Information Content Of Earnings Research Articles

Relationship Between Accounting Earnings, Cashflows and Stock Prices of Service Sector in Malaysia Stock Market

There had been evidences reported that the accounting earnings and cash flows have information content for stock valuation. However, it is still questionable on whether cash flows have incremental information content beyond earnings disclosures. This paper examines the relative information content of earnings and cash flows in explaining stock returns. By employing a sample of service companies from the years 2002 to 2013, the study adds evidence on the impact of accounting earnings and cash flows on annual stock returns of Malaysian public listed companies. Earnings are found to have more significant impact on stock returns and demonstrate a stronger degree of positive association with the stock returns. Among the three components cash flow, investing cash flows are found to have weak influence on the stock returns. The findings suggest that earnings have greater explanatory power for stock returns than cash flows and the cash flows have weak incremental information content beyond earnings. In general, the investors tend to value stock prices of the service companies using earnings rather than cash flows in the services sector.

IFRS 의무도입 후 이익 정보력이 재무분석가의 이익예측의 정확성에 미치는 영향

IFRS 의무도입 후 이익 정보력이 재무분석가의 이익예측의 정확성에 미치는 영향

Degree of Operating Leverage, Earnings Properties and the Information Content of Earnings

We investigate the relation between the usefulness of earnings and a firm’s cost structure. We document that firms with a greater proportion of fixed to variable costs, a higher degree of operating leverage, report more volatile earnings and are more likely to aggressively recognize revenue to meet earnings thresholds. We then show that the usefulness of earnings to external users decreases in the degree of operating leverage and that this decrease stems from the effect of cost structure on earnings volatility and aggressive revenue recognition. Our results illuminate how firm fundamentals influence a firm’s information environment and the usefulness of earnings to external users.

The Information Content of Earnings Following Restatements

This paper examines the information content of earnings following restatements of prior period earnings. Results indicate that the information content of earnings announcements declines in periods following a restatement, but that the loss of information content is temporary. In particular, the earnings response coefficients for earnings announcements surrounding a restatement exhibit a U-shaped pattern in which they return to pre-restatement levels over an average of four quarters, suggesting that the market's concern regarding subsequently reported earnings is somewhat transitory. The extent to which the earnings of restatement firms suffer a loss of information content varies across several dimensions. First, the loss of information content is greater for firms that restate earnings to correct revenue recognition errors than it is for other types of restatements. Second, the information content of earnings is significantly lower for firms that do not make changes to their financial reporting governance structure following a restatement relative to firms that initiate governance changes. Overall, the evidence presented in this paper is consistent with a short-term decline in investor confidence regarding financial reporting following restatements, but that recovery typically takes place within four quarters.

The Effect of Restatement Detection Speed on Reporting Credibility

A primary goal of the regulatory reforms enacted around the implementation of the Sarbanes-Oxley Act (SOX) was to improve the credibility of financial reporting. While earnings restatements resulting from accounting issues damaged investor trust prior to the implementation of SOX, we hypothesize that quicker detection of restatements in the post-SOX era should dampen investors’ skepticism that accounting problems will have long-lasting effects on reporting credibility. This study documents that irregularity-related restatements were detected more quickly after SOX, which is consistent with greater attention paid to reporting quality and higher levels of audit scrutiny. The results also show that investors have modest credibility concerns regarding firms that announced irregularity-related restatements in the post-SOX era, as the decline in the information content of earnings is short-lived and contagion effects for industry-peer firms are limited. However, this study shows that changes in reporting credibility are influenced by how quickly restatements are discovered and disclosed, as the adverse credibility effects are confined to accounting irregularities that have lengthy detection periods. The evidence from this study highlights the importance of monitoring mechanisms for discovering and resolving accounting irregularities quickly, as the market does not seem to have significant suspicions about ongoing reporting credibility for such firms.

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.

Voluntary disclosures and market response to earnings announcements

Purpose The aim of this paper is to investigate the impact of voluntary disclosure on information asymmetry between investors and the average information content of subsequent the earnings announcement. Design/methodology/approach The authors use empirical methodology relying on multiple regression analyses. The authors estimate models of trading volume and stock returns around the earnings’ release date as a function of voluntary disclosures, measured using information in the 8-K statements. Findings Voluntary disclosures prior to the earnings release date increase trading volume related to stock returns. In addition, voluntary disclosures also reduce stock price movement around that date. Research limitations/implications The results indicate that voluntary disclosures increase trading volume related to stock returns around the earnings release date. Such increases indicate increased differential precision among investors, demonstrating that voluntary disclosures increase differences in opinion among investors. The reduced stock price movement around the earnings release date also show that voluntary disclosures reduce the information content of earnings. One limitation is that the measure of voluntary disclosures does not consider the variation in the information content of individual disclosures. Practical implications Firms who make voluntary disclosures will need to carefully consider how to structure such releases to minimize asymmetry between investors. Investors should pay greater attention to finding out, and interpreting, voluntary disclosures by firms. Social implications Regulators have previously expressed concern about leveling the playing field between more and less informed investors. The results showing increased differences in information as a result of voluntary disclosures provide valuable insights as regulators debate the balance of mandated and voluntary disclosure. Originality/value This is the first study to investigate the effect of voluntary disclosures on information asymmetry among investors using trading volume and, consequently, the first to find increased differences among investors that result from those voluntary disclosures. The paper is also the first to use a direct measure of voluntary disclosure developed by Cooper et al. to demonstrate the negative relation between voluntary disclosure and the average informativeness of earnings announcements.

