Quarterly Earnings Research Articles

Earnings deviation of interim and annual accounts: pre and post-MASB 26

This study is to examine whether the use of discrete method may enhance the quality of interim financial accounts. It examines whether the magnitude and occurrence of earnings deviation post-MASB 26 is significantly lower than pre-MASB 26. Data is based on listed companies on Bursa Malaysia for two years before and after the introduction of MASB 26 in 2002. The t-test shows that the magnitude of earnings deviation pre-MASB 26 is significantly higher as compared to post-MASB 26. Sub-sample analyses also showed that the magnitude of both overstated and understated companies is significantly higher pre-MASB 26. However, Pearson chi-square shows that the occurrence of earnings deviation has increased post-MASB 26 which was contributed to by the increase in occurrence of understated quarterly earnings. This study provides evidence that the use of discrete method might enhance the quality of interim reporting. Whilst, alternative methods of accounting provide different benefits and drawbacks, this study highlighted the need for regulators to consider the objective of financial reporting in formulating the accounting standards.

ÇEYREK KAZANÇ DUYURUSUNUN KURUMSAL FİNANSAL PERFORMANS ÜZERİNDEKİ ETKİSİ

Using event study methodology and regression analysis method, this study had examined quarterly earning announcement and its impact on the stock returns. The earning announcements were divided in to three groups: (1) Good news (quarterly positive earnings announcement), (2) No news (quarterly neutral earnings announcement) and (3) Bad news (quarterly negative earnings announcement). The study result confirmed that both the good news and the bad news had a strong impact which is significant statistically on the share returns. While no news did not show any impact which is significant statistically. The study is in line with the information content hypothesis, as the good news (bad news) event announcement had impacted to the abnormal returns positively (negatively) and significant statistically. The study also found a positive and statistically significant relationship between quarterly earnings and stock price.

Digital Transformation for Agility and Resilience: An Exploratory Study

ABSTRACT In recent times, the concepts of IT-enabled agility and digital resilience have gained increased attention. The COVID-19 pandemic has brought a turbulent environment in its wake, thus providing an opportunity to study organizations’ agility and digital resilience. This study examines retailers’ strategies and IT’s role in facilitating responsiveness to uncertainties in the marketplace. An analysis of the quarterly earnings call transcripts shows the increased reliance of organizations on IT to drive and sustain their strategies. This study supports the oft-made claim that IT capabilities can make an organization more responsive and agile in the face of disruptions.

Quarterly earnings thresholds: Making the case for prior quarter earnings

AbstractWe provide evidence that the prior quarter earnings number is an important and informative benchmark that is relatively unexplored in the accounting literature. Our analyses suggest that managers appear to avoid negative earnings changes relative to the prior quarter. Moreover, we find that even after controlling for the information contained in other frequently used benchmarks (i.e., analysts’ forecasts and earnings from the same quarter of the prior year), changes over the prior quarter's earnings are associated with stock returns. We find that this result is stronger post‐Regulation FD and XBRL, perhaps as a result of the improved information environment. We also find that the informativeness of prior quarter earnings is greater for firms with less volatile earnings and that meeting‐or‐beating prior quarter earnings are associated with future performance.

Does the Equity Market Reward “Superior” Management Earnings Forecast? Evidence from the U.S. Quarterly Earnings Guidance

This paper examines whether equity markets reward the controversial practice of issuing short-term management earnings forecasts. Using a large sample of quarterly earnings forecasts, this research found that firms may temporarily reduce stock price volatility by issuing quarterly earnings forecasts. Furthermore, the analysis showed that not all guidance issuers are equally rewarded by equity capital markets. The benefits of reduced stock price volatility and favorable market valuation primarily accrue to firms with a track record of supplying accurate and timely short-term earnings forecasts. Findings suggest that superior short-term earnings guidance, which fosters transparent financial information environments and reduces investor information uncertainty, is indeed rewarded by equity capital markets. As limited research examines the association between forecast attributes and the capital market consequences of quarterly earnings guidance, this study aimed to provide empirical evidence on equity capital market rewards by issuing high-quality quarterly earnings guidance. A practical implication is that firms need to invest in accounting information systems and accounting talent in order to achieve capital market benefits of supplying high-quality short-term earnings forecasts. Keywords: quarterly earnings guidance, forecast attributes, accounting information system, equity market rewards, United States

