Market-based Accounting Research Research Articles

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

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

MANAJEMEN LABA, TATA KELOLA DAN NILAI PERUSAHAAN

The purpose of this study is to empirically determine the effect of earnings management and corporate governance practices on firm value. Modified Jones-based discretionary accruals are used as a proxy for earnings management. Firm value is measured by Tobin's Q and corporate governance is evaluated by independent commissioners, managerial ownership, institutional ownership, and auditor reputation. The study uses companies listed in Indonesia Stock Exchange for the 2017-2019 period. The main findings indicate that earnings management has a positive effect on firm value and institutional ownership is able to weaken the effect of earnings management on firm value. This study contributes to market-based accounting research and corporate governance.

THE EFFECT OF FIRM VALUE AND FINANCIAL PERFORMANCE ON EARNINGS MANAGEMENT IN SHARIA ISSUERS: EVIDENCE FROM THE INDONESIA STOCK EXCHANGE

Earnings management is still an interesting focus of research from year to year. Research does not only focus on conventionally based entities but also moves to Sharia entities. This study aims to investigate the effect of firm value and financial performance on earning management. From the 20 sharia issuers that were successfully analyzed as samples, we found that, in general, there is no strong evidence that Islamic issuers practice earnings management, this can be seen from the positive average discretionary accruals. Referring to the discussion of the influence of firm value as measured by Tobin’s Q on the practice of earnings management, it was concluded that firm value had a significant effect on earnings management practices. This research has two contributions. Firstly this research is expected to contribute to market-based accounting research. Secondly, this study provides evidence of earnings management practices for Islamic entities.

The Valuation Properties of the Rating to Economic Profit

The primary objectives of this paper are to critically analyze and extend a fundamentals-based investment criterion (HSBC’s Rating to Economic Profit – REP) and to examine its ability to justify analysts’ target prices. Although variations of this model are used extensively in practice, REP has mostly been ignored by academics. This study justifies the use of REP as an investment appraisal technique, provides significant extensions of the basic formula, and discusses implementation issues. It also conducts a content analysis of selected analysts’ reports, which may serve as insightful cases facilitating the work of valuation educators and practitioners. The authors provide some descriptive evidence of the usefulness of accrual accounting numbers over dividends for valuation purposes. Finally, the authors empirically show that analysts may use REP to justify their target prices, and offer estimates of the implied growth rates by reverse-engineering the growth-adjusted formula of REP. This paper should be of interest to empiricists in the area of market-based accounting research, valuation educators, and financial analysts. To the best of the authors’ knowledge, this is the first academic study that offers a comprehensive analysis of REP.

Value Relevance of International Financial Reporting Standard (IFRS) Based Accounting Information: Nigerian Stockbrokers’ Perception

Value relevance of accounting information is a well-researched market-based accounting research apparently calling for more empirical evidence into the perception of information users in the stock market. Therefore, this study examined the perception of the Nigerian stockbrokers regarding value relevance of International Financial Reporting Standards (IFRSs) based accounting information. The research data were drawn from 121 purposively selected stockbrokers at the Nigerian stock exchange using a Likert scale survey questionnaire and based on the exploratory paradigm. Relative importance index measure showed that earnings, net assets and cash flows from investment ranked first separately as critical variables while operating income, the book value of equity and net cash flows at the year-end ranked least accounting data for each statement respectively. Evidence from statistical analyses using one way contingency Chi-square test revealed that sampled stockbrokers perceive IFRS disclosure demands present accounting information better than Nigerian Statement of Accounting Standards (SASs). Further tests into the stockbrokers’ perception on value relevance of IFRS based income statement, financial position and cash flows statements accounting information showed that all tested accounting data are statistically value relevant. The results imply that accounting disclosure demands/standards drive value relevance more under IFRS regime than under Nigerian SAS. Thus, beyond earnings and book value according to Ohlson price model, value relevance of other accounting data should be explored while other users’ perception regarding this course should be investigated and compared in future studies.