The Ebbing of Accrual Accounting

This paper investigates the evolution of accruals ability to improve the information content of earnings over cash flows, as reflected in market prices. We documented a pronounced decline in the price association of earnings relative to cash flows. We find that, after year 2000, cash flows have informed prices at least as much as earnings. We explain the decline in earnings price association through the decrease of the timing role of accruals related to “the growth in the frequency and the magnitude of non-timing accruals” (Bushman et al. 2016). Our results imply that this evolution of accruals has severely limited the information content of earnings and, consequently, significantly weakened the pertinence of accrual accounting to prices.

The Information Content of Earnings Announcements in Newly Public Firms (WITHDRAWN)

This study examines whether the Jumpstart Our Business Startups Act (JOBS Act) had any effect on the information content of earnings in newly public firms. The Act relaxes certain disclosure and re...

Audit quality during the global financial crisis: The investors’ perspective

In response to the concerns raised by the financial media and regulators about the audit quality around the recent global financial crisis (GFC), this study examines whether investors also perceived the audit quality to have declined during the GFC. Based on a sample of US firms over 2003–2009 and using the information content of earnings announcements as the proxy for the investors’ perception of the audit quality, we find evidence of an increase in the information content of earnings announcements during the GFC period compared to pre-GFC period. The subsample analysis shows an increase in the information content of earnings announcements for both the non-financial and financial firms. Our results also show that the increase in the information content of earnings announcements is not dependent on auditors’ size (Big 4 versus non-Big 4 auditors) or auditors’ independence (based on the level of audit, non-audit and total audit fee). Additional tests also reveal that the reported increase in the information content of earnings announcements are not driven by a general decline in the richness of information environment during the GFC. Overall, our results provide a strong evidence of an increase in the perceived quality of audits during the GFC for US firms non-financial and financial firms.

The Market Reaction to Earnings Announcements in Public Family Firms

This paper investigates the market reaction to earnings announcements in public family firms and whether this type of announcements affect firm’s return, liquidity and cost of capital, providing also evidence on whether family businesses differ from non-family ones in what concerns the earnings announcements effects. To do so, we analyse a sample of Portuguese listed firms for the period 2000-2013, using the event study and a panel data approach. Overall, we find no support for the earnings-signalling hypothesis and for the efficient markets hypothesis. In addition, we find no significant differences between family and non-family firms in what concerns performance. We conclude that ROA appears to fit better than ROE or MB to relate earnings and firm performance. The results show that firm’s size and age contribute positively to the firm’s performance. Finally, we find no evidence of a significant relationship between earnings changes and both the firm’s liquidity and weighted average cost of capital, giving no support for the pecking order theory. This study is of interest to scholars and practitioners in the finance field, namely the information content of earnings and the differences between listed family and non-family firms in what concerns the earnings announcements effects.

The effect of IFRS mandatory adoption on the information asymmetry

AbstractThis paper examines whether the mandatory adoption of IFRS/IAS in the European Union is beneficial in terms of the information content of earnings. The informational relevance of earnings was reflected by the level of information asymmetry measured by the cost of capital and the financial analysts’ forecasts. So, the article purpose is to study the impact of IFRS adoption on the cost of capital and on the financial analysts’ forecasts. Using an unbalanced panel data of firm—year observations spanning from 2002 to 2012, we hypothesize and empirically find the following. First, IFRS adoption represents a key determinant of information asymmetry reduction, as it contributes significantly to the decrease in the capital cost for the post-IFRS period. Second, the adoption of these international standards has significantly contributed to the improvement of financial analysts’ forecasts reflected by an enhancement of the forecasts properties, a decrease in dispersion and error. The results contribute to t...

Does Hedge Accounting Under SFAS 133 Increase the Information Content of Earnings: Evidence From the U.S. Oil and Gas Industry

This article examines the information content of reported earnings for a sample of U.S. oil and gas firms that use hedge accounting, under Statement of Financial Accounting Standards (SFAS) 133 and International Accounting Standard (IAS) 39. The study finds that for firms that use hedge accounting, earnings are more informative about firm value and risk exposure than firms that do not use hedge accounting. The study also finds that firms that use hedge accounting and are effectively using derivatives have higher firm value than other firms in the study sample. © 2016 Wiley Periodicals, Inc.

