Incremental Information Content Research Articles

The impact of equity share class on the information content of earnings and cash flows: evidence from Mexico

We investigate the relative and incremental information content of earnings and cash flows in Mexico. Mexico provides a unique setting to test this relation because firms are allowed to issue different classes of equity shares which appeal to different investors. Share classes differentiate between investors based on nation of origin (domestic vs. foreign), voting rights and cash flow rights. We find that, for the market as a whole, both earnings and cash flows provide incremental information and earnings provide greater relative information. We also test these relations for each share class individually and find that cash flows provide the greatest amount of information when investors are at the greatest risk of expropriation.

The impact of equity share class on the information content of earnings and cash flows: evidence from Mexico

We investigate the relative and incremental information content of earnings and cash flows in Mexico. Mexico provides a unique setting to test this relation because firms are allowed to issue different classes of equity shares which appeal to different investors. Share classes differentiate between investors based on nation of origin (domestic vs. foreign), voting rights and cash flow rights. We find that, for the market as a whole, both earnings and cash flows provide incremental information and earnings provide greater relative information. We also test these relations for each share class individually and find that cash flows provide the greatest amount of information when investors are at the greatest risk of expropriation.

Forecasting stock market volatility and information content of implied volatility index

ABSTRACTThis study investigates the incremental information content of implied volatility index relative to the GARCH family models in forecasting volatility of the three Asia-Pacific stock markets, namely India, Australia and Hong Kong. To examine the in-sample information content, the conditional variance equations of GARCH family models are augmented by incorporating implied volatility index as an explanatory variable. The return-based realized variance and the range-based realized variance constructed from 5-min data are used as proxy for latent volatility. To assess the out-of-sample forecast performance, we generate one-day-ahead rolling forecasts and employ the Mincer–Zarnowitz regression and encompassing regression. We find that the inclusion of implied volatility index in the conditional variance equation of GARCH family model reduces volatility persistence and improves model fitness. The significant and positive coefficient of implied volatility index in the augmented GARCH family models suggests that it contains relevant information in describing the volatility process. The study finds that volatility index is a biased forecast but possesses relevant information in explaining future realized volatility. The results of encompassing regression suggest that implied volatility index contains additional information relevant for forecasting stock market volatility beyond the information contained in the GARCH family model forecasts.

Cash flow disaggregation and prediction of cash flow

PurposeThe purpose of this paper is to investigate the incremental information content of estimates of cash flow components in predicting future cash flows.Design/methodology/approachThe authors examine whether the models incorporating components of operating cash flow from income statements and balance sheets using the direct method are associated with smaller prediction errors than the models incorporating core and non-core cash flow.FindingsUsing data from US and UK firms and multiple regression analysis, the authors find that around 60 per cent of a current year’s cash flow will persist into the next period’s cash flows, and that income statement and balance sheet variables persist similarly. The explanatory power and predictive ability of disaggregated cash flow models are superior to that of an aggregated model, and further disaggregating previously applied core and non-core cash flows provides incremental information about income statement and balance sheet items that enhances prediction of future cash flows. Disaggregated models and their components produce lower out-of-sample prediction errors than an aggregated model.Research limitations/implicationsThis study improves our appreciation of the behaviour of cash flow components and confirms the need for detailed cash flow information in accordance with the articulation of financial statements.Practical implicationsThe findings are relevant to investors and analysts in predicting future cash flows and to regulators with respect to disclosure requirements and recommendations.Social implicationsThe findings are also relevant to financial statement users interested in better predicting a firm’s future cash flows and thereby, its firm’s value.Originality/valueThis paper contributes to the existing literature by further disaggregating cash flow items into their underlying items from income statements and balance sheets.

Bankruptcy Prediction Based on Stochastic Processes: A New Model Class to Predict Corporate Bankruptcies?

This study proposes a simple theoretical framework that allows for assessing financial distress up to five years in advance. We jointly model financial distress by using two of its key driving factors: declining cash-generating ability and insufficient liquidity reserves. The model is based on stochastic processes and incorporates firm-level and industry-sector developments. A large-scale empirical implementation for US-listed firms over the period of 1980-2010 shows important improvements in the discriminatory accuracy and demonstrates incremental information content beyond state-of-the-art accounting and market-based prediction models. Consequently, this study might provide important ex ante warning signals for investors, regulators and practitioners.