The valuation implications of strategy in R&D-intensive industries

PurposeThe purpose of this paper is to investigate the valuation impact of firm’s strategic choices in a setting of intangibles-rich industries.Design/methodology/approachThe authors adopt the conceptual framework of Miles and Snow (1978, 2003), which identifies three viable types of firms based on their organizational strategy profiles: defenders, prospectors and analyzers. The authors use a replicable strategy score, whose scoring convention is based on rolling ratings of six ratios for the previous four years (Bentleyet al., 2013), to distinguish between prospector and defender strategies.FindingsThe authors offer empirical evidence that supports the hypothesis that prospector strategies are positively associated with firm value in the industries of electronics and electrical equipment, pharmaceuticals and biotechnology and technology hardware and equipment. The authors do not find evidence to support such a relationship in the software and computer services sector.Research limitations/implicationsThe results of this study have significant implications for researchers, who adopt a market-based accounting research framework to examine the characteristics, performance and valuation of firms with different strategic orientation.Practical implicationsThe findings of this paper are useful to managers, who would like to pursue a value-adding strategy in dynamic industrial environments that are characterized by high levels of innovation, risk and growth.Originality/valueAlthough previous studies have yielded mixed results with respect to the association between firm’s performance and prospector strategy, the authors identify a set of R&D-intensive industries, where the implementation of the prospector strategy adds significant value to the shareholders’ wealth.

Scale and Scale Effects in Market-Based Accounting Research

The nature of the data we usually encounter in market-based accounting research is such that the results of the regression of market capitalization on financial statement data are driven by a relatively small subset of the very largest firms in the sample. We refer to this overwhelming influence of the largest firms as the scale Firms with large price (and large per share accounting variables) have a similar effect. This effect is more than heteroscedasticity. It arises due to the non-linearity in the relation between market capitalization (price share) and the financial statement variables.

Mapping Market-Based Accounting Research in Indonesia: Graphics and Guidelines for Future Research

The purpose of this study is to describe the development of market based accounting research (MBAR) published in Indonesia for 10 years. This study attempts to explain the topics of MBAR, research method used, the variables, between-variable relationship formed, and the units analysis used in MBAR. This research uses qualitative-descriptive method to create descriptive models of MBAR articles published in accounting journals that have been accredited with minimum grade of B. The analysis of 109 MBAR articles of five accounting journals shows that 10 MBAR themes are still potential. Among three methods in MBAR, the multivariate association study is dominant. Some papers use intervening and moderating model to explore the relationship between accounting data and capital market reaction. The results for each theme are described in a research map that shows the relationship between variables (constructs) of MBAR from three units of analysis. This paper finds some implications to MBAR research agenda in the future, especially for meta-analysis research and triangulation research, due to many inconsistencies of the MBAR findings in Indonesia. In addition, accounting standard research topic is still promising in the moment of accounting standards transition.

Mapping Market-Based Accounting Research in Indonesia: Graphics and Guidelines for Future Research

The purpose of this study is to describe the development of market based accounting research (MBAR) published in Indonesia for 10 years. This study attempts to explain the topics of MBAR, research method used, the variables, between-variable relationship formed, and the units analysis used in MBAR. This research uses qualitative-descriptive method to create descriptive models of MBAR articles published in accounting journals that have been accredited with minimum grade of B. The analysis of 109 MBAR articles of five accounting journals shows that 10 MBAR themes are still potential. Among three methods in MBAR, the multivariate association study is dominant. Some papers use intervening and moderating model to explore the relationship between accounting data and capital market reaction. The results for each theme are described in a research map that shows the relationship between variables (constructs) of MBAR from three units of analysis. This paper finds some implications to MBAR research agenda in the future, especially for meta-analysis research and triangulation research, due to many inconsistencies of the MBAR findings in Indonesia. In addition, accounting standard research topic is still promising in the moment of accounting standards transition.

The Effects of Hybrid Financial Instruments Under the Market-Based Accounting Research Perspective: Empirical Evidence from a Cross-Country Approach

