Information Content Of Earnings Research Articles

The impact of corporate governance on the information content of earnings and cash flows: Evidence from Brazil

We use the unique capital market structure that Brazil established in 2000 to investigate how different governance listing segments impact the relative and incremental information content of earnings and cash flows. Brazilian firms are classified into different listing segments on the stock market depending of their voluntary compliance with corporate governance regulations. We find that earnings provide greater relative information in the market as a whole, and this result is driven by the segments with enhanced governance regulations. For the market as a whole and for the enhanced governance segments, both earnings and cash flows provide incremental information.

Reakcije ulagača na objave tromjesečne dobiti na Zagrebačkoj burzi

This study investigates the investors’ reactions to the publication ofquarterly earnings for companies at the Zagreb Stock Exchange. The empiricalresearch based on the event study and 409 firm-year observationsconfirms that investors react to the publication of quarterly earnings, whilethe Friedman test indicates that the reactions are most frequent for earningsannouncements from the second quarter (Q2). The occurrence of abnormalstandardized returns on announcement day suggests that the efficient markethypothesis in semi-strong form does not hold for the Croatian capital market.Moreover, there is evidence of gradual price adjustment after announcementday. Longitudinal analysis in the period 2010-2022 indicated that investors’reactions are stable and that there is no trend of growth or decline in standardizedabnormal returns. The estimated pool regression model revealedthat several firm characteristics influence the information content of quarterly earnings. The earnings surprise variable positively affects standardizedabnormal returns, while firm size and reporting of losses variables negativelyaffect standardized abnormal returns. The results of the study confirm tocapital market regulators the practical benefits of quarterly financial reporting,to firms that they can use quarterly financial reports to reduce informationasymmetry and to investors that after the quarterly earnings publicationthere is the possibility of achieving abnormal returns. The limitation of thisstudy is relatively small sample in comparison with similar studies. Findingsabout slow price adjustment after the day of earnings release might be challengedby the occurrence of other price-sensitive information. Some futureresearch might improve findings by use of additional independent variables,like management analysis and analyst forecast, which could shed new lighton the quarterly earnings information content at ZSE.

Mandatory Monthly Sales Disclosure and the Information Content of Earnings

Synopsis The research problem Taiwanese stock markets practice a unique form of reporting frequency, combining quarterly interim financial reports with mandatory monthly sales announcements. This unique setting allows us to compare the information content of quarterly earnings that are announced before, bundled with, or announced after the monthly sales disclosures. Motivation Monthly sales disclosures likely contribute to the pricing of earnings announcements (EAs) by providing investors with valuable information that helps them revise their expectations when forecasting earnings and cash flows. We examine whether monthly sales disclosures help investors to process earnings information. The test hypotheses Our first hypothesis is that the immediate market response to earnings news is lower if the previous quarter’s EAs are disclosed after the reporting of monthly sales for the first month of the next quarter. Our second hypothesis is that the subsequent market response to earnings news is lower if the previous quarter’s EAs are disclosed after the reporting of monthly sales for the first month of the next quarter. Target population We studied a sample of Taiwanese listed firms from 2014 through 2018. Adopted methodology We used multivariate regressions to test the hypotheses. Analyses We examined the monthly sales disclosures for the first month of quarter [Formula: see text], which are released within the first 10 days of the second month of quarter [Formula: see text]. We analyze the pricing of the content of the earnings of quarter q, conditional on whether the earnings are released before, simultaneously with, or released after the monthly sales disclosures. Findings We found that earnings disclosed after the monthly sales news are associated with weaker EA returns and post-EA drift, relative to earnings disclosed before or bundled with the monthly sales news. These results suggest that monthly sales disclosures preempt the information content of late EAs. More importantly, we found that late EAs are associated with less positive correlation between EA returns and post-EA returns than early and bundled EAs. Overall, these results suggest that by providing timely sales information, monthly sales disclosures improve the information environment.

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

The information content of earnings for UK firms disclosing under UK GAAP and IFRS

Our study examines whether the earnings announcements of the United Kingdom (UK) firms cross-listed on United States (US) stock exchanges exhibit distinctive impacts on stock price and trading volume when disclosing these earnings using UK generally accepted accounting principles (GAAP) versus International Financial Reporting Standards (IFRS). We find that IFRS earnings announcements exhibit a greater amount of return variation on the days immediately surrounding the earnings announcement than do UK GAAP earnings announcements even after controlling for profitability, risk, growth, and firm size. We also find sustained abnormal trading volume activity preceding and subsequent to UK GAAP announcements; whereas, abnormal trading volume surrounding IFRS announcements reveals little significance preceding the announcement and a less sustained reaction in the days following the announcement of earnings. Taken together, our study suggests that IFRS earnings announcements provide more earnings surprise on the day of the announcement and result in more consensus following the announcement than do UK GAAP earnings announcements, despite the relative similarity between the two systems of earnings disclosures.

