Future Earnings Research Articles

The value relevance of voluntary disclosure through social media platforms: Evidence from European Union listed firms

This paper examines whether the level of voluntary disclosure through social media platforms provides value-relevant information. Economic theory suggests that information is value relevant whether it signals for something capable of increasing firm market value. Based on a sample of 200 European Union listed firms over the 2020-2022 period, we find that more voluntary disclosure through social media platforms increases firm market value, thus suggesting that it contains value-relevant information. Empirical evidence holds to several robustness checks, such as endogeneity tests, alternative regression specifications, and cross-sectional analyses. We further examine whether the level of voluntary disclosure through social media platforms influences the relationship between current returns and future earnings. We find that more voluntary disclosure improves the association between current returns and future earnings to the extent that current returns better reflect future earnings when firms provide more voluntary disclosure through social media platforms. This study adds to the growing academic debate on the role of social media usage for firm value.

ESG risk rating and company valuation: The case of the Warsaw Stock Exchange

This research investigates whether investors on the Warsaw Stock Exchange are willing to pay a premium to invest in large companies with a relatively more favourable environmental, social and governance (ESG) risk profile. The theory is that lower exposure to ESG risks and better ESG risk management practices are perceived by investors as a signal of potentially lower financial uncertainty and improved ability of companies to grow future earnings. The analysis was conducted for companies included in the mWIG40 and WIG20 indices. The relationship between market ratios reflecting company valuation, such as price to net book value and enterprise value to EBITDA, and their ESG risk ratings was modelled using regression models. Those were estimated using ordinary and generally least squares techniques. Although ESG management practices are still at a relatively early stage of implementation in Central Europe (including Poland), the results of the analysis confirm a strong negative relationship between the severity of ESG risks and the relative valuation of the company, accompanied by the existence of significant valuation differences across industries. Of particular note is the impact of a favourable ESG risk rating on a higher Enterprise Value to EBITDA ratio. This ratio is important because it is very often used as a valuation basis in corporate buy-sell transactions. The research confirms that investors are willing to pay more for companies that have built business models that are less vulnerable to future ESG risks and have a quality management culture. As a result, the research provides evidence that consciously investing in climate risk mitigation and improving corporate governance practices in large companies pays off for shareholders.

Programs of study and earnings dynamics

University programs differ in the subsequent earnings processes of their enrollees, including many features that students might care about to differing degrees such as the level of average earnings, earnings growth, and volatility. Do the earnings features of a university program’s enrollees reflect the causal effect of enrolling in that program or the self-selection of students into that program? Would students experience a different earnings process if they enrolled in a different program of study? To estimate the causal impact of enrolling in a program of study on the enrollees’ future earnings process, we exploit a discontinuity built into the Danish national university admissions system, which provides quasi-random assignment of similar applicants to different programs. We leverage the rich cross-program variation in the enrollees’ future earnings processes to measure the impact of entering a program whose enrollees experience high earnings levels, growth, and volatility on their own subsequent earnings level, growth, and volatility. We find that a student’s subsequent earnings levels and volatility – but not their earnings growth – are caused by entering programs of study whose enrollees have those features.

Peculiarities of compensation for damage caused by the death of a minor

This article is emphasised of compensating for damages resulting from the death of a minor. The loss of a minor is an emotionally devastating event for any family, compounded by the complex legal considerations surrounding compensation for the damages incurred. This abstract delves into the peculiarities of compensation for damages arising from the death of a minor, examining the multifaceted dimensions that legal systems must navigate.
 The author explores the peculiarities surrounding compensation in such cases, shedding light on the legal frameworks, precedents, and challenges that shape the compensation process. In many jurisdictions, the calculation of compensation for the death of a minor involves intricate assessments of both tangible and intangible losses. While quantifiable expenses such as medical bills and funeral costs are relatively straightforward, the valuation of non-economic damages, such as loss of companionship, guidance, and future earnings potential, poses significant challenges. The inherent difficulty in assigning monetary value to these intangible losses underscores the need for nuanced legal frameworks sensitive to the unique circumstances of each case.
 The analysis of scientific literature is covered various aspects, including legal responsibilities, the determination of damages, and the establishment of liability. The determination of liability in cases involving the death of a minor often raises complex questions of causation and responsibility. Legal systems must carefully consider factors such as negligence, wrongful acts, and contributory negligence, weighing the actions of all parties involved to ascertain accountability. In cases where the death results from medical malpractice or accidents, the burden of proof may be particularly onerous, requiring thorough investigation and expert testimony.
 The article is examined potential reforms and policy considerations that may enhance the adequacy and fairness of compensation for the death of a minor. It navigates through the complexities of assigning a monetary value to intangible losses, such as the emotional and psychological suffering endured by the bereaved family. In conclusion, the compensation for damages caused by the death of a minor is a multifaceted issue that demands careful consideration of legal, ethical, and societal factors.

