Quarterly Earnings Research Articles

Balancing the radical and the incremental: CEO affiliative humor and organizational ambidexterity

Organizational ambidexterity is positively associated with firm performance. Yet, it is difficult for CEOs to implement ambidextrous strategies as the radical and incremental innovations that underlie ambidexterity are seemingly incongruous. As such, an important task for both scholars and practitioners involves discerning which factors influence organizational ambidexterity. Building on incongruity theory, we address this puzzle by focusing on CEO affiliative humor, establishing its link with ambidexterity, and further developing and testing theory related to boundary conditions. Through videometric analysis of executive interviews, textual analysis of quarterly earnings calls, and a series of supplemental tests, we offer robust evidence for our study's key relationships. Our study thus makes several contributions, including shedding light on a new pathway—CEO affiliative humor—through which firms can carry out and manage the radical and incremental innovations that underlie ambidexterity, as well by highlighting the complementary role of the CEO-director interface in this regard.

Stock Splits Puzzle: An Additional Answer From Pre‐Split Earnings Announcements

ABSTRACTIf stock splits are used by managers to convey private information to the public, we hypothesize that the information content of splits should be related to the information managers reveal during quarterly earnings announcements. Supporting this hypothesis, we find that post‐split stock returns and operating earnings growth are positively correlated with the 5‐day returns around the last earnings announcement prior to the splits. This relationship holds even after controlling for different characteristics, including size, book‐to‐market, and momentum. These findings add new evidence to the rich literature on the signaling hypothesis regarding the motivation behind this corporate event.

Media Intervention and Cessation of Quarterly Earnings Guidance

Media Intervention and Cessation of Quarterly Earnings Guidance

The effect of ASC 606 adoption on value relevance of revenues: Early evidence

This study examines the effect of adopting the principle-based revenue recognition standard, i.e., ASC 606, on the value relevance of reported revenues. We hand-collect data on the cumulative effects of ASC 606 adoption on retained earnings to identify materially impacted firms. We find that, compared to firms not materially impacted by ASC 606 adoption, the value relevance of reported revenues has improved for firms materially impacted based on long-window tests, while the informativeness of reported revenues has not improved for firms materially impacted based on short-window tests around quarterly earnings announcements. We also find that analysts' revenue forecast revisions have increased incrementally for firms materially impacted by ASC 606 adoption. Overall, our results suggest that ASC 606 adoption has generally increased the value relevance and informativeness of reported revenues.

Do Financial Markets Care About Human Capital? Evidence from Quarterly Earnings Calls

Do Financial Markets Care About Human Capital? Evidence from Quarterly Earnings Calls

Investor response to engagement quality review hours

PurposeThis study aims to investigate whether mandated disclosure of engagement quality review hours provides new information that affects investors’ decision-making.Design/methodology/approachIn 2014, Korean authorities mandated that audit engagement quality review hours must be disclosed in their audit reports. Using this unique field setting in Korea, this study presents empirical evidence of the policy initiative’s effect on earnings reliability by examining both pre- and post-implementation periods.FindingsFollowing the initial disclosure of engagement quality review hours in 2014, the authors observe that the capital market’s valuation of quarterly earnings surprises, measured by earnings response coefficients (ERCs), was significantly lower for firms with high levels of abnormal engagement quality review hours than for other firms. This paper also finds that the observed association between engagement quality review hours and ERCs in the postregulation period hinges on the probability of earnings management, proxied by discretionary accruals and just meeting or beating analyst earnings forecast.Originality/valueThis paper suggests that the policy mandating disclosure of engagement quality review hours provides original information that the market considers relevant for appraising the reliability of reported earnings.

Financial Report Sentiment Analysis Using Loughran-mcdonald Dictionary and BERT

In the ever-changing world of financial markets, understanding investor behavior and making informed decisions relies heavily on sentiment analysis. This study delves into the integration of traditional techniques, such as the Loughran- McDonald dictionary, with advanced natural language processing (NLP) methods utilizing BERT (Bidirectional Encoder Representations from Transformers). The goal is to enhance the accuracy and depth of sentiment analysis in financial reports.To begin, we employ the specialized Loughran-McDonald dictionary designed for financial sentiment analysis. This lexicon includes domainspecific word lists for positive and negative sentiments, forming a solid foundation for sentiment scoring. Expanding on this foundation, we incorporate BERT, an advanced transformerbased NLP model. BERT’s contextual understanding of language and ability to capture intricate semantic relationships within financial texts aim to overcome the limitations of rule-based sentiment analysis. The methodology involves preprocessing financial reports, integrating Loughran-McDonald sentiment scores, and fine-tuning BERT for financial sentiment classification. This hybrid approach leverages both the domain expertise encoded in the dictionary and BERT’s contextual comprehension of financial jargon and nuances. We validate and evaluate our implementation using a diverse dataset comprising quarterly earnings releases, annual reports, and other relevant disclosures. Performance metrics such as precision, recall, and F1 score are analyzed to assess the effectiveness of our hybrid approach compared to individual methods. The findings have significant implications for financial analysts, investors, and policymakers by providing a more nuanced understanding of sentiment in financial reports. Our hybrid approach aims to offer improved accuracy in capturing sentiment polarity while facilitating more informed decision-making in today’s complex and dynamic realm of financial markets.

