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Author: Ray Ball
Publisher:
ISBN:
Category :
Languages : en
Pages : 53
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Book Description
The accounting literature has traditionally focused on firm-level studies to examine the capital market implications of earnings and other accounting variables. We first develop the arguments for studying capital market implications at the aggregate level as well. A central issue is that diversification makes equity investors at least partially and potentially almost completely immune to several firm-level properties of earnings by holding diversified portfolios. Diversification is particularly important when assessing the welfare consequences of random errors in accounting measurement (imperfect accruals) and, to the extent it is independent across firms, of deliberate manipulation (earnings management). Consequently, some firm-level metrics of association, timeliness, value relevance, conservatism and other earnings properties do not map easily into investor welfare. Similarly, earnings-related risk manifests itself to equity investors largely through systematic earnings risk (covariation with aggregate earnings and/or other macroeconomic indicators). We conclude that the design and evaluation of financial reporting must adopt at least in part an aggregate perspective. We then summarize the literature in accounting, economics and finance on aggregate earnings and stock prices. Our review highlights the importance of studying earnings at the aggregate level.
Author: Ray Ball
Publisher:
ISBN:
Category :
Languages : en
Pages : 53
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Book Description
The accounting literature has traditionally focused on firm-level studies to examine the capital market implications of earnings and other accounting variables. We first develop the arguments for studying capital market implications at the aggregate level as well. A central issue is that diversification makes equity investors at least partially and potentially almost completely immune to several firm-level properties of earnings by holding diversified portfolios. Diversification is particularly important when assessing the welfare consequences of random errors in accounting measurement (imperfect accruals) and, to the extent it is independent across firms, of deliberate manipulation (earnings management). Consequently, some firm-level metrics of association, timeliness, value relevance, conservatism and other earnings properties do not map easily into investor welfare. Similarly, earnings-related risk manifests itself to equity investors largely through systematic earnings risk (covariation with aggregate earnings and/or other macroeconomic indicators). We conclude that the design and evaluation of financial reporting must adopt at least in part an aggregate perspective. We then summarize the literature in accounting, economics and finance on aggregate earnings and stock prices. Our review highlights the importance of studying earnings at the aggregate level.
Author: Wen He
Publisher:
ISBN:
Category :
Languages : en
Pages : 39
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Book Description
Kothari, Lewellen and Warner (2006) document that in the U.S. market aggregate earnings changes are negatively related to contemporaneous market returns. This is puzzling given the well-documented evidence that firm-level earnings changes are positively related to stock returns. In this study we use a sample of 28 countries to provide international evidence on this important issue. In pooled cross-country and time-series regressions, we find that aggregate earnings changes are positively associated with contemporaneous market returns. When we run time-series regressions of market returns on aggregate earnings changes for each country, we find only four countries have negative coefficients for aggregate earnings changes and none of these negative coefficients are statistically significant. This evidence contrasts the U.S. evidence. Furthermore aggregate earnings exhibits substantial persistence, suggesting current earnings convey information about future earnings. Finally we find that the earnings-returns relation at aggregate becomes less positive in countries with more transparent accounting disclosure. This result supports the argument proposed by Sadka and Sadka (2009) that predictability of aggregate earnings leads to the negative relation between aggregate earnings and market returns in the U.S.
Author: Lakshmanan Shivakumar
Publisher:
ISBN:
Category :
Languages : en
Pages : 16
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Book Description
Anilowski, Feng and Skinner (Journal of Accounting and Economics, 2006, this issue) examine the relationship between aggregate earnings guidance, aggregate earnings news and market returns. They provide evidence that changes in aggregate proportions of downward or upward earnings guidance are associated with aggregate earnings news and weakly associated with market returns. However, the study is unable to establish causality or the precise nature of the relationship between aggregate earnings guidance and market returns. To better understand the relationship, this paper analyses the relation between aggregate earnings, stock market returns and the macroeconomy. I empirically document that aggregate earnings primarily contain information about future inflation. This inflation information in aggregate earnings causes aggregate earnings to be negatively correlated with stock returns. The paper concludes with suggestions for future research.
Author: Ryan T. Ball
Publisher:
ISBN:
Category :
Languages : en
Pages : 33
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Book Description
We examine whether the contribution of firm-level accounting earnings to the informativeness of the aggregate is tilted towards earnings with specific financial reporting characteristics. Specifically, we investigate whether considering the volatility of earnings relative to the volatility of cash flows at the firm level (smoothness) increases the informativeness of aggregate earnings for future real GDP, and if so, whether macroeconomic forecasters use this information efficiently. This study innovates on recently developed mixed data sampling methods in the construction of an aggregate earnings growth measure by allowing each firm's contribution to the aggregate to vary as a function of earnings smoothness. We find that the aggregate is tilted towards firms with smoother earnings and that this composition of aggregate earnings outperforms traditional weighting schemes in the association with future GDP growth. Further, this tilted aggregate has a stronger positive association with forecast revisions; in fact, analysts who utilize earnings the most in their forecasts appear to fully impound the informativeness of earnings smoothness. Our results synthesize and span parallel yet distinct streams of research on the role of accounting earnings in firm-level and macroeconomic outcomes and suggest an important role for financial reporting characteristics in the aggregate.
