and debt financing based on financial stability, profitability, and risk profiles.

Does CEO Power Affect the Relations between CEO Compensation and Risk-Taking?

Purpose - This study investigates the effect of incentive compensation and CEO power on a firm’s risk-taking behavior, leveraging stock return volatility and earnings volatility as the key indicators of risk-taking.
 Design/Methodology/Approach - A comprehensive analysis is conducted using data from 1,958 U.S. firms over a 28-year period (1992- 2019). The study employ both ordinary least square (OLS) regression and two-stage least square (2SLS) regression for analysis. Pay-volatility sensitivity (PVS) and CEO-pay slice (CPS) are used as proxies for incentive compensation and CEO power, respectively.
 Findings - The findings offer solid empirical proof that PVS and CPS have a negative influence on both earnings volatility and stock return volatility. Furthermore, the detrimental effect of PVS on managerial risk-taking is significantly more pronounced for CEOs with lower CPS compared with those with higher CPS. While incentive compensation appears to deter CEOs from embracing higher risks, CEOs with more power are less risk-averse when offered incentive compensation compared to their less powerful counterparts.
 Research Implications - This study significantly contributes to existing literature by revealing the interactive effects between CEO power and incentive compensation on a firm’s risk-taking behavior. Understanding these dynamics is pivotal as it offers a nuanced view of how CEO compensation structures and power hierarchies within a firm influence its risk-taking propensity, which is critical for both firm performance and broader financial stability considerations. The insights derived from this analysis can inform more balanced executive compensation structures and governance models that ensure an optimal level of risk-taking.

The Capital Structure Decisions of Banks: An Evidence From MENA Region

The study examines the significant factors affecting the capital structure decisions for banks’ in MENA region. An unbalanced panel data comprising of 132 banks operating in fifteen different countries of the MENA region from 2012 to 2017, data was extracted from Bank Scope resulting in 891 bank year observations. Macroeconomic indicators and institutional characteristics data has been taken from World Bank and World Bank governance indicators database and financial freedom data has been collected from heritage foundation. We use the two-step system Generalized Method of Moments (GMM) to explore the relationship between dependent and explanatory variables. The regression outcome between profitability and leverage shows a negative and significant relationship. No significant association between tangibility and leverage is found. Earnings volatility is negatively and significantly related to leverage. The relationship between growth and leverage is negative and significant. Macroeconomic indicators GDP growth and inflation show a positive relationship with leverage. Finally, the institutional factors, that is, government effectiveness, political stability, and rule of law have positive association with leverage. The study results will lend a hand to bank managers to make value-maximizing financing decisions to achieve an optimal capital structure. It will also help the policymakers to articulate an effective regulatory framework in the region. As per our knowledge, this is the first study to explore the determining factors of capital structure for banks operating in the MENA region. Moreover, the findings from MENA region banks could also support the comparative study with other regional blocks.

Income growth, forecasting and stock valuation

Abstract Accepted by: Aris Syntetos We show that using forecasts of a firm’s income growth in the context of stock valuation can lead to overpricing of the firm’s stock, which is consistent with ‘optimism bias’ reported among financial analysts. Firms with volatile earnings, high income growth and low systematic risk are prone to larger valuation errors. To address this issue, we develop a new estimator of the firm value that corrects for the bias from forecasting income growth. The new estimator is significantly superior to the traditional value estimator under various performance measures. To support managerial decision-making, we construct closed-form confidence intervals for the firm value and the implied cost of capital that account for uncertainty in income growth.

Bank competition and corporate risk: Firm‐level evidence from BRIC economies

AbstractThe study analyzes the potential influence of bank competition on corporate risk‐taking. The study also analyzes the interactive role of firms' dependence on external finance in this framework. We gauge corporate risk through idiosyncratic risk (market‐based measure) and earnings volatility (accounting‐based measure). Analysing firm‐level data for Brazil, Russia, India, and China (BRIC) from 1999 to 2018 through a ‘two‐step dynamic panel system GMM,’ we discover that more (less) competitive (concentrated) banking sectors assist in reducing corporate risk taking. The risk‐reduction effect is specifically stronger for financially dependent and small‐sized firms. The findings remain unchanged when different proxies of financial dependency, banking sector competitiveness, and risk are employed. Further analysis of the ‘transmission mechanism’—the channel by which the extent of banking sector competitiveness influences corporate risk—uncovers that the competitive banking sectors increase firms' access to finance and allow them to operate with lesser financing obstacles.

Does state ownership mitigate political risk in foreign direct investments? Evidence from subsidiary-level data for Norwegian MNEs

PurposeRecent international business research finds that state-owned multinational enterprises (SOMNEs) invest relatively more in politically risky host countries than do privately-owned multinational enterprises (MNEs). This study aims to investigate theoretically and empirically whether state ownership mitigates the impact of host-country political risk on subsidiary economic risk.Design/methodology/approachThe authors link theoretical arguments on state ownership to arguments from non-market strategy literature to outline mechanisms whereby state ownership can buffer subsidiaries from political risk, weakening the link between host-country political risk and earnings volatility in subsidiaries. Using a data set on Norwegian MNEs’ foreign subsidiaries across almost two decades, the authors test this prediction using both matching methods and panel regressions.FindingsWhile standard panel regressions provide empirical support only for the infrastructure sector and for the highest political risk contexts, nearest-neighbour matching models – comparing only otherwise similar private- and SOMNE subsidiaries using the full sample – reveal more general support for the political risk mitigation hypothesis.Originality/valueThe study presents the first comprehensive analysis of whether state ownership can mitigate the effect of political risk on subsidiary economic risk.

Dividend Policy Revisited in an Emerging Market

This study examines the impact of dividend policy on the share price volatility for 376 non-financial firms listed on Bursa Malaysia from 2003 to 2021. Conforming to the dividend relevance theory, the study’s empirical findings suggest that greater dividend yield and dividend payout shall lower share price volatility, encouraging investors to invest in high-dividend paying firms with certain returns in the future. Further examination reveals that the chosen control variables produce predicted results and sit alongside earlier Malaysian studies. These include both earnings volatility and leverage are positively associated with share price volatility, while firm size demonstrates a significant negative association with share price volatility. The present study finds that asset growth does not influence share price volatility. The practical implication of the presented findings suggests a dividend smoothing behaviour by Malaysian firms during COVID-19 and dividend stocks are more favoured by the investors.