The Puzzle of UK (Under‐) Investment: Is Investment Short‐Termism Just a Supply‐Side Problem in Capital Markets?

AbstractInvestors and financial market intermediaries have been blamed for under‐investment, low growth and low rates of innovation in the UK, with their behaviour being attributed to short‐termism. Various reasons for short‐termism have been identified, including undervaluing long‐term earnings, increased financial obstacles associated with longer investment horizons, and the adoption of financial control systems to meet investors’ demands for quarterly earnings reports. As a result, firms may opt for suboptimal short‐term investment projects while neglecting potentially valuable long‐term initiatives. Most research has focused on large corporates, which constitute a small fraction of the economy and involve multiple stakeholders. There is a significant knowledge gap regarding small owner‐managed firms that rely primarily on internal financing and bank debt for investment. Our study fills this gap by analysing a comprehensive UK finance and investment decision‐making survey of 1501 firms across all classes. The survey reveals that investment appraisal relies on a ‘payback’ period. We find that 58.8% of firms choose a payback period of 3 years or less, with shorter payback periods more prominent among the smallest firms. This suggests that financial frictions impact the investment behaviour of the smallest firms, while shareholder‐driven short‐termism influences the largest firms but only in relation to research and development projects.

The Impact of Unexpected FOMC Actions on Corporate Earnings Expectations

This paper fills a gap in the literature by examining the impact of unexpected Federal Open Market Committee (FOMC) actions on the markets expectations of U.S. corporate earnings by examining the sell-side analysts' quarterly earnings forecasts from 1989 to 2022. This paper reveals a significant negative correlation between analysts' earnings forecasts and unexpected changes in the target interest rate. This correlation weakened after the Federal Reserves implementation of Forward Guidance as a monetary tool in 2004, which appears to enhance the market's ability to predict target rate adjustments. In addition, this paper shows that with a given amount of unexpected target rate changes, value firms display greater earnings forecast revisions from analysts than growth firms. Debt levels or profitability factors cannot fully explain this phenomenon. The findings of this paper contribute to the knowledge of how FOMC actions exert influence on equity valuations and the transmission mechanisms of monetary policies.

Instantaneous audience responses: an organizational genre theory perspective

PurposeThe worldwide imposition of lockdown measures to control the 2020 coronavirus disease 2019 (COVID-19) outbreak has shifted most executive communications with external stakeholders online, resulting in quick responses from stakeholders. This study aims to understand how presentational styles exhibited in online communication induce immediate audience responses and empirically test the effectiveness of reactive impression management tactics.Design/methodology/approachThe authors analyze presentational styles using MP3 files containing executive utterances during earnings call conferences held by S&P 100-listed firms after June 2020, the quarter after the World Health Organization declared the COVID-19 outbreak a pandemic on March 11, 2020. Using timestamps, the authors link each utterance to a 1-minute interval change in the ask/bid prices of the stocks that occurs a minute after the corresponding utterance begins.FindingsExhibiting an informational presentation style in earnings calls leads to positive and immediate audience responses. Managers tend to increase their reliance on promotional presentation styles rather than on informational ones when quarterly earnings exceed market forecasts.Originality/valueDrawing on organizational genre theory, this research identifies the discrepancy between the presentation styles that audiences positively respond to and those that managers tend to exhibit in earnings calls and provides a reactive impression management typology for immediate responses from online audiences.

Does environmental and social performance affect pricing efficiency? Evidence from earnings conference call tones

This paper examines how environmental and social (ES) performance, proxied by related incidents, affect the managerial and analyst tones in quarterly earnings conference calls and its incremental effect on post-earnings call returns. We document that firms experiencing poor ES performance in the quarter prior to the earnings call exhibit more negative management tone after controlling for quarterly financial performance metrics. Tone difference in conference calls between managers and analysts predicts negative abnormal returns in the three-day window around the call. In the 60-day post-call period, we show that firms with poor ES performance exhibit returns negatively related to the tone difference on the conference call – low tone difference leads to return continuation and high tone difference predicts reversals for firms with positive earnings surprises. These results are consistent with an increase in information asymmetry and lower transparency for firms following poor ES performance.

Practical Applications of How Do Corporate Managers Explain Quarterly Earnings?

Practical Applications of How Do Corporate Managers Explain Quarterly Earnings?

Gender difference in CFO communication: Evidence from earnings calls

We examine gender differences in the language of CFOs who participate in quarterly earnings calls. Female executives are more concise and less optimistic, are clearer, use fewer idioms or clichés, and provide more numbers in their speech compared to their male counterparts. These differences are associated with more positive immediate market reactions and correlate with CFOs’ overconfidence, conservatism, and ethical standards.