Author: Lindsey A. Gallo
Publisher:
ISBN:
Category :
Languages : en
Pages : 49
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Book Description
We exploit differences in institutional and macroeconomic environments to shed light on what drives variation in the aggregate earnings-returns relation over time within the U.S. and across countries. We find that both intertemporal and cross-country variation in the aggregate earnings-returns association are driven primarily by two factors, namely, the monetary policy news conveyed in aggregate earnings and the market reaction to that news, which suggest that the strength of the discount rate news channel plays an important role in explaining the aggregate earnings-returns relation both within and outside of the U.S. We further find that institutional characteristics have a significant effect on the information content of aggregate earnings and hence on the aggregate earnings-returns association--aggregate earnings are more informative about policy changes in countries with stronger investor protection and greater accounting transparency. Overall, our study provides new evidence on what drives the aggregate earnings-returns relation across the globe.
Author:
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ISBN:
Category : Freight and freightage
Languages : en
Pages : 300
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Author: Jeremy Bertomeu
Publisher:
ISBN:
Category :
Languages : en
Pages : 23
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Book Description
This article develops further results on earnings management and the cost of capital, which complement Strobl (Journal of Accounting Research, forth.). Within a simplified version of the model, I illustrate the existing linkage between earning management activities and firms' cost of capital, even if the individual fraud risk is diversifiable. I identify plausible conditions under which the cost of capital will increase with more earnings management and show that the level of managerial ownership and enforcement are important testable determinants of this association. Lastly, I argue that, in the absence of an observable aggregate wealth portfolio, whether accounting quality is informative on firms' beta or a separate risk factor are observationally equivalent propositions. I then show that an aggregate accounting quality measure would provide information about expected returns.
Author: Aydin Uysal
Publisher:
ISBN:
Category :
Languages : en
Pages : 15
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Book Description
In this study, I provide evidence that aggregate earnings are predictable based on the cointegration relation between earnings and cash flows implied by the accounting identity that earnings is the sum of the cash flows and the accruals. I first show that earnings and cash flows follow random walks with drifts while accruals is stationary with zero mean. I then show that earnings and cash flows are cointegrated and the cointegration error is the accruals. I finally show that earnings is the error correction term in this cointegration relation, hence predictable. My results which are robust to various financial statement frequencies, earnings measures, universes, and periods may help to answer some of the questions which were raised regarding to the contemporaneous relationship between aggregate earnings surprises and stock returns in the recent literature.
Author: Koren M. Jo
Publisher:
ISBN:
Category : Accounting
Languages : en
Pages : 124
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Book Description
In this study I examine the time series properties of quarterly aggregate earnings and aggregate analyst earnings forecasts. Using quarterly data from January 1988 to December 2012, I show that both quarterly aggregate earnings and analyst earnings forecasts follow a random walk process in contrast with the corresponding firm level's actual and forecasted earnings, which both follow a seasonal random walk process. The fact that aggregate earnings follows a random walk process suggests that researchers using aggregate earnings need to account for the serial correlation in aggregate earnings in their models. Moreover, the level of aggregate earnings and aggregate analyst forecasts are co-integrated even though aggregate analyst forecasts are biased. I further show that prior forecast errors are correlated with growth in aggregate GAAP earnings but not aggregate Street earnings. The exclusion of special items makes Street earnings smoother and easier to predict, thus making forecasts of Street earnings more efficient. Finally, random-walk-based forecasts outperform analyst forecasts in terms of accuracy when GAAP earnings are forecasted, but not when Street earnings are forecasted.
Author: Carol Anilowski Cain
Publisher:
ISBN:
Category :
Languages : en
Pages : 49
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Book Description
We investigate whether earnings guidance affects aggregate stock returns through its effects on expectations about overall earnings performance and/or aggregate expected returns. We find that aggregate guidance, especially relative levels of quarterly downward guidance, is associated with analyst- and time-series-based measures of aggregate earnings news. We find more modest evidence that guidance, again, largely downward guidance, is associated with market returns - market returns appear to respond to guidance toward the end of each calendar quarter, when most earnings preannouncements are released, and there is some evidence that firm-level guidance affects market returns in short windows around its release.
