Incremental Information Content Research Articles

Evidence on the incremental information content of concurrent financial and non-financial corporate disclosures

This study examines if a firm's regulated non-financial information that is concurrently published with its annual financial disclosures, provides investors with information content beyond that contained in the financial disclosures. Employing an event-study approach for a sample of German firms that can actively choose the disclosure date of regulated non-financial information, I find higher capital market responses to concurrent financial and non-financial disclosures, indicating an incremental information content. The effect is observable if non-financial information is concurrently disclosed in a firm's management report or in a standalone non-financial report. Collectively, my findings have important implications for regulators and reporting firms.

The relative valuation of cash flow and current accruals affected by their extremity

PurposeRecent studies on the securities market’s differential pricing of earnings components have shown that cash flow from operations is more highly valued than total accruals and that moderate cash flow from operations has higher valuation than extreme total accruals. An interesting question that follows is whether these findings hold regarding the differential valuations of cash flow and current accruals. This study aims to extend prior research by addressing this issue in two ways. First, the authors examine the incremental information content of cash flow from operations beyond working capital from operations. Second, the authors assess the effect of extreme working capital from operations on the incremental information content of cash flow from operations. This study aims to extend prior research by addressing this issue in two ways.Design/methodology/approachThis study adopts market-based accounting research to test its hypotheses and to achieve its objectives. Specifically, this study uses statistical associations between accounting data and stock returns to examine the incremental information content (value relevance) of cash flow and working capital from operations and the effect of extreme working capital from operations on the incremental information content of cash flow.FindingsThe results show that cash flow from operations is not more highly valued than current accruals (both being valued equivalently). However, moderate cash flow from operations has higher valuation than extreme current accruals (each is valued differently). Overall, these research findings indicate that cash flow becomes more important for valuation as accruals get “extreme”.Practical implicationsAs accruals are unlikely to persist to be permanent across the years, these results can be interpreted as indicating that cash flow and accruals information are used jointly by investors, with one being more important than the other depending on the relative “extremeness” of each. Therefore, both are of value to the investor and both should be reported.Originality/valueThe paper contributes to the UK research on determining the preferred level of disaggregation of earnings components, i.e. operating cash flow, current accruals and non-current accruals. This would help investors to improve their investment and credit decisions.

COMPARING VALUE - BASED AND TRADITIONAL MEASURING TOOLS. EVIDENCE FROM PAKISTAN

This paper's primary goal is to evaluate the assertion that value-based measures are preferable to traditional accounting based financial-performance measures, such as profit after tax (PAT), earnings per share (EPS), return on assets (ROA), return on equity (ROE), and return on investment (ROI), in the non-financial sector of Pakistan, while also providing empirical evidence to support the claim. Additionally, it evaluates and tests the informational value of different performance measures and how they relate to stock return. The sample of 97 non-financial Pakistani companies included in this study was obtained from the Pakistan Stock Exchange (PSX) between 2016 and 2021. The information richness of value-based measurements and conventional performance measures in explaining shareholders' returns is investigated using a variety of regression models. Relative information content tests shows that traditional accounting-based measures such as EPS, ROE and ROA performed better than value based measures in explaining the returns of Pakistan non-financial companies. Incremental information content of value based measures doesn’t have any contribution to information content above traditional performance measures. The claim of superiority of value based measures over accounting-based measures in association with shareholder returns is proved invalid in Pakistan non-financial companies. According to the study's findings, value-based financial performance indicators are not any better at explaining stock returns of Pakistani non-financial enterprises than traditional accounting-based financial performance measures. Panel data are tested using the Hausman's test for fixed and random effects, the variance inflation factor (VIF) test for multicollinearity, and the Durbin-Watson test for autocorrelation in order to ensure substantial results.

Beware of Extreme Investor Sentiments! Indian Evidence on the Performance of Neuro-specific Options Volatility Trading Strategies on the Facets of COVID-19

This study investigates the dynamic relationship between noise trader sentiment and excessive volatility in the Indian financial market during the COVID-19 outbreak. It proposes novel options trading strategies to ensure profitability in times of irrational exuberance and to satisfy diverse investment requirements of volatility traders, which arise from the varying levels of stimulating neurotransmitters, namely dopamine and serotonin in the human body. Empirical results show that the incremental information content of sentiment measures is vital in forecasting future volatility and the proposed options trading strategies effectively accomplish the neuro-specific intentions of the traders during extreme volatility in the Indian equity market. JEL Codes: G12, G13

