Incremental Information Content Research Articles

Information Content of Index Options in Predicting Indian Stock Market Volatility

This paper attempts to identify the changes in predictive power by addition of the incremental information contained in the Implied Volatility of the NSE Index options to GARCH and EGARCH models. This is done by adding the implied volatility as an exogenous variable in the GARCH and EGARCH models. The within-sample incremental information content is tested using the Likelihood ratio test. The paper further compares the incremental information in near expiry calls and far expiry calls.

Fair Value's Affect on Accounting's Ability to Predict Future Cash Flows

AbstractThis study assesses the ability of the outputs from an accounting system to predict future cash flows. Specifically, we focus on a complete accounting system's ability to predict future cash flows as compared to the predictive ability of an accounting system implementing a variety of accounting attributes (including, for example, historical cost and value, among others). We find that the outputs from an accounting system implementing a variety of accounting attributes has greater information content for future cash flows than the outputs from a complete accounting system. The results of this study imply that moving toward a value accounting system may reduce accounting data's predictive ability for future cash flows.(ProQuest: ... denotes formulae omitted.)IntroductionThis study assesses the ability of the earnings and book value of equity derived from two different financial accounting systems to predict future cash flows. The two different accounting systems used in this study are (1) the accounting system based on the implementation of current accounting standards (hereafter referred to as a mixed attribute accounting system) and (2) mar1 ket data where the data is utilized as a proxy for a complete accounting system.2,3> 4While fair value has a variety of meanings and definitions, it appears that the IASB is inherently using market as its definition of value.5 The IASB specifically discusses exit as its measure of value but as this term is utilized by the IASB, exit will often equal value (Penman, Richardson, and Tuna [2007]). One may argue that the IASB does not intend for a complete system to be implemented. However, the IASB has noted that many if not all of the assets and liabilities currently recorded under a different accounting system (such as historical cost) will be recorded under value accounting under certain circumstances. A listing of the standards that will be affected by value measurement can be found at http://www.iasplus.com/agenda/fairvalue.htm. Specifically included in this listing are the following two standards: IAS 16 (Property, Plant and Equipment) and IAS 38 (Intangible Assets).We find that, on average, a mixed attribute accounting system outperforms a complete accounting system in predicting future cash flows, possessing both greater relative and incremental information content. This finding highlights a potential cost of the current movement towards value accounting. That is, a mixed attribute accounting system is more likely to meet financial accounting's predictive objective than a complete accounting system.6In this study, we utilize price and the change in price plus dividends as reasonable proxies for the reported values of book value of equity and earnings under a complete accounting system.7 In essence, this data is utilized as the equity and earnings that would be reported under a complete accounting system.8 Throughout this paper, it is important to remember that under this application of a value accounting system, the book value of equity is equal to the value of equity.9 In addition, income is the change in value exclusive of dividends; in other words, income equals the return in dollars.The next section describes the sample characteristics. Subsequently, we discuss the research design. We then review the relative and incremental explanatory power between the two accounting systems, followed by a summary and concluding comments.Sample DescriptionUsing this concept of complete accounting, book value will be reporting the value of shareholders' equity, that is, the capitalization; and income will be reporting the change in the value of shareholders' equity plus dividends. …

INCREMENTAL INFORMATION CONTENT DALAM OPINI AUDIT UNQUALIFIED DENGAN PARAGRAF PENJELASAN

This study investigates whether there is any different market reaction to unqualified and unqualified with explanatory paragraph audit opinion. The result of empirical univariate and regression test on 291 firm-years, with balanced proportion between the two opinions, shows that there is a significant difference of stock returns between the two audit opinions around opinion announcement. Market appreciates the existence of explanatory paragraph in the unqualified audit opinion with higher excess returns compared to standard unqualified audit opinion. Overall this study shows incremental information content in unqualified with explanatory paragraph audit opinion.

