Quarterly Earnings Research Articles

Not Like the Rest of Us? How CEO Celebrity Affects Quarterly Earnings Call Language

Not Like the Rest of Us? How CEO Celebrity Affects Quarterly Earnings Call Language

Quarterly earnings guidance and real earnings management

AbstractWe examine if quarterly earnings guidance induces real earnings management. Quarterly guidance may cause myopia and inefficient decision‐making, if managers become overly concerned with setting and beating short‐term earnings targets. We test these associations on a large sample of US firms. Our evidence suggests that quarterly guidance is informative and lowers myopic incentives. However, our analyses also reveal endogenous associations exist between guidance and real earnings management. In contrast with existing concerns over frequent guiders, we find that guidance appears problematic in infrequent guiders, and in firms that issue good news earnings guidance and that operate in settings where earnings pressures are high.

More than words: Can tone of consumer product reviews help predict firms’ fundamentals?

AbstractAlthough financial market participants are increasingly interested in the financial value of unstructured qualitative information regarding the prospects of a firm, empirical evidence remains sparse on the properties of qualitative content in consumer product reviews and their capital market implications. Using a broad sample of consumer reviews posted on Amazon.com, I examine whether the linguistic tone of aggregate consumer product reviews conveys information that is associated with firms’ sales, earnings, stock returns and risk. I find that aggregate review tone successfully predicts a firm's forthcoming quarterly sales. Moderating analyses show that this predictability is stronger for firms operating in a highly competitive environment. I further find that review tone predicts a firm's quarterly earnings surprises, abnormal stock returns and risk. A path analysis shows that the effect of review tone on stock prices is partially channeled through its effect on firms’ earnings. I finally find that negative review tone is more informative and useful than positive tone in predicting a firm's fundamentals. Importantly, these results hold after controlling for other review characteristics, including review rating, review volumeand review dispersion. Overall, my findings highlight the importance of considering the tone of consumer reviews when evaluating a firm's prospects and value.

Impact of COVID on Employment and Earnings of SNAP Employment and Training Participants

ABSTRACT COVID-19 has adversely affected the employment and earnings of many US workers, but little is known about its effects among low-income workers. We use Unemployed Insurance data, SNAP administrative records and longitudinal survey data collected in 10 states before and during the pandemic, along with innovative counterfactual modeling methods, to estimate its effect on labor market outcomes of individuals enrolled in the Supplemental Nutrition Assistance Program Employment and Training program. We find that COVID-19 decreased average quarterly employment by 13% and average quarterly earnings by 33%. We also find differences across subgroups defined by demographic, economic, and geographic characteristics.

The (un)Making of Digital IT Services? Category Work and the Dynamics of Plausible Categories

Our interpretive study of the contested rise of ‘digital’ services in the global information technology (IT) services industry during 2011-20 sheds light on how the ordinary and autonomous engagement of producers with a plausible category may shape the formation of the said category, i.e., its meaning and distinctiveness. Focusing on a subtler form of producer agency than the purposeful agency of category promoters often discussed in the existing literature, we analyze the claims made to the plausible ‘digital IT services’ category by eight IT services firms in their quarterly earnings calls over the span of a decade (2011-20). We argue that the articulation of category claims constitutes category work towards the settling or the unsettling of the meaning and the distinctiveness of the focal category. Apart from identifying four mechanisms (juxtaposition, projection, reproduction and revision) of such category work that is distinct from the better-understood and more conspicuous acts of category entrepreneurship, our study also contributes to developing a vocabulary to understand plausible categories which may linger in a liminal state of emergence and, thus, do not neatly align with the binary sensibility of emergence / non-emergence extant in the category formation literature.

Cash dividends, return on equity and earnings persistence

With reference to Ohlson’ model, we optimise earnings persistence model and express earnings persistence measure as a function of return on equity (R.O.E.), dividends payout ratio and other factors. Our theoretical model reveals that dividends payout ratio has little effect on the earnings persistence, while R.O.E. has a decisive effect on earnings persistence. Using quarterly earnings data of 872 listed firms in China over 2011–2020, we calculate the Revised Persistence value of earnings (RPer value) of our earnings persistence model, and find that the Rper value of our model have more explanatory power than that of Kormendi and Lipe’ model. Our study also suggest that quarterly earnings are useful and have information content. Both the theoretical model and empirical results of our research are of great significance to understand and support the implementation of semi-compulsory cash dividends rules in China.

Two Inconsistent Behavioral Biases

Our study explores two well-known anomalies that seem to be inconsistent with one another. Investors underreact to extreme quarterly earnings surprises resulting in returns drift that may persist for several quarters. This behavioral bias suggests that investors believe that extreme earnings surprises are mostly transitory during the earnings announcement period, but modify their beliefs later as new information arrives in subsequent quarters. In contrast, investors overreact to extreme performance of mutual funds; they pour more money into mutual funds that have recent outstanding performance and withdraw funds from mutual funds that have recently experienced extreme low performance. As these extreme patterns in performance tend to reverse in subsequent quarters, this behavior by investors suggests they erroneously consider most of the extreme performance to be permanent. We do not attempt to explain this inconsistency for retail investors but provide a potential explanation for this behavior among professional investors.