IRS Enforcement and Voluntary Tax Disclosure

ABSTRACT Although voluntary tax disclosures can improve firms’ information environments and reduce financial statement users’ costs of processing complex tax information, they can also inform tax authorities about tax avoidance strategies. This study explores the content of voluntary tax disclosures during quarterly earnings announcements and conference calls to examine the effect of IRS enforcement on managers’ voluntary tax disclosure decisions. We estimate a negative relation between IRS enforcement and voluntary tax disclosures that is concentrated in the subset of firms with high levels of tax avoidance. These results are consistent with managers having concerns about the potential costs of voluntary disclosures to tax authorities. In supplemental analysis, we find results consistent with voluntary tax disclosures benefiting analysts, but at the cost of increasing IRS attention. Collectively, our results suggest an unintended negative effect of IRS enforcement on the information environment. Data Availability: Data are available from the sources cited in the text. JEL Classifications: H25; M41; M48.

Earnings predictability or truthfulness? Which one investors care more about

Purpose This study aims to investigate the impact of earnings predictability and truthfulness on nonprofessional investors’ investment willingness. Design/methodology/approach Earnings predictability is captured by quarterly earnings autocorrelation, and earnings truthfulness is indicated by real earnings management (REM). The average of investment attractiveness and willingness measures investment willingness. The authors use experiments to isolate the impact of quarterly earnings autocorrelation and REM on investors’ investment behaviors. Findings From the 2 × 2 design, the authors observe that investors weight more on earnings predictability than earnings truthfulness. Research limitations/implications The generalization of the findings may be constrained for the following reasons. First, the authors use only one proxy, REM, to measure earnings truthfulness. In addition, the authors provide the participants, Amazon Mechanical Turk, with earnings predictability. Results may no longer hold if each participant has different understanding and analysis of earnings predictability. Practical implications In periods of unprecedented and severe financial uncertainty (i.e. the COVID-19 pandemic), investors rely more on earnings predictability than on earnings truthfulness. The study assists managers to strategically emphasize the predictability of earnings to attract investors, especially when firms face financial challenges or uncertainty. Social implications This study contributes to understanding investor behavior and the critical role of earnings predictability and truthfulness in shaping investment decisions. Originality/value This paper contributes to the literature of earnings properties in financial reporting, particularly by shedding light on the nuanced interplay between earnings predictability and earnings truthfulness. The research also demonstrates that elevated earnings autocorrelation indirectly stimulates investment willingness by enhancing the investors’ perception of earnings persistence of targeted firms.

Monthly income patterns and earnings management in banking

ABSTRACT This study makes use of 38,070 loan portfolio-month observations in the 2009–2017 recessionary period and investigates whether monthly loan portfolio income distribution patterns can indicate earnings management in banking. We find that discontinuous monthly income patterns throughout the year based on Gini estimations are clear telltale signs of reported income manipulation detected via a Regression Discontinuity Design. We highlight that banks manipulate reported income by varying their loan loss provisions and reversals throughout the year. Specifically, they increase provisioning in the early months and release them towards year-end. This monthly-based strategy is employed by bank managers to influence the annual financial numbers reported in year-end public financial statements. The study contributes to understanding how banks internally manage provisioning on-average within a year, revealing a key mechanism of earnings management in the banking sector. The study fills a significant research gap in the existing literature on bank earnings management, primarily focused on quarterly earnings research.

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.

Text-Based Measure of ESG Risk Exposure

Against the backdrop of increasing instability and uncertainty in the world economy, evaluating corporate ESG (Environmental, Social, and Governance) risks has become an important tool for enhancing resilience, effectively countering and mitigating external risks, and achieving sustainable development. In order to assess the magnitude of ESG risk disclosure at the corporate level, this paper first constructs dictionaries for the three dimensions of ESG using Word2vec model and a corpus consisting of ESG reports and ESG-related news. Secondly, a firm-level ESG risk disclosure measure is developed using quarterly earnings conference calls from 2017 to 2024. Subsequently, the validity of the measurement indicators is verified through a review of human reading of phrase-level surface validity and excerpt snippets. Finally, the patterns of corporate ESG risk disclosure are demonstrated from both industry and time perspectives. These results indicate that text-based measurements provide a reliable quantification of corporate-level ESG risk exposure. By measuring corporate ESG risks, potential risks in environmental, social, and governance aspects can be timely identified, thus contributing to proactive risk management.

Do Firms Get “Stuck” Issuing Quarterly Earnings Guidance?

Do Firms Get “Stuck” Issuing Quarterly Earnings Guidance?

Equity market responses to surprise Covid-19 lockdowns: The role of pandemic-driven uncertainty

The onset of the Covid-19 pandemic raised questions about identifying and measuring vulnerabilities in non-financial firms in response to large shocks. Applying natural language processing on quarterly earnings call reports, we construct a firm-specific measure of concern about the pandemic for a set of Indian non-financial firms. Compared to their peers, firms with early concern about the pandemic had worse equity responses after the announcement of a surprise, nationwide lockdown in March 2020. We extract the context of the pandemic-related discussions to disentangle the possible mechanisms. The differential returns can only be explained by higher information uncertainty about the impact of the pandemic and its implications for future cash flows.