Value Relevance of Earnings and Cash Flows from Operations: Effects of Earnings Permanence, Growth and Firm Size in Tunisian Stock Exchange

The purpose of this study is to examine the information content of accounting earnings and CFO to explain security returns in Tunisian Stock Exchange through the study of their response coefficients and the explanatory power of regression models in the period of 1997 - 2001 (an application of a New Accounting System of Companies). We hypothesis that (i) earnings (CFO) have an incremental information content beyond CFO (earnings) when the two variables are jointly used in return regression, (ii) the response of returns to CFO (earnings) increases (decreases) when earnings is transitory, (iii) security returns response to both earnings and (CFO) will be higher (lower) for high (low) growth firms and (iv) the security returns response to accounting earnings (CFO) are weaker (higher) for large (small) firms. We have introduced market-to-book ratio and market value of equity as additional variables in regression models and as proxies of growth and firm size. Results can not affirm that CFO plays a more important role in marketplace when earnings are transitory. Results in relation to earnings growth and firm size hypothesis show that CFO can join Market-to-Book ratio and market value of equity as proxy of risk.

Is economic value added more associated with stock return than accounting earnings? The UK evidence

PurposeThe paper seeks to examine the claim of EVA® advocates of its superiority as a financial metric compared with other measures.Design/methodology/approachThe paper uses a sample of 2,252 firm‐year observations from the UK market and applies panel data regressions to test the relative information content of EVA and other accounting measures and the incremental information content of EVA components in explaining stock return.FindingsIt is found that net operating profit after tax and net income outperform EVA and residual income in explaining stock return; it was also found that accruals and operating cash flow have significant incremental information content, while the accounting adjustments of EVA proponents have significantly less contribution in explaining stock return. Yet the paper concludes that other variables must be considered in order to capture the unexplained variation in stock return models.Research limitations/implicationsFuture research should include US and UK data in the same sample and examine whether the conclusions are maintained.Originality/valueFor a set of cross‐sectional time series data, ordinary least square (OLS) regressions produce biased results and inaccurate estimates of the parameters coefficients; however, this paper applies panel data regressions.

Evidence on the Usefulness of Components of Cash Flows from Operating Activities in Predicting Future Cash Flows

This paper investigates the relevance of the actual components of Cash Flows from Operating Activities (CFO) in predicting future CFO. We find evidence that receipts from customers and payments to suppliers have incremental information content (relative to aggregate CFO) in predicting CFO. Further, utilising the disclosure of both interest received and interest paid (rather than the net interest paid or received) we find that a models incorporating both variables provide incremental information for cash flow prediction. These results remain robust after controlling for accruals information. Consistent with Dechow (1994) further tests show variation in company's operating cycles affects the predictive ability of cash flow components and also substantially enhance the explanatory power of the model when current CFO alone performs poorly as a predictor for future cash flow. These results have potential relevance to investors' concerned with estimates of future CFO and regulators current deliberations on cash flow disclosure.

Information Content and Earnings Management Implication of Changes in the Valuation Allowance for Deferred Tax Assets

The valuation allowance for deferred tax assets is an estimate of the portion of deferred tax assets that is not realizable because of insufficient future taxable income. A change in the valuation allowance might contain the manager's private forward-looking information that helps users of financial statements assess the firm's future income. The inclusion of changes in the valuation allowance in income from continuing operations, however, creates opportunities for earnings management because the valuation allowance amount is based primarily on the manager's unverifiable judgment. This study provides evidence of both benefits (incremental information content) and costs (earnings management implication) of disclosing the valuation allowance for deferred tax assets. Changes in the valuation allowance contain incremental information content, in addition to publicly available information, in predicting one- and two-year-ahead income. However, changes in the valuation allowance for firms that likely manage earnings through their valuation allowance accounts are less associated with future income than for non-earnings management firms, implying that managers manipulate the valuation allowance to manage earnings.

Simultaneous Releases of U.S. and Foreign GAAP Earnings

Prior studies examine the incremental information content of U.S. generally accepted accounting principles (GAAP) reconciliation of U.S. listed foreign firms and find mixed results. One of the main methodological issues in prior studies is the uncertainty concerning the dates of the reconciliation releases. This study examines the information content of U.S.GAAP reconciliation for a sample of U.S. listed foreign firms that released both U.S. and foreign GAAP earnings information simultaneously. The findings show that there is no incremental information content for the U.S. GAAP reconciliation over foreign GAAP earnings. When added to other empirical evidence from prior studies, this studies' results of no incremental information content further support the recent SEC announcement to work towards eliminating the reconciliation by 2009 for firms using IFRS.