Educational choice, initial wage and wage growth

AbstractWe study the effects of expected initial wages, expected wage growth, and observed and unobserved heterogeneity in the choice of college major in a sample of American college graduates. We propose a three-stage empirical model that relates future earnings to individual choices. In the first stage, starting from revealed choices, observed wages, and life-cycle wage profiles, we estimate the expectation on initial wages and wage growth from the individual point of view, where the panel structure of the data allows us to produce estimates corrected for self-selection bias. We find substantial differences in expected real wages and expected real wage growth between majors and that both characteristics of life cycle earnings influence major choice. Our parametric models show a strong correlation between salary trends and major choice, whereas semiparametric models yield less reliable results. We interpret our results as being consistent with agents being rational and as a validation for our estimation strategy based on counterfactual imputation.

Does a consistently capitalized R&D ratio improve information effects of capitalized development expenditures?

This study examines whether a consistently capitalized R&D ratio provides value relevant information that is faithfully represented to investors. Given that R&D investment generally remains stable over time to create sustainable competitive advantages, we posit that a high consistency in the R&D capitalization ratio represents less bias and lower error in the accounting choice of R&D expenditures. To measure the extent of consistency, we use the coefficient of variation of a firm-level ratio of capitalized development costs to total R&D expenditures over five consecutive years. Using a sample of publicly listed Korean firms from 2003 to 2019, we find that capitalized development expenditures are value relevant only for firms with a high level of consistency in their capitalization ratios. Moreover, stable R&D capitalization ratios also allow stock returns to better reflect more information about future earnings. Finally, we observe that the positive effect of consistent capitalization ratios on the value relevance of capitalized development expenditures and informativeness of stock prices becomes more pronounced after the adoption of International Financial Reporting Standards (IFRS). Overall, our findings suggest that maintaining a stable R&D capitalization ratio conveys value relevant financial information to the market, thus improving the quality of accounting information for investors by representing the economic reality of R&D activities faithfully.

Does annual report readability influence the design of SEOs?

Motivated by the rapid growth in non-quantitative corporate disclosure and seasoned equity offerings (SEOs) in the U.S., we take a fresh look at the decision-making process behind accelerated offerings in SEOs, with a specific emphasis on the readability of annual reports within 10-K filings. In particular, our study explores whether readability of annual reports affects the choice of SEOs methods. Using a hand-collected sample of 3143 instances of seasoned equity issues between 2002 and 2021, we show a significantly positive relation between readability scores and accelerated offerings. These results hold across various robustness tests. We further reveal a negative relationship between abnormal operating performance and long-term stock performance following the announcements of SEOs, demonstrating that: firstly, SEOs provide valuable insights into future earnings; and secondly, these insights have a lasting impact on stock performance. Overall, our evidence strongly highlights the substantial influence of annual report readability on the design of SEOs, emphasizing the critical importance of conveying financial information concisely and effectively to the market.

Analyst/Investor Days and Firms’ Information Environments

SYNOPSIS This paper investigates the impact of analyst/investor days on hosting firms’ information environments. The event allows for human interaction and information exchange among participants. Using hand-collected data, I document the impact of analyst/investor days on the hosting firms’ information environments in two different periods: an immediate effect around the time of the event and a persisting effect around future earnings announcements. First, I show that the inaccuracy of analysts’ forecasts for various forecast horizons significantly decreases around the event. Second, I find evidence that analyst/investor days decrease information asymmetry and improve analyst forecast quality around future earnings announcements. This result suggests that the information effects persist into the future and help investors and analysts better interpret future earnings releases. Overall, this study documents the forward-looking and multidimensional nature of information disclosed at analyst/investor days in the context of sequential disclosures. JEL Classifications: M41; G14; G24; G32.

Bankruptcy in the UK: Do Managers Talk the Talk Before Walking the Walk?