The purpose of this study was to evaluate the effects of hybrid financial instruments in market-based accounting research. Thus, value relevance and timeliness models were used to determine how the accounting figures are assimilated by stock prices and returns (Ohlson, 1995; Aboody et al., 1999; Lopes & Walker, 2012). Additionally, the relationships between these bonds and the cost of capital, financial leverage, and the effective tax rate were observed, all of which are crucial to this fundraising tool (Lee & Figlewicz, 1999). The methodological approach was composed of two samples: (1) the interest group, formed by 39 companies that issued hybrid instruments in 10 different jurisdictions; and (2) the control group, comprised of 107 organizations domiciled in the same jurisdictions and having a similar equity composition to the interest group. The observations, collected quarterly from December 2005 to December 2015, totaled 3,386. The findings indicated that the hybrid financial instruments affected the stock prices and returns of the issuers in a positive and statistically significant way, much like other equity elements (e.g., book value per share and earnings per share). Concerning the determinant factors for the issuance of these bonds, it was found that the issuers had a higher cost of capital, more financial leverage, and a lower effective tax rate than the non-issuers. Therefore, it can be concluded that, while new forms of contracts for obtaining resources, such as hybrid financial instruments, are relevant for the financing of business activities, it is essential that accounting models faithfully represent the economic nature of these instruments in order to prevent biases from occurring among the users of financial statements.

Do accrual minimise (maximise) stock risk (return)?: evidence from Indonesia

This study investigates the ability of accruals as earnings component to explain stock risk and its return. We believe managers use accruals to maximise firms' value through minimising stock risk and maximising stock return. Using Indonesian data, we find a negative relation between total accruals to stock risk, especially for loss and small firms. We also present a positive relation between total accruals to abnormal return, particularly in profit and large firms. Those phenomena indicate that investors use higher accruals to produce lower stock risk and higher abnormal return. This study contributes to market-based accounting research.

Book Reviews

Book Reviews

Incremental Information Content of Cash Flow and Earnings in the Iranian Capital Market

Purpose - This study aims to examine the incremental information content of cash flw from operations and earnings in the Iranian capital market. Design, methodology, and approach - Based on market-based accounting research, this study uses statistical associations between accounting data (earnings and cash flw) and stock returns to assess/measure the incremental information content (value relevance) of cash flw and earnings. A multivariate regression model based on panel data is used to examine the incremental information content of earnings and cash flow from operations. Results - The results show that both earnings and cash flow from operations have incremental information content beyond each other. These results are consistent with the findings of recent studies. Overall, the fidings of this study support the usefulness of cash flw information in addition to earnings, in fim valuation by investors in the Iranian market. Conclusions - The study makes the following contributions to the Iranian literature on incremental information content of cash flw and earnings. First, this study employs actual cash flw data derived from cash flw statements. Second, this study employs a large sample size for a more recent period.

Value-Relevance of Financial and Non-Financial Information for the Publicly Traded Internet-Based Companies in the Post-Sarbanes-Oxley Period

This research is a value-relevance research and constitutes a part of the Market-based Accounting Research (MBAR).It examines the relationship between the market value of Internet-based companies from the NASDAQ QNET index and different financial and non-financial value-drivers.The period examined is from Q1 2009 to Q2 2010. Financial components considered are book value, profit, operating cash flow, R&D and SG&A expenses as well as earnings before interest, taxes, depreciation/amortization (EBIT). The non-financial item used is Alexa rank which is a composite Internet metric based on web traffic, page views and other popular non-financial metrics examined in the previous research. The Ordinary Least Square (OLS) regression analysis is used to examine these relationships. The book value of equity and R&D expense are found to be value-relevant in line with the previous research done in 1999-2002. SG&A expense is not found to be value-relevant in this study. The quality of data sets and transformations for the cash flow, profit and EBIT variables precluded coming to any definite conclusions regarding their value-relevance. The internet metric, Alexa rank, is not found to be value-relevant but the small sample size for this particular test as well as the short time period considered could be the reasons. Originally three hypotheses were proposed however it became possible to expand the models to include two additional hypotheses. This ensured a more extensive value-relevance analysis for different components of financial statements.

Accruals quality vis-à-vis disclosure quality: Substitutes or complements?

The impact of accruals quality and disclosure quality on stock returns is a topical issue in market-based accounting research. Most of the debate is centred on their incremental ability to predict future earnings. Recent studies suggest that higher information risk proxied by either lower accruals quality or lower disclosure quality results in higher stock returns. This paper examines the relationship between accruals quality and disclosure quality, and investigates whether they are complements or substitutes in explaining the time-series variation in portfolio returns. Applying portfolio groupings, we find a positive association between accruals quality and disclosure quality, suggesting that firms with higher disclosure quality engage less in earnings management and have higher accruals quality. Asset pricing tests show that an accruals quality factor and a disclosure quality factor explain the time-series variation in the excess returns of similar sets of portfolios. This suggests that they contain similar information and confirms the substitutive nature of accruals quality and disclosure quality factors.

