Negative Earnings Research Articles

Who is Resilient in a Time of Crisis? The Importance of Financial and Non-Financial Resources

We identify the individual resources that predicted psychological resilience during the COVID-19 lockdown. Using UK data, we compare psychological distress observed before COVID-19 with distress measured in April, May, and June 2020. After matching respondents on key characteristics, we find that the most important predictor of resilience is non-cognitive skills, as measured by self-efficacy. Self-efficacy also reduces the psychological effects of negative earnings shocks. Neither income, wealth, cognitive ability, nor social capital predicted resilience. Our findings hold when comparing differences between household members. These findings support investments in non-cognitive skill development in order to reduce the damage-function from adverse events.

Tweeting in the Dark: Corporate Tweeting and Information Diffusion

Is there a link between corporate information dissemination on social media and valuations? Are social media reshaping the diffusion of corporate information? After constructing a novel and comprehensive data-set of over 7 million tweets posted by S&P 1500 firms, I adopt text analysis methods and find that firms with negative earnings surprises have higher announcement returns if they tweet about earnings news. This result is concentrated among firms with higher retail investor ownership and larger social media networks. I also find evidence that firm-initiated tweets increase investors' fundamental information acquisition and the speed of information diffusion to investors. The findings are consistent with firms managing investors expectations and utilizing social media to expedite the diffusion of corporate information, encouraging more efficient market reactions.

Firm Life Stage and Earnings Announcement Reactions

Prior literature documents that corporate decisions are influenced by firm life stage, yet whether firm life stage affects investors’ reactions is not well understood. Using a cash flow-based life stage classification, this study finds that investors’ reactions to earnings announcements differ by firm life stage. Introduction and decline stage companies exhibit three-day cumulative abnormal returns (CARs) around earnings announcements that are at least 112 bps lower than firms in growth, maturity, and shake-out stages. Specifically, introduction and decline stage stocks exhibit less positive reactions to positive earnings surprises and more negative reactions to negative earnings surprises relative to companies in other life stages. Lottery stocks’ excess returns around earnings announcements (Liu, Wang, Yu, and Zhao 2020) also vary based on firm life stage. Our findings suggest that noise/retail traders’ overoptimistic expectations for introduction and decline stage stocks are met with disappointment when value-relevant earnings news is released. This study demonstrates that firm life stage has real implications for stock price reactions to earnings announcements in financial markets.

Number of Numbers: Does Quantitative Disclosure Reduce Uncertainty in Quarterly Earnings Conference Calls?

Theoretical research argues that numbers convey more precise information than words. Based on this work, we hypothesize that when managers provide disclosure with a greater proportion of quantitative information, information risk will decrease and firm value will increase. We offer three main findings. First, after controlling for the cash flow news in earnings conference calls, we find a positive association between the extent of hard information (i.e., numerical disclosure) and short-window stock returns around the call. This result suggests that information risk decreases when managers provide greater numerical disclosure. Second, we find that this positive association is larger when firms’ information environment is otherwise poor. Finally, we find that this positive association is larger when uncertainty about firm performance is higher (i.e., when the firm issues a negative earnings surprise). Overall, our results suggest that investors react to the extent of hard information (i.e., numerical disclosure) in earnings conference calls.

A Temporal Analysis of Expectation Management: Evidence from Public Management Earnings Forecasts

We investigate the time trend of expectation management through management earnings forecasts to avoid negative earnings surprise. We find that the percentage of firms missing analyst earnings target before downward management guidance but meeting revised analyst earnings target have more than tripled from 5.5% in 1995 to 20.0% in 2014. We also show increase of both the magnitude of pessimistic management forecast bias and analysts’ tendency to converge to management guidance, two potential explanations for increasing expectation management. Additional analysis indicates that the increase in analyst convergence is more prominent for firms with larger downward bias in previous management forecasts.

Are earnings predictable?

We find that market reactions to earnings announcements can be predictable. Four-factor abnormal returns to earnings announcements that follow buyback announcements are higher by 5.1% than similar returns to earnings announcements that follow equity issues over the (− 1,+ 30) window; the difference is 2.2% when unadjusted returns are used. The magnitude is large and economically and statistically significant. The drift in these returns is unrelated and distinct from the post-earnings announcement drift. For example, we find positive drift for firms making buyback announcements even when they exhibit negative earnings surprises and find negative drift for firms issuing equity even when they show positive earnings surprises. Since the study looks at short periods around earnings announcements, it does not suffer from benchmarking errors that may influence long-horizon returns.