Does peer firms’ tone affect corporate investment? Evidence from China

It is unclear how valuable textual disclosures from peers are to a firm’s investment decisions in emerging markets. Using a dataset of Chinese listed firms from 2007 to 2019, the results show that peers’ MD&A tone has a significant and positive effect on corporate investment, supporting the incremental information content hypothesis in emerging markets. A one standard deviation increase in peers’ tone raises investment by about 5%. Further analyses show the effect of peers’ tone on investment is higher when peers’ disclosure quality is higher, the firm’s management has a stronger motivation to learn, or the industry competitiveness is greater. After addressing the endogeneity problem, ruling out alternative explanations, and a series of robustness tests, the results remain consistent. This paper confirms the value of textual disclosures and enriches the study of their economic consequences in emerging markets.

Relative and Incremental Value Relevance of Traditional and Real Performance Measures: Evidence from Palestine Manufacturing Listed Companies

Purpose: This study seeks to test both incremental and relative value relevance of the Economic Value-Added (EVA) as a real performance indicator and (EPS) as a traditional performance indicator in the context of the Palestine Exchange (PEX) listed manufacturing companies. Theoretical framework: Previous research provided mixed evidence about the superiority of EVA over the traditional performance measures in predicting market value; some studies supported the superiority of EVA (Zimmerman, 1997; Shishanya et al., 2020), while others denied that superiority (Biddle et al., 1997; Agnatia & Amalia, 2018). Testing the value relevance of EVA compared to EPS was rarely conducted in Palestine. Design/methodology/approach: Seventy company-year observations were gathered from 10 of 13 manufacturing PEX-listed companies over seven years (2015-2021); the study employed regression and correlation analysis. Findings: The study found a significant relationship between EPS and stock returns while concluding an insignificant relationship between EVA and stock returns. The study also found that EPS beats EVA. However, the findings showed that EVA adds incremental information content to EPS’s interpretation of stock returns. Research, Practical & Social implications: The study outcomes help and direct the investors and analysts, in assessing the company’s performance and predicting stock returns; it also helps policymakers and regulators in directing and updating reporting requirements. Originality/value: This study adds to the literature on the value relevance of real and traditional performance indices in Palestine. Further research is recommended on other sectors and the whole market.

Relationship between marketing strategy and profitability in industrial firms: Evidence from Jordan

A marketing strategy is a firm’s overall plan for reaching prospective consumers and turning them into permanent customers of their services or products. This paper aims to investigate the link between profitability and marketing strategy to understand how firm profitability influences marketing strategy. Moreover, it assesses the impact of return on assets (ROA) on the company’s marketing strategy. The study uses random effect regression models; a marketing strategy is measured using a sales expenses ratio, which equals sales expenses over total assets. The firm size is a control variable represented by the total sales normal logarithm. The study sample comprises Jordanian industrial shareholder companies; the analysis period is from 2005 to 2020. The study collected 808 annual observations. The findings reveal that ROA has a statistically significant effect on marketing strategy, but its components have no effect. The adj-R2 (the explanatory power) for model 1 is 18.8%, and for model 2 is 11.4%. Therefore, the main conclusion is that ROA components do not have any incremental information content in explaining the marketing strategy variance. The study recommends industrial firms in Jordan increase their profitability by adopting a diverse marketing strategy, focusing on customer satisfaction, investing in market research, using social media, and developing a strong brand image.

Earnings less risk-free interest charge (ERIC) and stock returns: ERIC’s relative and incremental information content in a European sample

This study tests the information content of earnings less risk-free interest charge (ERIC) and analyses its ability to explain fluctuations in market-adjusted stock returns. Following Biddle et al. (1997) study design, we perform relative and incremental information content tests. Relative information content tests reveal that mandatory reporting metrics — such as earnings before extraordinary items (EBEI), cash flow from operations (CFO), and total comprehensive income (TCI) — are more highly associated with stock returns and firm values than ERIC or residual income (RI). A number of sensitivity analyses support our findings. To test incremental information content, we split ERIC into five components. Primary results indicated that components specific to ERIC — changes of net assets, after-tax interest expenses, and capital charge — do not add relative information content. Yet, sensitivity tests suggest that some ERIC components add incremental information, especially when accounting for market expectations. However, these findings are not economically substantial compared to CFO and EBEI. Overall, we conclude that mandatory metrics generally outperform ERIC and residual income. Our unique contribution lies in applying the established methodology of measuring economic value added (EVA’s) relative and incremental information content to ERIC