Compliance Costs and Book-Tax Conformity: Evidence from Audit Fees and Audit Quality

The decade-long debate on required book-tax conformity has centered on three areas: the information content of earnings, the incentive to engage in earnings management, and the costs of compliance. While the first two have been studied extensively, studies on the effect that conformity may have on compliance costs are limited to estimates of the effect that perfect conformity will have on tax-related compliance costs, a near tautology. This lack of research is perhaps attributable to the relative invariance in conformity within the United States and the relative unavailability of compliance-related data outside the United States. This study overcomes those limitations and fills the gap in the extant research by using an international sample of firms with manually collected audit fee data. We focus on audit fees as it is a more economically significant compliance cost with available data and where the effect of book-tax conformity has tension. Test results show that increased conformity is associated with greater audit fees. This provides evidence that the hypothesized decreases in tax-related compliance costs may be offset by increases in audit fees, implying that the actual reduction in compliance costs may be lower than previously thought. The results of a difference-in-differences test using the adoption of IFRS for consolidated purposes only as an exogenous shock to book-tax divergence shows consistent results and supports a causal prediction. We also find evidence that higher conformity is associated with higher fees paid for auditor-provided tax service, an increased likelihood the firm chooses its auditor to provide tax services, and higher audit quality.

Market Response toward Accrual Earnings Management, Real Transactions, and Strategic Revenue Recognition - Earnings Management1

This study investigates how the capital market response to a variety of earnings management tools i.e., accrual-based earnings management, real transaction activities, and strategic revenue recognition. We measure the market response to the information content of earnings by the earnings response coefficient (ERC). By using pooled-OLS regression from 748 firm-years data of public listed companies on the Indonesian Stock Exchange (IDX) in 2004-2009, we find some evidence of a negative association between earnings response coefficients and information content of earnings that contained earnings management. Our study find that real transactions earnings management in operating activities has negative association with earnings response coefficient, but we do not find any evidence from the other earnings management tools. The findings of this study imply that the market participants are able to capture a certain kind of earnings management behaviour that may reduce the earnings response coefficient.

The effect of the level of indebtedness on the earnings information content stemming from the mandatory IFRS adoption

<p>This paper examines the impact of IFRS / IAS (International Financial Reporting Standards / International Accounting Standards) mandatory adoption on the earning's information content apprehended by the level of information asymmetry and whether this impact differs from one company to another with regard to its level of indebtedness. The information asymmetry is measured by the properties of financial analysts’ forecasts (error and dispersion).This study is conducted over 11 years from 2002 to 2012 by taking as a sample all the companies that belong to the CAC all tradable indexes. The results show a significant effect of these international's standards on financial analysts' forecasts, which stress informational content improvement. In addition, high level of indebtedness associated with IFRS adoption reduces forecast dispersion. By contrast, low level of indebtedness associated with IFRS adoption reduces forecast error.</p>

Do IFRS‐Based Earnings Announcements Have More Information Content than Canadian GAAP‐Based Earnings Announcements?

AbstractUsing an event‐study methodology, this study investigates whether the information content of earnings announcements changed for firms traded on the Toronto Stock Exchange (TSX) and the Canadian Venture Exchange (TSXV) following mandatory adoption of International Financial Reporting Standards (IFRS) in Canada. A priori, it may be argued that the information content of earnings would increase for both TSX and TSXV firms if IFRS earnings provided more value‐relevant information than Canadian GAAP earnings. Increased value relevance of information provided by IFRS earnings would likely reflect increased measurement of changes in net asset values based on expectations as opposed to realizations. Because values based on expectations are subject to greater divergence of opinion than values based on realizations, greater value relevance is likely to be accompanied by higher abnormal return volatility and abnormal trading volume during announcement periods. Consistent with this argument, we find that abnormal volatility and abnormal volume during earnings announcement periods were higher in post‐IFRS announcement periods than in pre‐IFRS announcement periods for firms traded on the TSX. We discriminate across the two exchanges in terms of information quality based on the mix of institutional and retail investors, analyst following, concentration in the oil, gas and mining sectors, and size of firm. We test for a residual difference in information content based on the more speculative nature of the TSXV exchange and find some evidence that divergence of opinion was higher for TSXV firms than TSX firms in the pre‐IFRS period but this residual difference does not carry through to the post‐IFRS period.

The Relationship Between Conditional Accounting Conservatism Measure and The Information Content of Earnings & Equity Cost of Capital In Korean Stock Market

The Relationship Between Conditional Accounting Conservatism Measure and The Information Content of Earnings & Equity Cost of Capital In Korean Stock Market

The Timeliness of Restatement Disclosures and Financial Reporting Credibility

AbstractThis study investigates whether prompt discovery and disclosure of earnings restatements is associated with greater post‐restatement financial reporting credibility. We measure the timeliness of restatement detection by the length of time between the end of the misstated period and the subsequent restatement announcement. We document that shorter detection periods are significantly associated with high‐quality corporate governance characteristics and executive and/or auditor turnover, but not with characteristics of restatements. We also find that firms with shorter detection periods exhibit a more moderate decline in the information content of earnings following restatement announcements relative to firms with longer detection periods, and that detection period length has an incremental effect on the information content of earnings relative to executive and/or auditor turnover alone. In addition, we find that restatement disclosures are more timely following the implementation of the SOX‐era reforms, and that only firms with shorter detection periods experience more moderate post‐restatement declines in the information content of earnings following the implementation of the SOX‐era reforms. The results from this study suggest that the timeliness of restatement detection and disclosure is associated with greater financial reporting credibility following restatements.