DOES CORPORATE SOCIAL RESPONSIBILITY AFFECT EARNINGS MANAGEMENT? EVIDENCE FROM THE INDONESIAN BANKING INDUSTRY

This paper aims at examining the effect of corporate social responsibility on earnings management in the Indonesian banking industry. Using Indonesian publicly listed banking firms in the years of 2013–2015 as the sample, we generate 94 firm-year observations as the final sample. The results show that corporate social responsibility positively affects earnings management, suggesting that the higher the corporate social responsibility score, the greater earnings management. Further, the study investigates the effects of corporate social responsibility on absolute earnings management, positive earnings management, and negative earnings management. The results robustly demonstrate the positive effects of corporate social responsibility on earnings management. Thus, this study implies that investors need to be cautious of banks that engage in higher corporate social responsibility because they are more likely to exhibit greater earnings management. While most of the previous studies in this issue focus on developed countries as their research settings, this study provides empirical evidence on the relationship between corporate social responsibility in Indonesia as an emerging market.

Pengaruh Earnings Variability, Ukuran Perusahaan, Dan Negative Earnings Terhadap Biaya Utang

The purpose of this research is to analyze the effect of earnings variability, firm size, and negative earnings on cost of debt.This research is conducted by using 267 samples of manufacturing companies listed in Indonesia Stock Exchange in the period of 2015–2017,using purposive sampling method and processed with EViews 10 program. The result of partially test (t test) shows thatearnings variability, firm size, and negative earnings have significant effect on cost of debt. This study also shows that earnings variability, firm size, and negative earnings have a significant effect on cost of debt simultaneously

Disagreement in the Equity Options Market and Stock Returns

We estimate investor disagreement from synthetic long and short stock trades in the equity options market. We show that high disagreement predicts low stock returns after positive earnings surprises and high stock returns after negative earnings surprises. The negative effect is stronger for high-beta stocks and stocks that are more difficult to sell short. In the cross-section of all stocks and the subset of the 500 largest companies, high disagreement robustly predicts low monthly and weekly stock returns.

Analyst Contrarianism

ABSTRACTWe examine a specific form of what we term analyst contrarianism. We define contrarianism as cases where an analyst expresses a summary opinion contrary to the direction of a given earnings surprise or revision. Distinct from analyst optimism or boldness, we document that analysts interpret negative (positive) earnings news in a positive (negative) light in approximately 11–15 percent of reports. We conjecture that some analysts look for opportunities to make a contrarian stock call for their clients in order to gain visibility, recognition, and career advancement. Our empirical evidence, which is supported by analyst interviews and content analysis of analyst reports, shows that: (1) analysts at non-top-tier brokerage houses are more likely to make a contrarian call, (2) analyst reports that contain contrarian opinions are associated with greater market reactions, and (3) contrarian analysts are more likely to exhibit career advancement.JEL Classifications: G41; M41.

When More Or Less Is Less: Managers’ Clichés

In their communications with the public, company managers disclose internal information, sometimes unwittingly. Prior studies have documented that the tone change in earnings conference calls can help predict future excess returns. Similarly, managers who use euphemisms on earnings calls to describe negative performance (think “headwinds”) essentially convey negative information to investors, and their stock is negatively affected. This study investigates another mechanism to identify management’s hedging (or obfuscation): the use of clichés. In this article, the authors identify the most frequently used clichés in earnings calls and examine whether investors react negatively to them. They find that managers use more clichés when performance is bad, and investors correctly react negatively to clichés, even after controlling for negative earnings news and the general tone of the earnings conference call. They also find that a hedge portfolio consisting of long positions in companies that used no clichés and short positions in companies that used at least four clichés earned an average of 2% per month and had a statistically significant intercept of 40 bps monthly after controlling for the five-factor Fama–French model. <b>TOPICS:</b>Security analysis and valuation, quantitative methods, factors, risk premia, performance measurement

Strategic timing of corporate insiders when trading at earnings announcements

This paper provides new evidence that insiders exploit their stock’s mispricing after earnings announcements rather than their foreknowledge of future cash flows to make profitable trades. Insiders buy and sell more intensively shortly after the publication of earnings (from day 0 to +5) in response to market reaction to earnings announcement, and the explanatory power is higher relative to book-to-market and long-term past returns. Also, in line with insiders trading on mispricing, insiders’ purchases and sales are profitable both after positive and negative earnings surprises, which indicates that their trading strategies are superior to simple contrarian or momentum strategies.

Do Managers Bias their Forecasts of Future Earnings in Response to their Firm’s Current Earnings Announcement Surprises?