Does the Market Listen to Whispers?

In this study, we investigate the characteristics and information content of whisper forecasts of earnings. Based on data on earnings whispers obtained from public sources and from one private website (‘getwhispers.com’), we examine whether whisper forecasts are more optimistic, on average, than consensus analyst forecasts, and how the market perceives whisper forecasts as compared to consensus analyst forecasts. Our results indicate that whisper forecasts are more optimistic, on average, than consensus analyst forecasts. Further, we find that consensus forecasts are as accurate as whisper forecasts. Our market perception tests reveal that in both the short-run and the long-run, whispers are not incrementally informative to consensus analyst forecasts. Further, we find no evidence that analysts use the information contained in whispers to revise their forecasts. On the contrary, we find that analysts9 consensus forecasts often have incremental information content over whisper numbers. However, our inferences are not applicable to recent whisper data since our sample period ends in March 2001. Proprietary ways of analyzing market and street expectations have the potential to add value in picking stocks and assessing market direction. Our findings do not apply to data disseminated via existing, commercial whisper websites that are not part of the sample which may have the potential to add value through proprietary data or analyses using proprietary algorithms. <b>TOPICS:</b>Security analysis and valuation, fundamental equity analysis

EVA and Traditional Accounting Measures: Which Metric is a Better Predictor of Market Value of Hospitality Companies?

This study tests the hypothesis that Economic Value Added (EVA) is more highly associated with hospitality firm values than with traditional performance measures. The purpose of this study is to provide empirical evidence on the relative and incremental information content of EVA and traditional performance measures, earnings, and cash flow. Regression analysis tests the information content of EVA and indicates that earnings are more useful than cash flow in explaining the market value of hospitality firms. EVA itself has very little explanatory power. Incremental information content tests show that EVA makes only a marginal contribution to information content beyond earnings and cash flow. Overall, the results do not support the hypothesis that EVA is superior to traditional accounting measures in association with equity market value.

PERBANDINGAN PENGARUH EVA DAN PENGUKURAN KINERJA LAINNYA TERHADAP IMBAL HASIL SAHAM DI INDONESIA

The purpose o f this study is to examine whether Economic Value Added9 (EVA) is more highly associated with stock returns than other conventional accounting- based measures such as Earnings before Extraordinary Items, Cash Flow from Operation, and Residual Income, as claimed by Stern Stewart. Using pooled ordinary least square method or Panel Data on 121 Indonesian- listed companies in Jakarta Stock Exchange over the period 2001-2003, the test emphasizp on two approaches. Relative Information Content describes the association ofeach individual performance measure relatively with stock returns and Incremental Information Content describes the association of each performance measure with stock return individually and simultaneously. The relative information content tests reveal that earnings to be more closely associated with stock returns than EVA®, Cash Flow from Operation, and Residual Income. The incremental information content tests reveal that earnings and Cash Flow from Operation to be more closely associated with stock returns than EVA® and Residual Income. Other tests for components of EVA® reveal only Cash Flow from Operation and Accruals to be significantly associated with stock returns, where Cash Flow from Operation and Accruals are equal with earnings.