AbstractThis study examines whether managers employ annual report textual disclosures as a conduit to communicate the probability of future corporate bankruptcy or to intentionally mislead stakeholders owing to impression management incentives. We conduct various examinations around the information content of the tone conveyed by textual disclosures in unstructured UK annual reports and the probability of corporate bankruptcy. We document that firms that communicate a more net positive tone are associated with lower bankruptcy risk. Importantly, this association is found to be stronger for firms whose managers have a lower incentive to mislead investors owing to better board monitoring, stringent stock market regulation, and Big 4 audits. We also offer complementary evidence that firms conveying a more net positive tone exhibit higher future performance and earnings persistence, and lower future performance volatility. These firms are also less likely to exhibit extreme corporate policies and to receive a qualified auditor's opinion. Overall, this study sheds light on whether managers tend to inform or misinform (bury their heads in the sand) about corporate bankruptcy.

Accounting and Finance: Complementarity and Divergence

Abstract Penman (2023. Accounting for Uncertainty. Accounting, Economics, and Law: A Convivium) develops a conceptual framework which reconciles accounting and finance in view to provide information for financial investment. His framework is based upon resolution of uncertainty over expectations as a convenient basis for accrual accounting. In this context, accrual accounting can be interpreted as a convenient instrument to protect the corporate capacity to generate future earnings on which the expected financial value is based upon. However, in order to fulfil this control function, accounting applies an additive process (simple return), while financial valuation imposes a multiplicative process (compound return) over the invested financial capital. This divergence between accounting and finance enables disentangling business profit – as determined by accounting – from money interest and ownership rent, paving the way to a theory of the business firm based upon its accounting structure, and enabling measures of financial performance consistent with this divergence.

On the informativeness of unexpected exclusions from street earnings

AbstractExclusions from street earnings can include both expected exclusions, forecasted ex ante by analysts, and unexpected exclusions, revealed after earnings are reported. While prior research largely examines total exclusions from street earnings, unexpected exclusions reflect the news or surprise in exclusions. We investigate the properties and informativeness of unexpected exclusions for future profitability, benchmark beating, analyst forecast errors, and future stock returns. We find that unexpected exclusions represent a mix of transitory and recurring items and are informative about future street earnings. In an analysis of hand‐collected analysts' reports, we find that unexpected exclusions are more likely to reflect misestimated recurring items when analysts forecasted exclusions, and unexpected transitory items when analysts did not forecast exclusions. We also examine benchmark‐beating behavior, in which street earnings meet street forecasts but GAAP earnings miss GAAP forecasts. We observe that benchmark beating is more likely to occur when analysts forecast exclusions than when they do not. Moreover, we find unexpected exclusions are more persistent when street earnings meet street forecasts but GAAP earnings miss GAAP forecasts. These findings are consistent with recurring earnings amounts being opportunistically shifted to excluded items to meet analysts' street forecasts. Finally, we find some evidence that analysts and investors react to, but do not fully incorporate, the information in unexpected exclusions, based on forecast revisions and stock price reactions.

Does More Frequent Financial Reporting Bring the Future Forward?

SYNOPSIS Exploring mandatory financial reporting frequency changes in the United States from 1954 to 1972, we find that a mandatory increase in reporting frequency is associated with an increase in firms’ future earnings response coefficients. This effect is stronger for firms with higher sales seasonality or operating in industries with lower earnings persistence and for firms that provide more voluntary disclosures of forward-looking information after the reporting frequency increase. We also find that investors increase (decrease) the weight on long-term (near-term) earnings when pricing the firm after the reporting frequency increase. Our findings suggest that more frequent mandatory reporting can enhance the ability of investors to predict future earnings by providing additional useful information on future earnings and by triggering more voluntary disclosures. Our study informs the ongoing policy debates on mandatory financial reporting frequency by highlighting the informational benefit of frequent financial reporting for investors. Data Availability: Data are available from public sources identified in the paper. JEL Classifications: G14; M41; M48.

A literacy of the relevance of Asian value sustainability reporting in Indonesia

An independent institution gives appreciation to companies in Indonesia that have published their sustainability reports by ranking their sustainability reports in the Asia Sustainability Reporting Rating. This institution plays a role in facilitating and encouraging companies, organizations and other entities in Indonesia to adopt good sustainability reporting practices. This ranking factor is predicted to influence the movement of abnormal returns so that it can influence value relevance through the earnings response coefficient. The aim of this study is to reveal the relevance of value in order to obtain empirical evidence regarding the influence of sustainability reports, sustainable report ratings and earnings persistence on the earnings response coefficient. The research sample was 130 companies in Indonesia that were included in the Asia Sustainability Reporting Ranking for the period 2019 to 2022. This paper uses a quantitative multiple linear regression method to test the hypothesis. The research results show that consistent profits can be predicted from the past and make a positive contribution to future earnings response. A company transparently discloses its performance in the sustainability aspect, thereby making the profit response more positive. Companies with high sustainability ratings tend to get a more positive profit response from the market and stakeholders. This study suggests that management and company owners in Indonesia are aware of the need to pay attention to long-term sustainability through the publication of sustainability reports to become a company’s commitment to implementing sustainability and minimizing risks arising from the company’s economic, social and environmental activities. AcknowledgmentsThe authors would like to thank the Directorate of Research, Community Service and Publications (DPPMP) of Stikubank University for supporting the funding of this research. Thanks also to fellow FEB lecturers who have helped provide the facilities needed for this research.