Information Content of Key Performance Indicators and the Properties of Their Analyst Forecasts

The documented decline in the information content of earnings numbers has paralleled the emergence of disclosures, mostly voluntary, of industry-specific key performance indicators (KPIs). We find that the incremental information content conveyed by KPI news is significant for many KPIs, yet it is diminished when details about the computation of the KPI are absent or when the computation of the KPI changes over time. Consistent with analysts responding to investor information demand, we find that analysts are more likely to produce forecasts for a KPI when that KPI has more information content and when earnings are less informative. We also analyze the properties of analysts’ KPI forecasts, and we find that KPI forecasts are more accurate than mechanical forecasts, and their accuracy exceeds that of earnings forecasts. Our study contributes to the literature on the information content of KPIs and increases our understanding of the factors that affect this content. We provide evidence pertinent to the debate on whether and how to regulate KPI disclosures. This study further contributes to research on the properties of analysts’ forecasts.

PERSISTENCE, VALUE RELEVANCE, AND ACCRUALS QUALITY IN EXTREME EARNINGS AND CASH FLOW SITUATIONS

ABSTRACT Purpose: To analyze the impact of extreme earnings and cash flows on the persistence, value relevance, and accruals quality of Brazilian public firms. Originality/gap/relevance/implications: The present study contributes to the literature by analyzing extreme earnings and cash flows. Because they change the results of the period in which they occur in an unusual manner, this study suggests that studying their behaviors and impacts on the quality of the information disclosed by companies tends to contribute to optimal decision making in the capital market. Key methodological aspects: The analyzed sample comprised non-financial public companies traded on the BM&FBovespa stock exchange from 2005 to 2014, with estimates made using quantile regression. Summary of key results: The main results indicate that cash flows are more persistent than earnings because the accruals component of the latter makes them less persistent. Extreme values of both earnings and cash flows affect the persistence of these variables, with a strong and negative effect on cash flows. Finally, extreme values of accruals negatively affect accruals quality because, compared to moderate quantiles, they significantly alter the standard deviation of extreme quantiles. Key considerations/conclusions: The presence of extreme values in this study's focus variables negatively influenced market information quality, reducing its predictive power and, consequently, its relevance. Furthermore, controlling for extreme values, it was possible to observe the incremental information content of these two metrics.

An Empirical Examination of the Information Content of Ohlson and Aierrs Modified Cash Flows

Ohlson and Aier (2009) propose a model of modified cash accounting (MCA) for analyzing and evaluating a firm’s cash flows. They suggest that MCA cash earnings provide a better measure of earnings than GAAP’s measure, and that the MCA bottom line is more informative because it identifies earnings due to operations on a cash- and approximate cash-equivalent basis. However, there is no empirical test for the information content of MCA cash earnings proposed by Ohlson and Aier (2009). This study empirically examines the incremental information content of MCA cash earnings compared with cash flow from operations (CFO) and GAAP earnings per share (EPS) using stock returns as the benchmark for firms’ performance during the 2001–2011 period. We find that MCA cash earnings provide incremental information content beyond CFO and EPS.

The Effect Of Earnings Quality On The Predictbaility Of Accruals And Cash Flow Models In Forcasting Future Cash Flows

Earnings management affects negatively the quality of earnings which affect the predictability of earnings. The main questions this paper answer are: (1) is the superiority of aggregate earnings over aggregate cash flows affected by the level of earnings quality? (2) Is the superiority of aggregate earnings over the main components of earnings (i.e. operating cash flows, accounts receivable, inventory, accounts payable, and depreciation) affected by the level of earnings quality? The methodology used in this study is a development of the study of Barth et al (2001). We provide replication of their main analysis, and then extend this to deal with the effect of earnings quality. Three main measures for earnings quality used (i.e. the modified Jones model (MJ, the modified Jones model with return on assets (MJROA) and the accruals quality (AQ). To provide answers on the questions of this study, the whole sample of the study is divided into two groups according to the level of earnings quality: high earnings quality and low earnings quality. The study covers the case of Jordan and employs data on a sample of industrial and services firms. The time horizon of this study includes the period of 2000-2014. The main conclusions of this study is derived from comparing the adjusted R2 of the models employed using Vuong's test. The results of the analysis reveal that the quality of earnings affect the predictability of both cash flow and earnings in that earnings outperform cash flows in predicting one-year a head future cash flow when earning quality is high. On the other hand, the main component earnings reveal incremental information content beyond that exist in earnings or cash flow regardless of the quality of earnings. These findings suggest that operating cash flow is appreciated by the market when earnings quality is low. In addition, the finding of this study provide more evidence on the importance of using all the accounting data provided in the financial statement to predict future cash flow to avoid the effect of earnings management on the predictability of the accounting data. This paper contribute to the existence literature in different ways: (i) provide more evidence on the superiority of cash flows over earnings based on developing countries as most the evidence were based on developed countries. (ii) the results shed light on the role of earnings management in destroying the reliability of earnings as a tool to predict future cash flows.