Measuring the Information Content of Disclosures: The Role of Return Noise

ABSTRACTDisclosure is of fundamental interest to accounting research. When the sign/magnitude of disclosed news is unclear, the information in disclosure events is inferred using the ratio of return volatilities during event and non-event windows (Beaver 1968). We show that return noise due to microstructure frictions and mispricing affects this ratio, and that effect is comparable to or exceeds that of information content. We use the SEC's Tick Size Pilot program to confirm the causal effect of return noise on the ratio, and to evaluate alternative ways to control for it. The most promising approach is to use the difference between, rather than the ratio of, return volatilities during event and non-event windows. We illustrate its benefits by showing how it alters prior inferences regarding time-series and cross-sectional variation in information content as well as changes in the information content of earnings announcements around the 2004 amendments to Form 8-K filings.

The role of earnings components and machine learning on the revelation of deteriorating firm performance

This study explores the proficiency of earnings components for detecting earnings and cash flows distress. The authors examine the deterioration of these two performance indicators for two aggregate and two disaggregate earnings models, each of which is subject to examination through different machine learning, non-parametric, and parametric methods. The results, obtained from firms in 22 countries, reveal that the current information content of earnings not only has explanatory power for future earnings and cash flows but also can support advance classifications of the two performance indicators as negative or positive. Each aggregate and disaggregate model offers distress classification ability, the disaggregation of earnings generates better, robust detection accuracies for cash flow distress, while aggregate earnings model provides improved classification for prospective earnings distress. The findings also suggest that machine learning estimation methods provide superior distress detection compared to a parametric method, despite its still decent performance.

The Role of Smog in Firm Valuation

ABSTRACT This paper examines the influence of smog on firm earnings and information content using the data of Chinese A share listed firms and the air quality monitoring data released by the China National Environmental Monitoring Center from 2013 to 2017. The empirical results show that smog will not only negatively influence the earnings of local firms, but also result in a decrease in the information content of their earnings for market valuations. This paper further tests the role of firm size in the influence mechanism of smog on earnings and information content. The results reveal the significant moderating effect of firm size in the influence mechanism, which is reflected by large-scale firms being more likely to suffer earnings decrease and less likely to suffer earnings information content decrease due to smog, while small-scale firms tend to experience the opposite.

Economic Policy Uncertainty and Enterprise Earnings Information Content: Evidence from China

Earnings information as a key factor affecting investors' decisions, has attracted much attention from scholars in recent years. Based on the data of A-share listed companies from 2002 to 2019, this paper examines the impact of economic policy uncertainty on earnings information content of enterprises through multiple linear regression, empirical results show that: 1. the benchmark results show that the uncertainty of economic policy significantly improves the earnings information content of enterprises. The above conclusions still hold after changing the uncertainty index of economic policy, carrying out the lag and lag treatment during the uncertainty of economic policy, and carrying out the robustness test by changing the measure method; 2. mechanism studies show that enterprises are more likely to attract investors' attention under uncertain environment, and the supervision pressure from investors forces enterprises to reduce earnings management and increase information disclosure, thus enhancing investors' trust in corporate earnings; 3. the expansion study found that the more high-quality accounting information, so as to establish a good corporate reputation among investors. The research conclusion not only expands the existing literature on the impact of economic policy uncertainty on the content of corporate earnings information, but also provides a new perspective and new empirical evidence for understanding whether and how the uncertainty of economic policy will affect the content of corporate earnings information, and has a certain practical significance.

Perceive it or Not: Information Quality and the Investors’ Response to Earning Surprises of Technologically Advanced Companies

One of the primary measures of information systems (IS) success that has been the subject of much investigation in a variety of contexts is information quality (DeLone & McLean, 1992; 2003). This paper hones in on the impact of perceived information quality in the context of the financial markets, where quality of accounting information is particularly important, as it informs investment decisions and impacts stock prices. In particular, seminal accounting research has consistently found that earnings announcements possess informational value (information content) based upon which the market reacts (Beaver, 1968). Market reaction to surprises in earnings announcements has long been used to understand the quality of the earnings announced and studies have explored various factors affecting the response. The current study adds to this body of research by factoring in the perceived quality of the information systems environment. We hypothesize that information reported by companies known for developing and employing sophisticated IT systems is weighed more heavily by investors. We conduct an analysis of stock price before and after earnings announcement surprises among firms known for sophisticated IT systems. Results provide direct support for our hypothesis, indicating that the market reacts more strongly to earnings surprises (both positive and negative) reported by innovative users of IT as compared to less innovative users of IT. These results contribute to a new insight into the circumstances that affect the information content of earnings announcements as well as a richer perspective on the impact of investment in advanced information systems in terms of perceived quality of a company’s information environment by the financial markets.