Economic value-added (EVA) myths and realities: evidence from the Indian manufacturing sector

PurposeThe main aim of this paper is to examine the claim that economic value added (EVA) advocates its superiority over the traditional accounting-based financial performance measures, i.e. profit after tax (PAT), earnings per share (EPS), return on assets (ROA), return on equity (ROE) and return on investment (ROI) in the Indian manufacturing sector and at the same time, give empirical facts. It also tests and examines the information content of various performance measures and their relationship with stock returns.Design/methodology/approachThe paper uses the sample of 534 Indian manufacturing companies from the Bombay Stock Exchange (BSE) during the period 2000–2018. Multiple regression models are applied to examine the information content of EVA and traditional performance measures in explaining shareholders’ returns.FindingsRelative information content tests revealed that traditional accounting-based measures such as EPS, ROE and ROA performed better than EVA in explaining the returns of Indian manufacturing companies. Incremental information content of EVA adds little contribution to information content above traditional performance measures. The claim of superiority of EVA over accounting-based measures in association with shareholder returns is proved invalid in Indian manufacturing companies.Originality/valueThis study concludes that EVA has no superiority over traditional accounting-based financial performance measures in explaining stock returns of Indian manufacturing companies. To achieve heftiness in outcomes, panel data are tested by using Breusch–Pagan–Godfrey (BPG) test for heteroskedasticity, Hausman’s test for fixed and random effect, variance inflation factor (VIF) test for multicollinearity and Durbin–Watson test for autocorrelation.

Earnings Less Risk-Free Interest Charge (ERIC) and Stock Returns—A Value-Based Management Perspective on ERIC’s Relative and Incremental Information Content

This paper investigates the relative and incremental information content of KPMG’s recently developed metric for shareholder value creation: earnings less risk-free interest charge (ERIC). We assess if ERIC has a better ability to predict stock returns than earnings, cash flow from operations (CFO), earnings before extraordinary items (EBEI), residual income (RI), or economic value added (EVA). We evaluate data from 214 companies listed on the U.S. Standard & Poor’s 500 Index from 2003 to 2012 (2354 firm-year observations). Similar to previous studies, we confirm that CFO and EBEI have the strongest association with stock returns in the short term, while EVA trails behind all other metrics. In terms of new findings, ERIC is the best predictor of stock returns over a 5-year period, as well as during times of crises (from 2009 to 2010). In this period, ERIC also adds incremental information content beyond that of EBEI. However, the low-short-/mid-term predictive ability of shareholder value metrics (EVA, ERIC) raises concerns regarding their reliable use in future research on shareholder value creation. We consequently propose a research agenda that focuses less on the measurement and more on the management of shareholder value.

CSR Disclosure and Information Asymmetry: The Role of Financial Reporting Quality

Based on firm-level data from 39 countries, over a nine-year period, this study analyzes whether financial reporting quality and CSR disclosure are related to each other in improving the quality of corporate information. The findings show that firms disclosing a greater amount of CSR information have a lower degree of information asymmetry (bid-ask spread). This relationship is less pronounced in firms with high financial reporting quality. It suggests a substitution association between financial reporting and CSR disclosure in reducing information asymmetry. Financial transparency is therefore an important factor to explain the informativeness of CSRD. With a high financial transparency, CSRD provides less incremental information content to the investors. However, the robustness tests show that CSRD decreases the quality of financial analysts’ forecasts. This seemingly contradictory result might be explained by firms engaging in differentiated information disclosure to cope with contradictory social and institutional pressures (investors versus financial analysts).

Intellectual capital components and industrial firm’s performance

The study aims to determine the connection between intellectual capital (IC) and financial performance of the Jordanian industrial listed companies. The methodology uses regression models, the IC will be measured using the VAIC model (value-added intellectual coefficient), on the other hand, company performance will be measured using return on equity (ROE). The main model includes financial leverage as a control variable to study the leverage role in the association between IC and return on equity. The study also investigates the incremental information content for intellectual capital components in explaining the change in firm performance. In addition, the size effect is studied to show if the company’s size affects the link between ROE and IC. The sample for this study is 77 Jordanian industrial firms and 788 company-year observations during the period 2006–2020. The study results are as follows: Intellectual capital has an important influence on industrial firm performance; Intellectual capital components have a significant impact on industrial firm performance. In particular, human capital efficiency (HCE) and capital employed efficiency (CEE) have a positive influence on ROE, and structural Capital efficiency (SCE) has a negative impact on firm performance. Lastly, firm size has an effect on the relationship between IC and industrial company performance.