A re‐examination of analysts versus time‐series extrapolation of quarterly earnings: Superiority in accuracy and earning expectation proxy

AbstractWe document findings that earning extrapolation based on seasonal random trend (SRT) model is not inferior to analysts’ quarterly earnings forecasts, which contradicts the belief that analysts are superior to time‐series models. Our findings suggest that while the frequency of analysts beating SRT extrapolations is greater than 50%, the marginal accuracy improvement is weak. Analysts’ forecasts contain larger absolute forecast error and significant pessimistic bias than SRT extrapolation. Prior studies attribute the superiority of analysts’ forecasts in proxying for earnings expectation to its higher accuracy. Given that the SRT extrapolations have lower average forecast error, we explore whether market participants use them to develop earnings expectations. Our findings indicate that the market anchors to analysts’ forecasts and treats SRT extrapolations as supplemental.

Investors respond negatively to executives’ discussion of creativity

Creativity and innovation are often considered to be essential characteristics of effective organizations. However, recent experimental research suggests that individual-level creativity in the workplace is not always perceived positively because of the uncertainty inherent in creative ideas. Although this research has advanced our understanding of perceptions of individual creativity in organizations, less is known about whether this creativity bias holds in real world contexts and, if so, whether there are organizational consequences. In this paper, we examine the organizational implications of executives’ use of words related to creativity and innovation (i.e., creativity-speak) during quarterly earnings calls. We predict that due to the association between creativity and uncertainty, market reactions to creativity-speak will be negative. However, we also predict that these same discussions of creativity will be associated with higher firm financial performance. We find support for our predictions, and additionally find that the creativity bias can be ameliorated through executives’ use of a positive tone when discussing creativity and innovation. Our study has a number of theoretical implications for the study of creativity, innovation, and executive communication.

Orders Backlog in Earnings Conference Calls

ABSTRACTFocusing on quarterly earnings conference call transcripts, we provide evidence that order backlog discussions are positively priced by investors. Pricing appears to be efficient whether these discussions are accompanied by quantitative support or are solely qualitative. We find these disclosures to have stronger pricing effects for growth firms and firms with weaker information environments. Our study contributes to the body of order backlog research by incorporating more timely disclosures as well as by incorporating qualitative disclosures.Data Availability: Data used in this study are available from public sources identified in the study.JEL Classifications: G14; M41.

The Difference Between Conditional and Unconditional Insider Silence Effect: Evidence from China

Abstract When the litigation risk is higher, future stock returns are significantly lower following unconditional insider silence (no trade behavior during the last year) than following insider sales [5]. Specifically, Hong and Li [7] define the silence that routine-based insiders strategically choose as conditional insider silence and find that conditional insider silence following routine sell (buy) results in positive (negative) future return. In this paper, we examine whether there are different between the conditional and unconditional insider silence effects in the Chinese stock market. We find that the unconditional insider silence effect is greater than the conditional insider silence effect. Moreover, the firm would have positive abnormal compensation after quarterly earnings announcement under unconditional insider silence. We do not have enough evidence to support that the conditional (unconditional) insider silence effect is larger for companies with good corporate governance than for companies with poor corporate governance. Empirical results show that there are no significant difference between CEO and non-CEO’s conditional and unconditional insider silence effects. JEL classification numbers: G11, G14, G34. Keywords: Insider silence, Earnings announcement, Corporate governance, CEO.

Information uncertainty of fiscal year end quarter earnings

PurposeThe purpose of this study is to investigate whether within the same firm, earnings risk is exacerbated in the fiscal year end (FYE) quarters relative to that of other quarters, more importantly, if this type of earnings risk is unique. Further, the authors discuss solutions to mitigate this type of information risk.Design/methodology/approachThis study provides evidence that the information risk associated with FYE quarter earnings cannot be explained by other identified risk factors. Solutions to mitigate this risk include strong corporate governance and a more streamlined financial reporting structure.FindingsThe paper shows that there is significantly lower earnings response coefficient for FYE quarters than for non-FYE quarters (1984–2015). Furthermore, strong corporate governance and a more streamlined financial reporting structure, either by firms willingly reducing the usage of extraordinary item reporting or by FASB codification changes such as FASB 145, can help mitigate this type of information uncertainty.Research limitations/implicationsThis study explains that the causes of the exacerbated information risk associated with FYE quarter earnings identified in prior literature, namely, the “integral explanation” and “manipulation explanation,” are not mutually exclusive. Therefore, the authors deem it futile to disentangle the two. Instead, the authors offer two possible solutions.