The vast majority of managers’ earnings forecasts are issued concurrently (i.e., “bundled”) with their firm’s current earnings announcement. We document a predictable bias in these forecasts – the forecasts fail to fully reflect the persistence of the current earnings surprise. Specifically, we find that managers issue (1) optimistically biased forecasts alongside negative earnings surprises and (2) pessimistically biased forecasts alongside large positive earnings surprises. Bayesian updating implies this bias could be unintentional, but we find that the bias is stronger when managers have greater incentives and fewer constraints to issue biased forecasts, suggesting that, to some extent, the bias might be intentional. Relatedly, although managers typically have better information about their firm’s earnings than analysts, we show that analyst reliance on these biased management forecasts represents a mechanism (and an alternative interpretation) for a similar analyst underreaction to current earnings attributed in prior literature to analysts’ cognitive bias. We also find that, on average, investors do not appear to initially understand the bias in these forecasts but eventually unravel it over longer windows. However, investors more quickly unravel the bias when the manager has a history of issuing these biased forecasts and when the firm has relatively more sophisticated investors. Overall, we document that managers’ forecasts appear to repeatedly underweight the persistence of current earnings surprises, are biased in ways that improve investors’ perceptions of managers’ ability, and that this behavior concentrates in subsamples where outsiders have a harder time recognizing any bias.

Aggregate earnings and gross domestic product: International evidence

ABSTRACTRecent studies in macro accounting suggest that changes in aggregate accounting earnings can predict quarterly GDP growth in the USA. Our objective in this study is to test the robustness of the association between aggregate earnings and real GDP growth across multiple countries and for different definitions of aggregate earnings. We test whether aggregate earnings changes predict future economic growth in eight countries – Australia, Canada, China, India, Japan, South Korea, the UK, and the USA. We find positive evidence regarding the generalisability of the aggregate earnings – real GDP relation in an international context. In additional tests, we find that economic forecasters appear to underreact to aggregate earnings information. Our results show that aggregate earnings lead economic growth and forecasts of real GDP growth can be improved by incorporating aggregate earnings information. Further, we also test if negative earnings changes contain more information than positive earnings changes and find only modest evidence in favour of this hypothesis. The results are robust to alternative statistical methodology and the removal of the USA data from the sample.

The relationship insurance role of financial conglomerates: Evidence from earnings announcements

This paper uses earnings announcements to analyze the trading behavior and associated price impacts of institutions that have a lending or underwriting relationship with client firms and also hold client firms' shares. Buying support from relationship institutions mitigates the negative impact of earnings surprises on client firms' stock prices, predicts subsequent negative earnings surprises, and is also associated with less selling by independent institutions holding the same firms' shares. Price reactions for firms without relationship institutions are significantly larger. Price support from relationship institutions appears to help resolve uncertainty accompanying clients' temporary earnings shocks, thus reducing noise in the capital markets.

Preliminary Earnings Estimate and Dividends Payout Ratio: A Comparison Study on High-Tech vs. Low-Tech Industries

본 연구는 2012년부터 2017년까지 국내 상장기업들을 대상으로 첨단산업군 기업(이하 첨단기업)들과 비첨단산업군 기업(이하 일반기업)들을 구분하여 기업의 배당성향을 비교 분석하였다. 아울러 첨단기업들이 사전공시한 잠정이익과 회계감사 이후 확정되는 확정이익의 차이인 잠정이익공시오차에 따라 기업의 배당성향이 어떻게 다른지 실증 분석하였다. 분석결과, 일반기업들은 잠정이익을 확정이익보다 과대하게 공시하고, 첨단기업들은 오히려 축소하여 공시하는 경향이 있는 것으로 나타났다. 이는 첨단기업들이 잠정이익을 과대공시하여 확정이익이 잠정이익에 미달하는 경우, 부정적 어닝 서프라이즈(negative earnings surprise)에 상대적으로 더 큰 부담을 갖는다는 것을 시사한다. 첨단기업은 일반기업보다 투자에 대한 욕구가 강하고 외부자금 조달비용이 많이 들어서 될 수 있으면 현금배당을 줄여 초과현금을 사내에 보유하려는 경향이 있다는 사실도 확인할 수 있었다. 첨단기업의 잠정이익공시오차와 배당성향의 인과관계를 분석한 결과, 기업이 잠정이익을 과소하게 공시할수록 현금배당금이 감소하는 것으로 나타났다. 이는 새로운 투자수요가 상대적으로 큰 첨단기업들이 사전에 잠정이익을 보수적으로 공시하면서 주주들의 배당에 대한 기대심리를 낮추어 현금배당을 적게 하려는 의사결정으로 판단된다. 본 연구는 일반기업의 잠정이익 과대공시 경향에 대한 기존연구들의 관점에서 벗어나 첨단기업의 배당성향과 잠정이익 과소공시 수준의 인과관계를 규명하였다.This paper examines firms’ dividends payout ratios and preliminary earnings in high and low-technology industries. Furthermore, this paper studies how errors in preliminary earnings of high-tech companies, which is a difference between the finalized actual earnings and preliminary earnings estimate, affect their dividend payout ratios. From the study of Korean public companies between 2012 and 2017, it is revealed that high-tech firms tend to understate their preliminary earnings while low-tech firms tend to report higher preliminary earnings than their actual earnings. The implication is that, compared to low-tech corporations, high-tech firms are more vulnerable to negative earnings surprises due to overly optimistic preliminary earnings disclosure. Moreover, because high-tech firms are more likely to have greater investment opportunities and to incur increased external funding costs, they are thereby incentivized to maintain more cash within the company. They achieve this by decreasing their cash dividends to lower market expectations based on conservative preliminary earnings announcements. On the basis of empirical tests, this paper presents the amount of cash dividends decreases as firms understate their preliminary earnings.