Comparing the informativeness of sustainability disclosures versus ESG disclosure ratings

PurposeThe purpose of this paper is to examine the impact of sustainability disclosures and disclosure ratings on firm value. This paper compares the informativeness of sustainability disclosures in company reports versus environmental, social and governance (ESG) disclosure ratings. The authors examine the extent to which they provide incremental information.Design/methodology/approachThe sample consists of panel data from over 2,600 publicly-listed non-financial US companies for the period 2014–2018. The authors obtain sustainability disclosures from Sustainability Accounting Standards Board (SASB) Navigator and ESG disclosure scores from Bloomberg. The authors regress market value and/or stock price on sustainability disclosures and ESG scores to evaluate information content.FindingsESG scores are positively associated with market value and price. Sustainability disclosures in the form of metrics and company-tailored narratives provide incremental information content on market value and/or price. Boilerplate disclosures reduce market value and price. Sustainability disclosures and ESG scores provide incremental information, suggesting that it would be beneficial to harmonize standards for reporting sustainability disclosures.Research limitations/implicationsThe limitation is that the authors have only considered sustainability disclosures for a sample of US companies from two sources – SASB Navigator and Bloomberg.Practical implicationsThe paper provides some evidence that may be pertinent to the debate on whether to harmonize the guidance on reporting sustainability issues.Social implicationsThe paper provides evidence on the benefits to firms for reporting sustainability issues.Originality/valueThis paper is among the first to analyze company sustainability disclosures obtained from two different sources – SASB Navigator and ESG disclosure ratings – and compare them for relevance for company valuation. With SASB Navigator, the authors obtain further refinement into the nature of the information provided in the sustainability disclosures, that is, boilerplate, company-tailored or metrics disclosures.

An Analytical Model Of Audits In Disclosure Of Pro Forma Earnings

Firms have discretion on financial reporting under Generally Accepted Accounting Principles or GAAP. The proliferation in recent years of earnings metrics that deviate from GAAP figures confounds investors' ability to compare firm financial performance. Non-GAAP (or pro forma) figures usually do not include certain balance sheet or income statement items that are required under GAAP. Regulators and accounting standard-setting body are concerned that pro forma financial measures have been used by management to mislead investors by overstating or smoothing earnings or to meet Wall Street earnings expectations. On the other hand, management asserts that by excluding certain nonrecurring and noncash items, pro forma earnings are more relevant in measuring firm performance. Indeed, prior empirical studies provide evidence that certain pro forma measures may have incremental information content over GAAP earnings. Pro forma earnings are typically unaudited and the quality of disclosures accompanying such measures varies across firms. This paper develops an analytical (mathematical) model to examine whether firms will exhibit higher credibility through auditor selection when disclosing pro forma earnings. This study extends prior empirical literature by providing an analytical perspective on the importance of attestation performed by auditors regarding pro forma earnings. The model in this study suggests that managers who possess superior information than shareholders in an asymmetric information setting and expect high future earnings are more likely to engage large auditors when disclosing pro forma earnings. As such, the model may explain the voluntary disclosure of accounting information by managers in capital markets.

Other comprehensive income reporting and earnings management: evidence from China

ABSTRACT Using data for 2007–2016 from a sample of Chinese listed firms, this study investigates how other comprehensive income (OCI) reporting influences earnings management. The results indicate that OCI reported in the income statement is more negatively associated with earnings management in the period 2009–2016 than in 2007–2008. There is no evidence that OCI reported is more negatively associated with earnings management in 2014–2016 than in 2009–2013. Further, we provide additional insights into OCI reporting and future cash flows, documenting that a firm’s OCI reporting provides incremental information content about operating earnings rather than about non-operating earnings.