The incremental information content of non-US GAAP earnings disclosures: Evidence from UK firms

This paper examines price and trading volume responses in the US equity market to the preliminary earnings announcements (PEAs) in the UK of UK firms listed on US exchanges (e.g., NYSE and AMEX). The inquiry focuses on whether the return forecast error (absolute and squared values) and volume residual (standardized and unstandardized) for each day were significantly different from the average on the day of the earnings announcements (PEA). The most significantly unexpected return occurred the day prior to the Financial Times ( FT) announcement. The results suggest prompt volume and price responses to the UK PEAs in the US security market. Excess trading volume occurred the day prior to and the day of the FT release price response occurred on the day subsequent to the PEAs. This may suggests that investors possess differential prior beliefs or likelihood functions in evaluating public disclosure. Consistent with Frost and Pownall [Frost, C., & Pownall, G. (1996), Interdependencies in the global markets for capital and information: The case of Smithkline Beecham plc. Accounting Horizons, 1, 38–57], US investors seem not to be confused by US/UK generally accepted accounting principles (GAAP) differences, and in fact use information about UK GAAP earnings in their valuations and trading decisions. This implies that traders correctly use UK accounting output to the determination of values in setting security prices and arriving at trading decisions. Broadly, these findings support the assumption that disclosures by UK-listed firms in their domestic market influence share liquidity and trading in the US market.

The relationship between returns and unexpected earnings: A global analysis by accounting regimes

Numerous studies have documented a long-term association between earnings and returns. Surprisingly, few attempts have been made to internationally examine market reactions to earnings releases over return windows less than 12 months. This paper globally explores the market reaction to unexpected earnings defined by both the change in earnings per share (EPS) and analyst forecast errors (AFE) using a 1-month return window. First, the existence of the earnings–returns relationship is examined using a sample of firms from 32 countries grouped into accounting regimes. Accounting regimes represent groups of countries that exhibit similarities in accounting standards, stock market characteristics, corporate governance mechanisms, and economic conditions. Thus, similar reactions to earnings are expected within regimes. Next, the incremental information content of analyst forecasts, a proxy for investors’ earnings expectations, is examined. Finally, changes in the structure of the earnings–returns relationship over time are investigated. Results support the existence of a relationship between earnings and returns in all accounting regimes. In addition, analyst forecast errors appear to be incorporated into earnings expectations in most developed countries. Finally, evidence suggests that the significance and explanatory power in the earnings–returns relationship has increased in recent years.

The Value-Relevance of Derivative Disclosures by Commercial Banks: A Comprehensive Study of Information Content Under SFAS Nos. 119 and 133

This study examines the value-relevance of banks' derivative disclosures under Statements of Financial Accounting Standards (SFAS) Nos. 119 and 133. Using the complete time-series of SFAS No. 119 disaggregated notional value disclosures and the most recently available SFAS No. 133 fair value data, this study investigates whether such expanded disclosures provide incremental information content beyond earnings and book value. Our results indicate that banks' notional principal amount disclosures are value-relevant, and that this evidence of incremental information content is robust to the inclusion of recently available fair value data and alternative model specifications.

Evidence for the Possible Information Loss of Conforming Book Income and Taxable Income

Recent corporate accounting reporting scandals and aggressive corporate tax shelters have led for calls for regulatory reform. One such call is to conform (or reduce the gap between) the calculation of book and taxable income. Proponents of conformity focus on perceived benefits while ignoring possible costs. We examine one possible cost: the loss in information content to investors if one measure is removed from the information set. We provide evidence for this possible loss by examining the relative and incremental information content over the past 20 years of book and (estimated) taxable income for a large sample of firms. We find that book income exhibits significantly greater relative explanatory power, while both exhibit significant incremental explanatory power. Conforming the two measures at a minimum results in the loss of incremental explanatory power and, if book income is conformed to the tax rules, a 50 percent loss in the explanatory power of earnings.

Empirical Evidence on the Relationship Between For-Profit Universities Financial Information and Future Cash Flows - Are For-Profit Universities Good Candidates for Investors or Students?

This study examines the relationship between for-profit universities financial signals and future cash flows. The study provides evidence as follows: (1) for-profit universities financial information can be categorized into four factors; information, stability, efficiency and reputation. (2) there is a positive association between price and future cash flows and a negative association between administrative costs and future cash flows. (3) financial vulnerability measures provide incremental information content beyond efficiency measures. The efficiency signal administrative costs is negatively and significantly related to future cash flows even after adding vulnerability measures to the equation. This indicates that vulnerability measures are not surrogates for the efficiency measure.