A novel approach to measuring consumer confidence

A new data collection method is put forward to measure daily consumer confidence at the individual level. The data thus obtained allow to statistically analyze the dynamic correlation of such a consumer confidence indicator and to draw inference on transition rates. The latter is not possible for currently available monthly data collected by statistical agencies on the basis of repeated cross-sections. In an application to measuring Dutch consumer confidence, results show that the incremental information content in the novel indicator helps to better forecast consumption.

The Effects of Restaurant and LOHAS Images on Customer Satisfaction and Loyalty: Focusing on the Incremental Information Content of LOHAS Image

The Effects of Restaurant and LOHAS Images on Customer Satisfaction and Loyalty: Focusing on the Incremental Information Content of LOHAS Image

The Effects of Restaurant and LOHAS Images on Customer Satisfaction and Loyalty: Focusing on the Incremental Information Content of LOHAS Image

The Effects of Restaurant and LOHAS Images on Customer Satisfaction and Loyalty: Focusing on the Incremental Information Content of LOHAS Image

Information Content of Earnings Managements: Implications on Growth and Value Companies

Objective: The purpose of this study is to investigate the pattern of earnings management on growth and value companies in Indonesia. This study predicts that earnings management has information contents. Therefore, earnings management tends to degrade the quality of earnings, then affect the future profitability. This study analyzes the effect of earnings management information content to the company's future profitability. This study provides an understanding about accounting information at certain market price levels for growth and value companies.
 Findings: Findings of this study indicate the differences between earnings management influence on growth and value companies. The results also support the differences of relative incremental information content of earnings management on growth and value companies. The growth firms tend to do earnings management and have higher profitability compared to the value firms. The implication is that the incremental information content of earnings management on growth firms is lower than those of the value firms to predict future profitability. 
 Implication: The contribution of this research is to provide an in-depth review on earnings management study associated with company life cycle (growth and value), as well as to give additional understanding about the existence of incremental information content of earnings management. Thus, firms show different earnings management behaviors and ultimately those behaviors affect the quality of profit to predict future earnings

Pengaruh Perubahan Dividen Terhadap Profitabilitas Perusahaan Pada Masa Yang Aakan Datang (Future Profitability)

<em>The research investigates the incremental information content of dividend changes about future profitability. We regress three of measurement of earnings (earnings level, earnings changes and abnormal earnings) to dividend changes and a number of control variables. By using 87 samples (420 firm years) of firm at Jakarta Stock Exchange over 1997-2003, We find that dividend changes provide information about the earnings insubsequent years, incremental to market and accounting data. The paper also documents that dividend changes are positively related to earnings changes for merely four year ahead. In detail examining, We find that dividend increase convey must new information about earnings changes and abnormal earnings for three year ahead than dividend decrease.</em>

Does the XBRL Reporting Format Provide Incremental Information Value? A Study Using XBRL Disclosures During the Voluntary Filing Program

This study investigates whether the eXtensible Business Reporting Language (XBRL) reporting format provides incremental information value beyond the same 10K/10Q filings previously provided in HTML format. Using a sample from the XBRL Voluntary Filing Program, we document a significant increase in stock price variance on the day when voluntary XBRL reports are filed. We find market response is stronger when more content is filed on the same day. To evaluate relative information value, we decompose the quarterly return variance for three primary news announcements related to earnings including earnings announcement, HTML filing, and XBRL filing. We find XBRL filings have larger relative information value than HTML filings. Our results indicate that the XBRL reporting format provides incremental information content.

The incremental information content of audit opinion

Purpose – The purpose of this paper is to examine the incremental information content of audit opinion while considering opinion determinants, such as auditor and auditee size, or a firm’s financial state. Design/methodology/approach – A market valuation model is employed using US firm data collected over 30 years. The model relates stock returns to earnings and incorporates as additional variables auditors’ opinion types, opinion determinants and their interactions with audit expression. Findings – The findings suggest that audit opinion has a significant market impact. The estimated positive or negative information content of the audit opinion types is associated with certain opinion determinants, such as auditor and auditee size and a firm’s financial state. Research limitations/implications – Additional firm-year observations regarding certain opinion qualifications could benefit future research. Practical implications – This study offers useful insights by demonstrating the importance of auditing profession to the users of financial statements. It examines investors’ perception of each audit opinion type and the conditions under which this expression has the most serious effects. The results demonstrate the role of audit opinion and its cause-effect relationship with various economic events, allowing regulators not only to track the efficiency of various audit policy changes but also act preventively and amend the regulatory framework. Originality/value – This paper empirically supports the significance of the auditing process and audit opinions by examining investor perceptions. It employs a value relevance model, in contrast to market-based research that adopts an event study methodology.