Pengumuman Laba Kuartalan dan Respon Investor saat Pandemi Covid-19 di Indonesia: Sebuah Studi Peristiwa

This research aims to examine and prove empirically the effect of the announcement of quarterly earnings information during the Covid-19 pandemic on investor responses by using event studies. The dependent variable in this study is the investor's response as measured by cumulative abnormal return (CAR). The observation window used in this study was 7 days, namely three days before the announcement and three days after the announcement. The independent variable is the announcement of quarterly earnings as measured by unexpected earnings (EU). This study also examines the effect of changes in quarterly income, type of industry, and growth in Covid-19 cases as control variables on investor response. The sample in this study was 2,212 which were determined using the purposive sampling method. The results of the study prove that the announcement of quarterly earnings has a statistically significant effect on investor responses in several windows, changes in revenue have no effect on investor responses for all windows used, only in the windows t0;t2 CAR for financial and non-financial companies is different and significant. statistically, and the growth of covid cases was influential and statistically significant for several windows.

Responses in divergence of opinion to earnings announcements: evidence from American depository receipts

PurposeThe purpose of this paper is to investigate the relationship between investors' divergence of opinions and the asset prices of foreign stocks and also examine the effect of home market country-level factors on the influence of divergency of opinions on stock price.Design/methodology/approachThe authors employ panel data estimation with fixed effects to examine the host market response in divergent opinions to the earnings announcements. The paper uses the American Depositary Receipts (ADRs) of 42 countries from 1985 to 2011.FindingsThe authors find a negative relationship between differences of opinions and excess quarterly earnings announcement returns, and investors do process information asymmetrically based on good and bad earnings shocks. In addition, the authors find the negative relationship between divergent opinions and excess earnings announcement returns in ADRs is more pronounced in countries with short-sales restrictions, while other home-market country-level factors – the enforcement of insider trading law, legal origin, investor protection and rating on accounting standard – do not influence the relationship between investors' divergency of opinion and stock returns.Originality/valueThis paper is among the first to bring asymmetric effects on convergence in Miller framework and enhance the understanding of price convergence documented in Miller (1977). In addition, this study incorporates home-market country-level factors in explaining the relationship between investors' divergency of opinions and stock returns.

Macroeconomic outlook optimism and analysts’ four-quarter-ahead quarterly earnings forecast optimism*

ABSTRACT We examine the relationship between the long-run macroeconomic outlook and four-quarter-ahead quarterly earnings forecasts and find that the four-quarter-ahead quarterly earnings forecasts are more optimistically biased in periods when the four-quarter-ahead quarterly macroeconomic forecasts are optimistically biased as well. This relationship is stronger when forecasts are for periods that turn out to be recessionary, which is attributable to all forecasters’ inability to predict recessions. Collectively, our results provide a non-opportunistic rationale for the optimistic bias in long-term quarterly earnings forecasts.

Net Buying Pressure and Informed Trading in the Options Market: Evidence from Earnings Announcements

By employing the modified net buying pressure as a measure of informed option trading, this study tested whether option trading around quarterly earnings announcements is either directionally motivated and/or volatility motivated. We found evidence that is consistent with the idea that option investors have private information prior to positive earnings announcements and use at-the-money options to exploit their informational advantage. In the post-event period, however, informed option investors trade by using deep-out-of-the-money and out-of-the-money options. We documented limited evidence on the volatility-motivated option trading, and our results suggest that this type of option trading could be motivated by hedging purposes only.

Corporate negative sentiments and the environment during a pandemic: evidence from quarterly earnings conference calls

Motivated by the rising number of COVID-19 cases that were reported around December 2019, firms started to show concerns about the adverse effects on their business operations. This study uses a COVID-19 variable of negative sentiments that is a text-based measure of the sentiment associated with the spread of COVID-19 that the US publicly traded firms disclose in their quarterly earnings conference calls. This study provides novel data and the first empirical evidence on the extent to which the COVID-19 negative sentiments disclosed by firms are positively correlated with a reduction in CO2 emissions. This study provides new insights and looks into the positive aspect of this pandemic, a greener environment due to a reduction in CO2. Results show that firms' concerns in their quarterly earnings conference calls are negatively correlated with CO2 emissions, fuel consumption, real gross domestic product and the US manufacturing production index.

Corporate Negative Sentiments and the Environment during a Pandemic: Evidence from Quarterly Earnings Conference Calls

Corporate Negative Sentiments and the Environment during a Pandemic: Evidence from Quarterly Earnings Conference Calls

Quarterly Earnings Guidance and Real Earnings Management

Quarterly Earnings Guidance and Real Earnings Management

Quarterly Earnings Information: Implications for Annual Earnings Forecast Models

Quarterly Earnings Information: Implications for Annual Earnings Forecast Models