Evidence on the Possible Information Loss of Conforming Book Income and Taxable Income

Recent corporate accounting reporting scandals and aggressive corporate tax shelters have led for calls for regulatory reform. One such call is to conform (or reduce the gap between) the calculation of book and taxable income. Proponents of conformity focus on perceived benefits while ignoring possible costs. We examine one possible cost: the loss in information content to investors if one measure is removed from the information set. We provide evidence on this possible loss by examining the relative and incremental information content over the past 20 years of book and (estimated) taxable income for a large sample of firms. We find book income exhibits significantly greater relative explanatory power while both exhibit significant incremental explanatory power. Conforming the two measures at a minimum results in the loss of incremental explanatory power and if book income is conformed to the tax rules, an estimated 50% loss in the explanatory power of earnings.

The value relevance of earnings and book values in equity valuation: An international perspective ‐ The case of Kuwait

This study examines the value relevance of earnings and Book values derived under the Kuwaiti accounting system that assures a complete compliance with the International Accounting Standards. Using a valuation model provided by Ohlson (1995), the study uses statistical association between stock prices and both earnings and book values to measure value‐relevance of the accounting system. The study also compares the incremental explanatory power of earnings and book values and examines some conditions under which earnings or book values would explain a relatively higher proportion of the variation of stock prices. The results show that earnings and book values jointly and individually are positively and significantly related to stock prices. The incremental information content of earnings is greater than that of book values. Earnings become less value‐relevant and book values more so as firms experience negative earnings. The best fit for the model was obtained for the industrial and food sectors followed by service and financial institutions. Earnings add more to the overall explanatory of the valuation model than book values for financial institutions, services, investments and real estate sectors; whereas book values have superiority only for the industrial sector. The results of our study are generally consistent with the results obtained from U.S. and other developed markets except for the fact that the incremental information content of earnings is greater than that of book values.

The Relative and Incremental Information Content of Accounting Earnings versus the Cash Recovery Rate*

Researchers in accounting, economics, and finance are interested in discovering the best measure of economic return. The usefulness of accounting rates of return has been questioned and alternative performance measures are being pursued. One fairly recent measure, the cash recovery rate, is based on continuous time analysis and U-shaped cash flows. We examine the relative and incremental information content of two competing performance measures using Tobin's q and stock returns as benchmarks. The two measures are (1) an accounting rate of return defined as return on assets (ROA), and (2) an estimated internal rate of return (EIRR) derived from the cash recovery rate (CRR). We use both short and long time intervals for our tests. Overall, our results indicate that ROA has no relative or incremental information content whereas EIRR is consistently positively related to both Tobin's q and stock returns over all measurement intervals. These results imply that accounting earnings-based performance measures are less value relevant compared to cash recovery-based measures.

The Effect of Foreign Ownership Restrictions on the Price Dynamics of Depositary Receipts—Evidence from the Taiwan and Hong Kong Markets

In this paper, we study depositary receipt prices in regulated markets and free-entry markets. Because of their unique environments, the Taiwanese and Hong Kong markets provide interesting settings that have not yet been explored in the literature. In particular, we focus on the following: (1) the difference in the long-term price relationships between depositary receipts and underlying securities in free-entry and regulated areas, (2) the price dynamics of the depositary receipts for firms with and without the long-term equilibrium relationships between depositary receipts and underlying securities, and (3) the incremental information content of the qualified foreign institutional investor (QFII) ownership ratio for the depositary receipts issued by Taiwanese firms. The empirical results reveal that long-term equilibrium relationships between depositary receipts and underlying security prices exist for firms listed in Hong Kong, a free-entry market, but do not necessarily exist for firms listed in Taiwan with foreign ownership restrictions. The long-term equilibrium relationships between depositary receipts and underlying securities and the local market conditions are the most important factors in explaining the depositary receipt returns when the equilibrium exists. In the absence of equilibrium, the lagged returns of depositary receipts or underlying securities and the local market conditions become important. In addition, QFII ownership ratios significantly explain the depositary receipt price variations in a regulated market, which implies the restriction effect on the price dynamics of the depositary receipts.