CAPITAL STRUCTURE ON PROFITABILITY -A CASE STUDY OF SBI LIFE INSURANCE -AN EMPIRICAL EVIDENCE

A companys capital structure is the sum of all the many forms of outside financing it employs in its first stages, as used in corporate finance. The balance sheet of a firm details its financial position, which includes equity, debt, and preferred stock. Ownership of a companys shares and the right to a portion of its future earnings and cash flows constitute equity capital. Equity may be expressed as ordinary stock, preferred stock, or retained profits, whilst debt can be issued as loans or bonds. An additional component of the capital structure is short-term debt. An examination of eight trading organisations data sets was conducted on the Bombay Stock Exchange (BSE). To analyse and test hypotheses, the acquired data was imported into EViews and the multiple regression analysis approach was used. Capital structure affects a companys financial success, according to the studys results. According to the results, long-term debt and equity both significantly affect financial performance in a favourable way, whereas short-term debt has the opposite effect. This paper explains about Capital structure of SBI Life Insurance on Profitability using Ratios and descriptive statistics. KEYWORDS: Capital Structure, Profitability, Financial performance, SBI Life Insurance. JEL CODES: O16, O17, O18, O19.

Do Analysts and Investors Efficiently Respond to Managerial Linguistic Complexity during Conference Calls?

ABSTRACT This paper examines whether analysts and investors efficiently incorporate the informational signals from managerial linguistic complexity (e.g., Fog) into their forecasts and trading decisions. We predict that a manager’s Fog during a conference call provides a signal of their private information through their willingness to engage with analyst questions. We find that informative (obfuscatory) managerial Fog provides a positive (negative) signal of future earnings growth. We also find that analysts efficiently revise their forecasts to both positive and negative signals, whereas investors only correctly interpret obfuscation during the call; there is a delayed price reaction to informative Fog. However, when buy-side investors ask questions during a call, we find an efficient price reaction to informative Fog. Our findings highlight an important benefit of two-way interactive disclosures and underline the importance of active call participation for efficiently incorporating linguistic signals of managers’ private information. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: D82; G14; G20; M41.

Predicting Future Earnings Changes: a Modest Integration of Artificial Neural Networks and Financial Factors

Predicting Future Earnings Changes: a Modest Integration of Artificial Neural Networks and Financial Factors

내부통제와 미래이익에 대한 주가 정보성

Purpose - This study examines whether internal control has an effect on stock price informativeness about future earnings. High quality internal control provides continuous assurance for the quality of financial reports, and these future earnings-related information is accurately reflected in the current stock price.
 Design/methodology/approach - This study collected 12,862 data from 2006 to 2021 in China to make an empirical analysis using the future earnings response coefficient (FERC) and the multiple regression analysis were hired in order to analyze the data.
 Findings - We find that internal control strengthens the association between current returns and future earnings, indicating that more information about future earnings is reflected in current stock prices. This positive effect exists in both the main board market and the growth enterprise market of China's stock market, especially in the main board market after the implementation of the internal control policy. In addition, we find that the positive effect is weaker for firms that report internal control deficiencies or receives non unqualified internal control audit opinions. The results using earnings persistence yield similar findings, further supporting the results based on the FERC model.
 Research Implications or Originality - Our tests provide strong evidence that the quality of internal control affects FERC in China stock market.

Compensation of damages related to the loss or reduction of employment capacity of a minor, minor person caused by disability or other health damage