코스피기업과 코스닥기업의 분기이익조정에 대한 비교연구: 회계제도 변화를 중심으로

Prior research finds that firms in the KOSDAQ market tend to manage annual earnings more than their counterparts in the KOSPI market. However, there is little research that systematically investigates differences in quarterly earnings management between the two groups. Hence, this study examines whether there are differences in quarterly earnings management between KOSPI and KOSDAQ firms. We also examine whether accounting reforms adopted to improve the quality of financial statements are effective in restraining quarterly earnings management. The results reveal that the KOSDAQ firms manage quarterly earnings to the greater extent than the KOSPI firms. We also find that the IFRS adoption has positive effects on quarterly earnings management in both KOSPI and KOSDAQ markets, whereas the auditor review of interim financial statements has no effect on quarterly earnings management.

A Study on the Differentiation of Quarterly Earnings Quality

본 연구는 분기별로 보고되는 이익의 품질이 과연 차별적인지를 살펴보는 데 연구의 목적이 있다. 선행연구에 따르면 4분기는 이전 분기들과는 달리 연차보고서의 결산을 앞두고 있어 이익조정의 가능성은 높지만, 예측 가능성 또한 낮다. 이러한 분기의 특성상 4분기의 이익 품질은 이전 분기들과는 차별적일 가능성이 높다. 또한 빅 배스(big bath)의 유인이 있는 손실기업의 경우, 4분기 이익 품질에서 이익기업과는 다른 양상을 보일 가능성이 있다. 이에 본 연구에서는 이익의 품질을 현금전환정도로 정의한 Dechow, Dichev(2002)의 모형을 기초로 한 Francis et al.(2005)의 모형에 따라 발생액의 질을 분기별로 추정하고 이를 이익 품질의 대용변수로 사용하여 과연 4분기 이익의 품질이 다른 분기들의 품질과 다른지에 대하여 살펴보았다. 2015년부터 2019년까지 유가증권시장에 상장된 기업 6,252개의 기업-연도-분기 자료를 대상으로 발생액의 질을 종속변수로, 4분기 여부, 손실기업 여부, 그리고 발생액의 질에 영향을 끼칠 수 있는 통제변수들을 추가하여 회귀분석을 실시한 결과, 4분기의 이익 품질은 이전 분기들의 이익 품질보다 낮았고, 당기손실집단의 4분기 이익 품질은 이익기업집단의 4분기 이익 품질보다 더 낮은 것으로 나타났다. 본 연구는 연차보고서의 결산을 앞둔 4분기의 이익 품질의 양상이 이전 분기들과 서로 다르다는 점과 특히 손실기업의 경우 4분기 재무보고의 해석에 유의해야 한다는 점을 확인했다는 점에서 연구의 의의를 찾을 수 있다.

Are Managers Motivated for Earnings Management through Interim Financial Statements: An Empirical Study Public Companies in Thailand