Forecasting the volatility of crude oil futures: The role of oil investor attention and its regime switching characteristics under a high-frequency framework

The purpose of this article is to investigate whether oil investor attention (OA), measured by Google search volume, contains incremental information content to predict crude oil futures volatility under high-frequency heterogeneous autoregressive (HAR) model specifications. Moreover, to account for possible structural breaks and nonlinearity in the relation between OA and crude oil volatility, this article extends HAR-type models with regime switching considerations. The results of parameter estimation and out-of-sample prediction show that the in-sample and out-of-sample performance of HAR-type and Markov switching (MS)-HAR-type models with OA is significantly better than that of their corresponding HAR-type and MS-HAR-type models without OA. Furthermore, our findings suggest that (i) HAR-type-OA models tend to produce better forecasts for the volatility of the crude oil market at short horizons (1-day) compared to HAR-type, MS-HAR-type and MS-HAR-type-OA models. (ii) MS-HAR-type-OA models have the best forecasting performance at relatively long prediction horizons (1-week and 1-month). Therefore, the result suggests that the OA and regime switching specifications have a significant positive impact on volatility predictions and can be useful for improving the performance of HAR-type models.

How do Stock Market Participants Value ESG Performance? Evidence from Middle Eastern and North African Countries

Empirical evidence indicates that Environmental, Social, and Governance (ESG) practices are associated with firm financial performance, but little is known about stock market participants’ behaviour towards ESG practices, especially in unfavourable settings, where the level of shareholders’ protection is relatively weak. In this article, we examine whether ESG performance provides shareholders with value-relevant information to help them in their equity pricing decisions. Using a cross-country sample of non-financial firms drawn from 10 Middle East and North African (MENA) countries between the period from 2013 to 2019, we find evidence, which is based on the price specification of Ohlson (1995) valuation model, that ESG performance practices are positively priced by market participants and add incremental information content to earnings and book value of equity (BVE). However, when we split the aggregate ESG performance into its components, governance practice is found to be more value relevant than social practice, while the environmental pillar is found to be value (ir)relevant to shareholders. Results using the return valuation model complement and validate the price model specification. Our results suggest that social capital and institutional structures prevail on firm environmental impact. These results are robust to a set of additional tests. Overall, our empirical results indicate that market participants incorporate ESG performance when assessing firm value for the MENA region. Our findings could have several implications for managers, stockholders and regulatory bodies.

Sentiment analysis and gender differences in earnings conference calls

We apply textual analysis to the transcripts of nearly 78,000 earnings conference calls between 2004 and 2018, comparing the difference in sentiment between female and male senior managers (CEOs and CFOs). We focus on two main measures of sentiment: tone and vagueness. Our contribution is twofold. Firstly, we show that female executives employ a more positive and less vague tone than their male colleagues during conference calls. The more positive and less vague tone of female executives does not reflect incremental information content but instead appears to be a linguistic feature that distinguishes female from male executives.Secondly, we find that financial analysts participating in conference calls exhibit a gender bias as they are less positive and more vague when facing a female executive. However, the stock market reaction to the call is affected by the sentiment of the call, but not by the executive's gender.

Does EVA valuation model outperform earnings valuation model in explaining market value of equity?

AbstractMost of the previous studies examine the efficiency of EVA versus accounting measures as a periodic performance measure. There is hardly any study conducted on examining and comparing the efficiency of EVA based valuation model with the earnings valuation model. However, this study examines and compares the efficiency EVA valuation with earnings valuation by conducting relative information content analysis across the years and on a year‐wise basis. It is observed that future growth value is the only difference between the two valuation models. This study further examines whether future growth value plays a significant role in increasing/decreasing the explanatory ability of EVA based valuation model compared to the earnings valuation model by conducting incremental information content analysis. It conducts both the analyses by using the sample data of 69 large‐cap, 88 mid‐cap and 79 small‐cap companies over the period 2002–17. The relative information content analysis conducted across the years reveals that large and small‐cap companies respond better to the earnings valuation model, whereas mid‐cap companies respond better to EVA based valuation model. The incremental analysis reveals that future growth value plays a significant role in increasing the decreasing explanatory ability of the EVA valuation model. The analysis conducted year‐wise manner also supported the fact.

Forecasting stock market volatility using implied volatility: evidence from extended realized EGARCH-MIDAS model

ABSTRACT This paper extends the realized EGARCH-MIDAS (REGARCH-MIDAS) model to incorporate implied volatility (IV) derived from option prices. The extension allows us to examine the incremental information content of IV for forecasting volatility. An empirical investigation with S&P 500 index shows that IV contains valuable information for forecasting volatility. Our proposed model provides more accurate out-of-sample volatility forecasts compared to the EGARCH, the REGARCH and the REGARCH-MIDAS models as well as the EGARCH-IV and the REGARCH-IV models.