Active fund managers and earnings management at portfolio companies

Purpose This paper aims to examine the association between the types of mutual funds, i.e. active versus passive, and the level of earnings manipulation in companies that comprise their stock portfolios. Design/methodology/approach The authors use Cremers and Petajisto’s (2009) classification of mutual funds by active share and tracking error volatility to differentiate between active and passive mutual funds. To assess the extent of earnings quality at portfolio companies, the authors measure accruals earnings management and real earnings management. Findings The authors find that the portfolio firms held by active fund managers exhibit lower levels of earnings manipulation. The inverse relationship between earnings management and fund holdings is more pronounced at higher levels of active share selection among concentrated active fund managers. Practical implications The degree to which earnings management influences mutual funds’ investment behavior has significant implications for the stability of the US stock market. Based on the findings that earnings management at portfolio companies serves as a potential instrument to guide funds’ investment decisions, future research would examine how these investment preferences exert price pressure (if any) on the stock of the portfolio companies. It would also help to ascertain whether the investment preferences of fund managers with respect to earnings management help to render the stock market more or less efficient. Originality/value This paper contributes to the understanding of how actively managed funds perform stock selection. Earnings manipulation leads to negative earnings quality that would inhibit stock performance over time. Active fund managers, who dynamically manage their exposures to systematic and stock-specific risks (in their attempt to outperform their benchmark index), target firms that manage earnings less to form part of their investment portfolios.

Leases and Over-investment

What factors enhance investment efficiency in leased assets, and what incentives give rise to over-investments? If firms over-invest in leases, what economic consequences arise? We develop a model of expected investment in leased assets, and use the residuals from the model as proxies for inefficient investments. We find that, in contrast to investments in capital expenditures, leasing appears to be a mechanism for over-investment even among firms with high reporting quality and negative free cash flows. Examining economic consequences, we predict and find that over-investments in leased assets trigger increasing future sales growth but declining future earnings growth for as long as three years ahead. We also find a negative relation with contemporaneous stock returns, suggesting investors view over-investments in leases as value destructive. Finally, despite negative earnings and returns consequences, we find that over-investments in leases are associated with higher CEO compensation driven primarily by future sales growth. Our results should inform investors, board members, and researchers interested in investment efficiency, corporate governance, and leases.

Dividend payout among Nigerian firms: Do female directors matters?

This study explores how female director(s) affect the decision to pay dividend in the sub-Saharan Africa. The study specifically employs non-financial firms listed on the Nigerian Stock Exchange Market from 2009-2015 and logit regression as the technique for data analysis. The independent variable of interest in the study is female director. Consistent with the hypothesis, the study found strong association that firms with at least one female director on board are more likely to affect the payment of dividends. The findings subsist after the commencement of the 2011 CCG and when firms with negative earnings were excluded from the main sample. Furthermore, the results do not change when the model was re-estimated using an alternative measure of female director as well as using OLS regression.

Readability of 10‐K Reports and Stock Price Crash Risk

ABSTRACTThis study shows that less readable 10‐K reports are associated with higher stock price crash risk. The results are consistent with the argument that managers can successfully hide adverse information by writing complex financial reports, which leads to stock price crashes when the hidden bad news accumulates and reaches a tipping point. Cross‐sectional analyses show that the effect of financial reporting complexity on crash risk is more pronounced for firms with persistent negative earnings news or transitory positive earnings news, greater chief executive officer stock option incentives, or lower litigation risk. Finally, accrual manipulation appears to be positively related to crash risk, even since the Sarbanes‐Oxley Act, if the manipulation is accompanied by complex 10‐K reports.