Purpose of the Research: This study aims to examine whether interim financial statements prepared by public companies in Thailand provide a leverage for corporate managers to manipulate their quarterly income reported in interim financial statements, which are not mandatory to be audited as against annual financial statements. managers, As explained by the agency theory, investors would react to financial performance and therefore, it could be always argued that managers to show a better picture of the company performance when such an opportunity prevails. Owing to business dynamism and the speed at which technology alters business operation, one-year period would be too late for investors to know about financial performance of the company through the annual report. Hence, there is a strong justification for providing updated and frequent financial information through interim financial statements by a corporation as a result of a regulatory requirement of Stock Exchange of Thailand and on the other hand, it would open a room for managers to manipulate the numbers in quarterly report until the annual report is submitted.
 Research Design: Quantitative methodology is used and accordingly, it is hypothesized that managers, in line with the agency theory d to manipulate earning figures in interim financial statements. Data is collected from interim financial statements and annual reports of SET 50 companies for last 10 years ending 2020. Summation of quarterly financial performance is compared with annual financial performance presented in annual reports through a paired t-test to find evidence for manipulation. Further, smoothing tests were carried out to see whether there were significant differences prevailed among quarterly earnings.
 Findings: The study does not find any evidence to prove that there is a significant difference between the summation of quarterly performances of one year and the profit for the year reported in the annual report. This could be justified by the recent development of International financial reporting standards which have a little flexibility for managers use the judgment in preparing financial statements. However, there were significant differences among quarterly earnings thus indicating that manipulation takes in quarterly reports but not in annual reports thus revealing the final quarter earning has been used to iron out the differences of earnings shown in first three quarters. Significant variation of earnings in the final quarter was seen compared to other quarters. Findings hold the relevance of propositions of agency theory as managers could make use opportunity to do so with the flexibility for preparing interim financial statements.
 Implication of The Research: Variations of quarterly earnings arising from manipulations are seen to have been adjusted by using the earnings reported in the last quarter in order to match it with annual earnings reported in annual reports based on IFRSs which do not leave much room for manipulation. Hence, the outcome of this research adds to the body of knowledge in the field of accounting and finance. Research findings can be linked decisions taken by capital market regulatory bodies, standards setting bodies and researchers. Usefulness and relevance of financial information in investment decisions can be linked to interim report in future dimensions of research and further the efficient market hypotheses should also be tested to see the relation between such hypotheses the possibilities of earnings management particularly in the stock market in Thailand and other capital markets in general.
 Keywords: Financial Information, Interim Financial Statements, Quarterly Earnings, Annual Reports, Income management, Income smoothing

Market reaction to quantitative and qualitative order backlog disclosures

Analysts and practitioners have long sought information on order backlog (OB) as indicators of future sales, and in turn, of future earnings and stock returns. OB disclosures, though mandatory for annual reports, are voluntarily included in some quarterly reports and are sometimes presented only in textual narration. Given that the required annual OB data may be partially preempted by voluntary quarterly disclosures, we test whether quarterly OB disclosures are used by market participants, especially the qualitative OB disclosures, which were not tested before. We show that OB growth is helpful in forecasting future sales and thus assign a positive tone to qualitative OB disclosures that indicate OB growth. Both quarterly quantitative OB increases and positive qualitative tone are associated with immediate and drift returns, after controlling for other disclosures during the quarterly earnings announcements and variables that affect voluntary disclosure. Our results indicate that regulators may need to consider requiring OB disclosures in quarterly intervals when OB is sufficiently material.

Bundled Earnings Guidance and Analysts' Forecast Revisions*

ABSTRACTBundling managerial earnings guidance with quarterly earnings announcements (EAs) has become an increasingly common practice. This study investigates the impact of bundled guidance on analysts' forecast revisions. Our findings indicate that analysts respond more to bundled guidance than non‐bundled guidance. This effect increases with analysts' time pressure and cognitive constraints around the EA. Analysts' revisions also incorporate more of the bundled management guidance when accompanied by additional information, such as conference calls. We further find that analysts revise their forecasts more quickly following bundled guidance than non‐bundled guidance. Together, these findings are consistent with the notion that analysts place more weight on bundled guidance than on non‐bundled guidance in their forecast revisions as bundled guidance facilities analysts' timely forecast revisions following EAs. Finally, we find that analysts' forecast revisions following bundled guidance generate significant market reactions. Our findings enhance our understanding of analysts' information processing and shed light on why bundling can be an effective guidance strategy.

Can Sell-side Analysts Compete Using Public Information? Analysts as Frame-makers Revisited

This paper extends qualitative research on sell-side analysts by investigating how analysts compete against each other in the market for investment advice. The paper challenges the assumption that analysts must utilize private information in such competition, and investigates the role of a public setting – the quarterly earnings presentation – for analysts’ analytical work and client communication. The paper draws on an in-depth field study, comprising observations and interviews, and theorizes analysts as frame-makers when analyzing the materials. The study reveals how accounting reports place assumptions within the valuation practices of the share into question and risk ‘overflowing’ established calculative frames. The analysts utilized such uncertainty to enhance their dialogues with both clients and managers. Reacting to public information, therefore, served a central role for analysts’ competition, whereas proactively developing investment cases and acquiring private information were of less importance. These findings are discussed against recent developments of the sell-side industry’s remuneration models, and it is argued that experience has become an increasingly valuable quality. The paper also contributes to the perspective of analysts as frame-makers by shifting attention to overflows and how calculative frames develop through so-called ‘cold’ negotiations.