Endogenous problems in cross-sectional valuation models based on accounting information

The main purpose of this paper is to deal with the analysis of the scale effect in the value-relevance of accounting numbers. We examine the impacts of widely used deflators on the adjustment of scale effect. We find that most of the usual deflators employed in the literature generate endogeneity problems. In this paper we recommend the use of exogenous deflator such as the number of employees in market-based accounting research models. This alternative deflator produces, at least for the USA and Canada data, slightly better statistical results than other (endogenous) deflators such as the market value, the book value of equity, or the total assets.

Validitas Empiris Model Valuasi Ohlson (1995)

This research tests the empirical validity of Ohlson (1995) valuation model by evaluating whether its valuation results explain market prices. Unlike previous researches that violated the model's assumption, which led to questionable conclusion, this research satisfies its assumptions regarding the calculation of abnormal earnings, which involves the clean surplus relation and risk-free discount rate, and in the attributes of the model's parameters that should be unique for each firm. The reexamination of the validity of the model is important considering the fact that the model has been utilized as a theoretical basis in determining market-based accounting research variables, such as risk and cost of capital. The result of this research indicates that the valuation results of Ohlson (1995) model are positively associated with market prices. The valuation error of the model is less than the valuation error of book value, suggesting that the Ohlson (1995) model is better than book value in explaining price. Nevertheless, the valuation result is still significantly less that market price, the difference of which might be a result of errors in estimating the model's parameters or even a misspecification in the model. The differences between the model's valuation result and price, however, implies a still open opportunity to conduct fundamental accounting researches.

Security Returns and the Value Relevance of Accounting Data

INTRODUCTION Empirical market-based accounting research seeks evidence of the value relevance of accounting data via analysis of the relation between these data and various market variables. The decade of the 1990s witnessed an increasing use of price per share and market rate of return as the market variables of interest. The focus of this commentary is on regressions of price per share on the levels of various financial statement data (referred to herein as “price-levels regressions”) and regressions of returns on changes in these financial statement variables (referred to herein as “returns regressions”). The main points in the commentary are:

Share price anticipation of earnings and management's discussion of operations and financing

This paper combines research on the measurement of disclosure quality and the measurement of share price anticipation of earnings to produce a new test of the usefulness of the information disclosed in management discussions of operations and financing for predicting future earnings. Market-Based Accounting Research has shown that earnings changes are anticipated and impounded in prices well before the financial year for which earnings are reported. This price anticipation leads to downward biased earnings response coefficients (ERCs) in the commonly estimated regression model of returns on contemporaneous earnings changes. We exploit predictable differences in the biasedness of the ERC estimate across firm-years to test the hypothesis that share prices are better informed when the annual report contains a detailed discussion of the firm's operations and financing. Our results suggest that such voluntary disclosure may have been useful in predicting future earnings changes. The effect would appear to be strongest (1) in models that examine one-period-ahead and two-period-ahead share price anticipation and (2) when we employ a disclosure index that captures forward-looking information.

An Analysis of a Free Cashflow Portfolio Investment Strategy

Many investment strategies are based on information derived from, or expectations related to, information in financial statements. Generally Accepted Accounting Practice (GAAP) are interpreted differently in various countries and this reduces the reliability of financial statements for international investors. This paper uses a market-based accounting research (MBAR) framework to examine an investment strategy for portfolio selection in domestic (South African) and foreign (African) equities. The strategy is based primarily on free cash flow and reduces reliance on the varied conventions of preparation of financial statements. The investment strategy selects firms that consistently generate free cash flows, have low free cash flow multiples, and low financial leverage. On average the selected equities in the domestic and foreign portfolios have systematic risks that are less than one, so without additional risk, the investment strategy yields higher returns than an international investment index. Further findings are that a domestic portfolio of Johannesburg Stock Exchange (JSE) listed equities designed with the same criteria as the foreign portfolio also earns returns that exceed the JSE Actuaries Overall Index (JSEAOI). African Journal of Finance and Management Vol.7(2) 1999:1-12