Value creation of EVA and traditional accounting measures: Indian evidence

Purpose– The purpose of this paper is to examine the superiority of economic value added (EVA) over the traditional accounting performance measures, i.e. earnings per share, return on assets and return on equity. For this purpose, the relative and incremental information content of EVA and accounting measures are tested by examining the relationship of these measures with stock returns.Design/methodology/approach– The analysis is performed for a sample of 50 Indian companies selected from the index Nifty 50 for the period of 2008-2011. The penal regression models are applied to examine the relative and incremental information content of EVA and traditional performance measures.Findings– The study finds that EVA has more relevant and incremental information content than accounting measures for analyzing shareholder value creation. These results confirm that EVA is better performance measure than traditional accounting measures.Research limitations/implications– The study could be further extended for the sample of other firms covering the specific industries and sectors. The calculation of EVA could be modified with respect to the adjustment in profit after tax and the calculation of cost of capital.Practical implications– The study has implications for the managers who are responsible to generate the wealth of shareholders by formulating the corporate financial policies. The findings also help investors who are closely concerned with the financial health of the firm while taking their investment decisions.Originality/value– The novelty of this study is that it relates total return of firm’s stock with the financial measures unlike the previous literature.

MARKET VALUE ADDED AND TRADITIONAL ACCOUNTING CRITERIA: WHICH MEASURE IS A BEST PREDICTOR OF STOCK RETURN IN MALAYSIAN COMPANIES

This study tests the hypothesis that market value added (MVA) is more highly associated with stock return (SR) than traditional performance measures. The purpose of this study is to provide empirical evidence on the relative and incremental information content of MVA and traditional performance measures, namely, net income (NI), net operational profit after tax (NOPAT), and earning per shares (EPS). The sample involved 395 non-financial companies listed in the main market of Bursa Malaysia over the period 2002–2011. To analyze the hypotheses panel data regression methods were employed. The results indicated that accounting measures (NI, NOPAT and EPS) have higher relative information content with stock return compared to MVA. Thus, the results do not support the hypothesis that MVA is superior to traditional accounting measures in association with stock return. Moreover, the findings showed that MVA has incremental information content with stock return compared to accounting measures. Consequently, MVA is a useful measure in describing the firm’s stock return in Bursa Malaysia. Therefore, Malaysian companies can use MVA with traditional measures (NI, NOPAT, and EPS) in evaluating companies’ performance.

Is refined economic value added more associated with stock return than accounting measures? The Malaysian evidence

The paper tests the hypothesis on whether refined economic value added (REVA) is highly associated with stock return compared to traditional performance measures. The goal of the study is to provide empirical evidence on the relative and incremental information content of REVA and traditional performance measures, such as net income (NI), net operational profit after tax (NOPAT), and earning per share (EPS). The study involves 395 non-financial companies listed in Bursa Malaysia over the period of 2002–2011. Pearson correlation coefficient and panel data single and multiple regression models were employed to analyze the data. The empirical results indicate that the relative information content of the REVA was not greater than that of NI and NOPAT to explain stock returns. NI and NOPAT were highly correlated with stock return compared to REVA. Additionally, the incremental information content test indicated that REVA makes some additional contribution to information content beyond the NI, NOPAT, and EPS. Finally, the panel multiple regression models showed that there was a strong relationship between NI, NOPAT, and REVA with stock return, but there was no meaningful association between EPS and stock returns. Overall, the results do not support the hypothesis that REVA can be considered superior to traditional accounting measures in association with stock returns.

Accounting for property investment: an examination of the value relevance of unrealised gains and losses recognised under IAS 40

The main objective of this study is to examine the relevance of fair value accounting for investment property permitted under IAS 40. This will be achieved by examining the value relevance of unrealised gains and losses reported in the income statement in explaining stock prices for real estate companies listed in Kuwait stock exchange. The study examines further the impact of unrealised gains and losses on the incremental explanatory power of earnings and compares the explanatory power of book value of equity to that of earnings. The results indicate that unrealised gains and losses recognised under IAS 40 have no incremental information content over net income before unrealised gains and losses and that the inclusion of unrealised gains and losses in income numbers decreases the explanatory power of the valuation model and decreases the incremental explanatory power of earnings relative to that of book value. The results indicate further that the incremental explanatory power of earnings exceeds the incremental explanatory power of the book value of equity when unrealised gains and losses are excluded from the earnings measure. These results question the fair value method permitted under IAS 40.