Incorporating Financial Statement Information to Improve Forecasts of Corporate Taxable Income

We contribute to the research on the information content of earnings as it applies to the forecasting of economic activity across reporting models. We examine whether publicly available financial statement information is incrementally useful in forecasting confidentially reported taxable income. More precise firm-level taxable income forecasts can improve policymakers’ modeling of the tax system and their ability to analyze the effect of proposed changes in corporate tax law. When aggregated, improved micro-forecasts can also yield more accurate macro-forecasts of corporate taxable income, a significant component of the federal budget. We find that financial statement information improves firm-level estimates of future taxable income by providing more timely information. We also document the usefulness of the deferred tax valuation allowance in improving taxable income estimates for loss firms. Our evidence suggests public financial statement information complements proprietary data to improve estimates of future taxable income for budgetary and policy use.

The momentum effect in the Tunisian stock market: Risk hypothesis vs. underreaction hypothesis

The purpose of this paper is to examine two controversial explanations for the momentum in the Tunisian stock market: the risk hypothesis and the underreaction hypothesis. To address the risk issue, the five-factor model of Fama and French (2015) was used to estimate the momentum profits. We found a strong evidence of risk-adjusted momentum profits indicating that the risk cannot explain the momentum effect. To test the underreaction hypothesis, an event study was performed to track the market reaction to the information content of earnings before, on and after earnings announcement. We found that good earnings news are followed by positive abnormal returns; while bad earnings news are followed by negative abnormal returns over 12 months after the announcement date. Consistent with the underreaction hypothesis, these findings indicate that the market slowly adjusts in the same direction to the unexpected earnings. To control for this effect, we extended the five-factor model to include a factor based on unexpected earnings. We found that the momentum profits are captured by a zero-investment portfolio that is short on the portfolio with the lowest unexpected earnings and long on the portfolio with the highest unexpected earnings.

An analytical measure of market underreaction to earnings news

Prior studies have provided a number of possible explanations for delayed market reactions to earnings announcements. However, there has been relatively little effort to predict the magnitude of the post-earnings announcement drift (PEAD). We show that the squared correlation coefficient (ρ2) between order imbalance and earnings surprise determines the magnitude of market underreaction to earnings surprises and PEAD=k⋅ρ2, where k is the information content of earnings. We discuss several testable implications of our analytical results, including a model-implied measure of information asymmetry that arises from the differential information processing ability of traders.

Revisions about Government Subsidy Disclosures and Investors’ Response to Earnings Reports: Evidence from the 2017 Government Subsidy Disclosures

We examine whether the quality of information in earnings reports, as indicated by the earnings response coefficient (ERC) decreases when the measurement and disclosure of government subsidy has been changed by revising accounting standards. According to the old accounting standards in China, the gains from government subsidy should be reflected in “non-operating” income. However, the newly revised accounting standards regulates that a part of government subsidy can be reflected in the report item of “other income” in under the operating income item. We use 2017 revisions of accounting standards in China as an instrument to capture a change in the position of financial statements where the government subsidy is revealed. Employing a difference-in-differences design and exploiting the adoption of the new accounting standards, we find a statistically and economically significant decrease in ERC for treated firms relative to controlled firms. Our findings represent the first empirical evidence that the change of government disclosures can negatively affect the information content of earnings report.

Is Comprehensive Income Superior To Net Income In Equity Valuation? Evidence From The Capital Market Of Kuwait

The study examines whether comprehensive income numbers reported under International Financial Reporting Standards (IFRS) have value relevance over net income in equity valuation. We use a sample of firms that are listed in Kuwait Stock Exchange from banking, investment, real estate, industrial, basic materials, telecommunications, consumer services, oil & gas and health care sectors during the years 2012-2015.The study applies a methodology used by Collins, Maydew and Weiss (1997) that is based on Ohlson (1995) equity valuation model and Theil (1971) technique to measure and compare the relative and the incremental explanatory power of comprehensive income and net income. The study provides evidence that comprehensive income is not superior to net income in equity valuation. Reporting other comprehensive income gains and losses as elements of the income statement produces a measure of earnings that decreases the explanatory power of the valuation model; decreases the incremental information content of earnings. Other comprehensive income gains and losses when added as an explanatory variable to the valuation model did not enhance significantly its explanatory power.The results we obtained supports the current requirement by the IFRS and US GAAP of deferring other comprehensive gains and losses and contributes to the literature on the value relevance of other comprehensive income gains and losses in emerging capital markets.