This scientific article explores the crucial issue of compensating minors for the loss or reduction of their working capacity resulting from mutilation or other health-related damages. Minors are particularly vulnerable to such injuries, which can have profound and lifelong consequences on their physical, emotional, and socio-economic well­being. This study delves into the legal, ethical, and practical dimensions of compensating minors in these circumstances.
 The research begins by analyzing the existing legal frameworks and international conventions that safeguard the rights of minors and underscore the obligation to provide compensation for harm. It highlights the importance of a child's right to development and protection from exploitation, emphasizing the need for a comprehensive approach to addressing the consequences of mutilation and health-related damages.
 Furthermore, this article explores the complexities surrounding the assessment of compensation for minors, taking into account the unique developmental trajectories and potential future earnings of children. It investigates methodologies for estimating both immediate and long-term damages, considering medical costs, psychological support, and educational needs. The article also discusses the role of insurance systems and public policies in facilitating compensation and support for affected minors.
 Additionally, ethical considerations are scrutinized, such as the necessity of prioritizing the child's best interests and ensuring that compensation mechanisms do not inadvertently perpetuate exploitation or discrimination. The article examines case studies from various jurisdictions, shedding light on successful practices and potential areas for improvement.
 In conclusion, this scientific article underscores the urgency of addressing compensation for minors who have suffered mutilation or other health damages affecting their working capacity. It advocates for a holistic approach that integrates legal, ethical, and practical considerations to ensure that affected minors receive the support they need to lead fulfilling lives and realize their full potential despite the challenges they face.

College Football Performance, Student Earnings, and the Gender Wage Gap

Abstract Fluctuations in U.S. college football team performance have been shown to have impacts on the student experience. This study explores the long-run implications, examining the impact of college football team performance relative to the period of student attendance on future earnings. Better college football team performance during the early years of school attendance increases average wages of male students, but does not impact female wages. Supplemental evidence suggests that positive shocks to student social networks may partly explain the positive impact on earnings. Better team performance near the time of graduation increases average wages for both men and women.

Principles based accounting standards, audit fees and going concern: evidence using advanced machine learning

PurposeThe current study uses an advanced machine learning method and aims to investigate whether auditors perceive financial statements that are principles-based as less risky. More specifically, this study aims to explore the association between principles-based accounting standards and audit pricing and between principles-based accounting standards and the likelihood of receiving a going concern opinion.Design/methodology/approachThe study uses an advanced machine-learning method to understand the role of principles-based accounting standards in predicting audit fees and going concern opinion. The study also uses multiple regression models defining audit fees and the probability of receiving going concern opinion. The analyses are complemented by additional tests such as economic significance, firm fixed effects, propensity score matching, entropy balancing, change analysis, yearly regression results and controlling for managerial risk-taking incentives and governance variables.FindingsThe paper provides empirical evidence that auditors charge less audit fees to clients whose financial statements are more principles-based. The finding suggests that auditors perceive financial statements that are principles-based less risky. The study also provides evidence that the probability of receiving a going-concern opinion reduces as firms rely more on principles-based standards. The finding further suggests that auditors discount the financial numbers supplied by the managers using rules-based standards. The study also reveals that the degree of reliance by a US firm on principles-based accounting standards has a negative impact on accounting conservatism, the risk of financial statement misstatement, accruals and the difficulty in predicting future earnings. This suggests potential mechanisms through which principles-based accounting standards influence auditors’ risk assessments.Research limitations/implicationsThe authors recognize the limitation of this study regarding the sample period. Prior studies compare rules vs principles-based standards by focusing on the differences between US generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) or pre- and post-IFRS adoption, which raises questions about differences in cross-country settings and institutional environment and other confounding factors such as transition costs. This study addresses these issues by comparing rules vs principles-based standards within the US GAAP setting. However, this limits the sample period to the year 2006 because the measure of the relative extent to which a US firm is reliant upon principles-based standards is available until 2006.Practical implicationsThe study has major public policy suggestions as it responds to the call by Jay Clayton and Mary Jo White, the former Chairs of the US Securities and Exchange Commission (SEC), to pursue high-quality, globally accepted accounting standards to ensure that investors continue to receive clear and reliable financial information globally. The study also recognizes the notable public policy implications, particularly in light of the current Chair of the International Accounting Standards Board (IASB) Andreas Barckow’s recent public statement, which emphasizes the importance of principles-based standards and their ability to address sustainability concerns, including emerging risks such as climate change.Originality/valueThe study has major public policy suggestions because it demonstrates the value of principles-based standards. The study responds to the call by Jay Clayton and Mary Jo White, the former Chairs of the US SEC, to pursue high-quality, globally accepted accounting standards to ensure that investors continue to receive clear and reliable financial information as business transactions and investor needs continue to evolve globally. The study also recognizes the notable public policy implications, particularly in light of the current Chair of the IASB Andreas Barckow’s recent public statement, which emphasizes the importance of principles-based standards and their ability to address sustainability concerns, including emerging risks like climate change. The study fills the gap in the literature that auditors perceive principles-based financial statements as less risky and further expands the literature by providing empirical evidence that the likelihood of receiving a going concern opinion is increasing in the degree of rules-based standards.