Be careful what you wish for: CEO and analyst firm performance attributions and CEO dismissal

AbstractResearch SummaryChief executive officers (CEOs) often make internal attributions of positive firm performance outcomes by highlighting their strategic choices as the cause of favorable performance results. We investigate the dynamic consequences of CEO internal performance attributions along a CEO's tenure. CEO internal attributions create an expectation that favorable firm performance will continue under the CEO's leadership. When firm performance turns negative, however, financial analysts also make internal attributions, pointing to the strategies highlighted by the CEO as the cause of performance downfall. Analysts' internal attributions provide a board with a legitimate account casting doubt on the CEO's leadership efficacy, increasing the likelihood of dismissal. We find strong empirical support for our hypotheses in a panel dataset that tracks CEO and analyst interviews in news media around quarterly earnings announcements.Managerial SummaryWhile prior studies of chief executive officers (CEOs) dismissal have considered different factors leading to CEO dismissal, our study highlights the role played by the CEO's own public performance attributions. Our results show that when CEOs attribute positive performance outcome to their leadership, financial analysts are also more likely to attribute subsequent negative performance outcomes to their leadership, which in turn ultimately leads to CEO dismissal. Given the difficulty of predicting firm performance over an extended period of time, CEOs should be aware that when they take credit for positive performance outcomes they may be setting themselves up for subsequent blame from external constituents seeking explanations for negative performance outcomes. Thus, our results suggest that CEOs may stand to gain from more self‐effacing behaviors.

Asymmetric Monitoring of Quarterly Financial Statements by Big 4 Auditors and the SEC's Timely Review Requirement

SYNOPSIS We investigate if Big 4 firms are asymmetrically more effective than non-Big 4 firms in monitoring income-increasing versus income-decreasing quarterly earnings management. We also study the Securities and Exchange Commission's (SEC) 2000 requirement that audit firm reviews of quarterly financial statements be completed prior to their filing with the SEC (“timely reviews”). We find Big 4 firms are more effective than non-Big 4 firms in curbing income-increasing earnings management around seasoned equity offerings (SEOs), but not income-decreasing earnings management around open market repurchases (OMRs). In the post-2000 period, after the SEC's mandate for timely reviews began, we find income-increasing earnings management around SEOs declined significantly, and this decline is primarily driven by the clients of Big 4 firms. We provide evidence that timely quarterly reviews improve earnings quality, especially when companies have incentives to engage in income-increasing accruals and are reviewed by Big 4 firms.

Labor market returns to a prison GED

Educational and skill-building programs are commonplace in prisons and have been the focus of recent prominent policy initiatives. These educational programs are expected to increase prisoners’ post-release employability, with the hope that these lead to both private and public benefits. One of the most popular programs prepares prisoners to pass the GED exam, which is an academic certification for those without a high-school diploma. We analyze the labor market returns to a GED earned in prison using new administrative data on all released prisoners in the state of Missouri over nearly 25 years, and a matched comparison group difference-in-differences design with individual fixed effects. We find that the GED can lead to higher short-term quarterly earnings and employment, with the largest benefits experienced soon after release. These effects are strongest for those who did not have strong work histories prior to entering prison and for those who had access to post-release support. We also find that the effect of the GED is of a similar magnitude for White and Black formerly incarcerated individuals.

Transfer Learning and Textual Analysis of Accounting Disclosures: Applying Big Data Methods to Small(er) Datasets

SYNOPSIS We introduce and apply machine transfer learning methods to analyze accounting disclosures. We use the examples of the new BERT language model and sentiment analysis of quarterly earnings disclosures to demonstrate the key transfer learning concepts of: (1) pre-training on generic “Big Data,” (2) fine-tuning on small accounting datasets, and (3) using a language model that captures context rather than stand-alone words. Overall, we show that this new approach is easy to implement, uses widely available and low-cost computing resources, and has superior performance relative to existing textual analysis tools in accounting. We conclude with suggestions for opportunities to apply transfer learning to address important accounting research questions. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G31; G32; M21; M41.