A Matter of Principle: Accounting Reports Convey Both Cash-Flow News and Discount-Rate News

This paper modifies the standard returns-earnings regression in accounting research to show that financial reports convey both cash-flow news and discount-rate (expected-return) news. The paper points to the realization principle, associated as it is with the resolution of risk, as the accounting feature that conveys expected-return news. The modified returns-earnings regressions indicate that the information so conveyed pertains to priced risk. In corroboration, the paper also shows that the identified expected-return news forecasts changes in both stock return betas and earnings betas, and expected-return news predicts future returns, whereas cash-flow news does not. The analysis yields a number of additional insights: financial statements distinguish expected-return news associated with operations from that associated with financing activities; given accounting information, there is not much news in dividends; and, in comparing the information content of earnings versus cash flows, cash flows largely convey expected-return news rather than cash-flow news. In sum, the paper shows that the objective of the Financial Accounting Standards Board and International Accounting Standards Board to provide information about the amount and uncertainty of future cash flows is (as least, partially) satisfied by accounting principles underlying current financial reporting. This paper was accepted by Suraj Srinivasan, accounting.

Perbandingan Pengaruh Laba dan Value Added pada Return Saham

The information of value added is considered to be a better company performance measure and has better association on stock returns compared to earning information that is often used. This study aims to compare the relative information content of earnings and value added in explaining stock returns. This research conducted on all companies listed on the Indonesia Stock Exchange in 2013-2017. 308 samples were taken using random sampling method. The data analysis technique was simple linear regression. It was found that EVA and FVA as proxies of value added outperformed earnings. EVA is also found to be more associated with stock returns compared to FVA. The theoretical implication is in addition to references to further research regarding company performance measurement and stock returns. The practical implications is a matter of consideration for investors to make investment decisions and reference for corporate in financial decision making according to preferences of shareholders.
 Keywords: Earning, economic value added, financial value added, stock return, relative information content

Firm-specific investor sentiment and the stock market response to earnings news

We link accounting-based anomalies to investors’ behavioral biases and find that investors respond to earnings news differently according to sentiment. The stock price reaction to positive earnings surprises is significantly greater for firms with high sentiment, suggesting that investors are more optimistic about the expected cash flows included in good earnings news for firms with high sentiment. Investors only partially accept information in good earnings news that differs from their expectations for firms with low sentiment. For negative earnings surprises, stock price sensitivity is slightly higher for firms with low sentiment, but this effect is insignificant because investors only partially update their information from bad earnings news regardless of the sentiment level. We observe no difference in the information content of earnings news according to sentiment level that could induce the different stock price sensitivity patterns.

International Financial Reporting Standards adoption and information quality: Evidence from Brazil

AbstractThis paper examines whether the mandatory adoption of International Financial Reporting Standards (IFRS) in Brazil in 2010 has improved the value relevance of accounting information, information content of earnings, financial analyst forecasting activities, and liquidity. We examine the variables in the pre‐IFRS mandatory adoption sample period, considered herein as 2008 to 2009, and the post‐IFRS adoption period of 2011 to 2012. We provide evidence demonstrating improvement in value relevance of earnings and number of analysts following the firms in the period after IFRS adoption, but we do not find improvements in information content of earnings, accuracy in analyst forecasting, and liquidity in the post‐adoption period. Our findings suggest a positive relationship between IFRS adoption and some areas of information quality in Brazil. By focusing on one important economy as it takes significant steps toward full convergence with IFRS, our study contributes to the growing literature concerning the impact of IFRS adoption around the world.

Consolidated financial reporting and the effect of mandatory IFRS adoption on the information content of earnings announcements: evidence from Korea

ABSTRACT We examine the effect of mandatory IFRS adoption on the information content of earnings announcement in Korea, and its main driving factors. We find an increase in earnings information content with IFRS adoption; however, this increase is only weakly associated with the IFRS reconciliation adjustment, as a proxy for accounting rule differences. In contrast, we observe a strong association between the availability of consolidated financial statements and the increase in information content. Collectively, our analysis contributes to understanding the source of the IFRS effect, by providing new evidence of the crucial role of disclosure policy changes in consolidated reporting. Abbreviation: International Financial Accounting Standards (IFRS).