Organizational structure and CEO dominance

We explore the effects of chief executive officers’ (CEOs’) personal dominance—an idiosyncratic character trait strongly associated with a desire for influence and control—on two fundamental organizational design decisions: the CEO’s span of control (1) and her delegation of responsibilities as reflected in the appointment of a chief operating officer (COO) (2). Linking three original measures of CEO dominance based on quarterly earnings calls with manually collected data on span of control and COO positions for a sample of CEOs presiding over large US corporations, we demonstrate that CEOs who are high in dominance have a significantly larger personal span of control and delegate fewer decision rights than less-dominant CEOs. We discuss implications of our findings and future questions from an organizational design perspective.

Being Counted and Remaining Accountable: Maintenance of Quarterly Earnings Guidance by U.S. Public Companies

Organizations are often pressured to adopt and maintain institutionally supported practices. Why do some companies remain committed to these practices, despite high operational cost and widespread frustration with them? Although prior theorists have emphasized the importance of institutional pressure at the broader population level, less research attention has been paid to the abandonment of a practice as a result of resource dependence between a firm and market intermediaries. In this paper, we theorize intermediary coverage breadth and depth as two important structural indicators of resource dependence. Firms lacking in coverage breadth (as indicated by the degree of reporting by market intermediaries) and firms with deeper coverage (as evidenced by a prolonged relationship with market intermediaries) are less likely to abandon a practice due to an increase in power imbalance and mutual dependence within the firm-intermediary relationships. We also theorize how a firm’s resource dependence, as determined by coverage structure, moderates the firm’s sensitivity to (1) observed peer support for the practice, (2) the intermediary’s expectation regarding the continued use of the practice, and (3) performance deviations that fail to meet intermediary expectations. Our empirical study of the abandonment of quarterly earnings guidance by U.S. public companies during 2001–2010 provides overall support for our theoretical arguments.

Strategic Announcement Sequencing: Earnings and M&A Announcements

The authors examine whether acquiring companies strategically time their quarterly earnings and merger and acquisition announcements. Acquiring companies have the ability and incentive to alter the sequence of these 2 types of announcements to optimize the market’s perception of the firm. The authors show that acquiring companies are more likely to announce earnings before mergers and acquisitions if their earnings meet analyst expectations, especially if the acquiring company plans to use stock as a full or partial method of payment. Additionally, the authors find that companies that announce favorable earnings profiles create a more positive news environment and generate higher abnormal returns for their subsequently announced acquisitions.

Non-Earnings Conference Calls: Content, Determinants, and Consequences

ABSTRACT I use computational linguistic techniques to study the content, determinants, and stock market consequences of conference calls that are not held in conjunction with quarterly earnings releases (hereafter, non-earnings conference calls). I find that large firms, loss firms, firms with more volatile earnings and returns, and firms with complex operations and a greater number of analysts following hold more non-earnings conference calls. Firms with volatile earnings and greater operational complexity discuss more earnings, investment, and market-related topics in non-earnings conference calls. These results are consistent with the notion that firms facing greater informational problems hold more non-earnings conference calls. I also find that controlling for other disclosure types, non-earnings conference calls incrementally explain quarterly abnormal stock returns, suggesting that they indeed help improve firms' information environment. Data Availability: Data are available from the public sources cited in the text.

The Benefits of Alternatives to Conventional College: Comparing the Labor-Market Returns to For-Profit Schools and Community Colleges

This paper provides novel evidence on the labor-market returns to for-profit postsecondary school and community college attendance using a two-step model to avoid recent concerns with singlestage fixed effects methods. Specifically, we link administrative records on for-profit school and community college attendance with quarterly earnings data for over 400,000 students in one state. Five years after enrollment, quarterly earnings conditional on employment exceed earnings in the absence of schooling by 20-29 percent for students attending for-profit schools and 16-27 percent for students attending community colleges. Despite differences in costs, in aggregate the benefits of attendance generally exceed the costs in both for-profit schools and community colleges. Finally, we present evidence showing that students in for-profit schools and community colleges pursue different degrees and focus on different areas of study.