Author: Jacek Welc
Publisher:
ISBN:
Category :
Languages : en
Pages : 28
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Book Description
Capital markets appreciate stability. It means that companies reporting smooth earnings patterns tend to be priced relatively high. However, the empirical issue is whether such valuation premiums for earnings smoothness are justified. We examine the relationships between past five-year earnings smoothness and relative stock prices of companies listed on the Warsaw Stock Exchange. The empirical investigation confirmed that on the Polish market the smooth historical earnings are rewarded with valuation premiums and the erratic earnings are penalized with valuation discounts. However, stocks with smooth past earnings tend to bring sub-par future stock returns while stocks with relatively erratic earnings seem to generate above-average returns. Furthermore, the scope of past earnings smoothness does not show any discernible relationships to realized investment risk measures. Finally, companies with smooth earnings tend to report “negative earnings surprises” and relatively slow earnings growth rates in the following year. All in all, our research suggests that there is not any empirically observable justification for the valuation premiums observed in the case of stocks with smooth past earnings because such smoothness translate neither into relatively low future investment risks nor relatively fast future earnings growth.
Author: Amanda M.. Badger
Publisher:
ISBN:
Category : Business enterprises
Languages : en
Pages : 93
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Book Description
"Bai et al. (2016) show that since the 1960s the ability of prices to explain variation in future earnings (i.e., price informativeness) has significantly increased for S&P 500 firms, but significantly decreased for the full sample of firms. Over the same time period, the fundamental properties of earnings have substantially deteriorated. All else equal, the deterioration in earnings properties should result in accounting earnings becoming a poorer measure of economic performance and reduce the market's ability to anticipate future earnings. Understanding the impact of the deterioration in earnings properties on price informativeness is important because more informative prices lead to more efficient resource allocation. I find that, for non-S&P 500 firms, changes over time in price informativeness are positively related to changes in revenue expense matching (REM). This indicates that, despite the dramatic increase in the amount and quality of financial information available to investors over time, the deterioration in REM negatively impacted the extent to which current prices reflect future earnings information for non-S&P 500 firms. In contrast, for S&P 500 firms, I find that changes in price informativeness are not related to changes in REM, indicating that the deterioration in REM did not inhibit the market's ability to anticipate future earnings for S&P 500 firms. Thus, I provide an explanation for the differential trend in price informativeness between S&P 500 firms and the full sample of firms documented by Bai et al. (2016), namely, the differential impact of changes in REM on the market's ability to anticipate future earnings for S&P 500 firms vs. non-S&P 500 firms."--Page vi.
Author: Paul Zarowin
Publisher:
ISBN:
Category :
Languages : en
Pages : 40
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Book Description
This paper presents a new approach to studying the effects of earnings management, by testing whether income smoothing, a particular form of earnings management, is associated with more informative stock prices. Stock price informativeness is defined as the amount of information about future earnings and cash flows reflected in current period stock returns, and ismeasured as the coefficient on future earnings (cash flows) in a regression of current stock return against current and future earnings (cash flows and accruals). I find that firms with greater smoothing have more informative stock prices, implying that managers use income smoothing to reveal their private information about the firm s future profitability.
Author: Konan Chan
Publisher:
ISBN:
Category :
Languages : en
Pages : 186
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Book Description
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: Panayotis Artikis
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
The main objective of this paper is to examine the persistence, pricing and economic significance of the cash component of earnings in U.K. listed firms from 1981 to 2013. In so doing, we break down the cash component of earnings into changes in the cash balance and into issuances/distributions to debtholders and equity holders. We find that the cash component of earnings is more persistent than the accrual component and that this higher persistence can be attributed primarily to cash distributed to equity holders. Cash retained by the firm as changes in the cash balance also appears to be more persistent than accruals, whereas cash attributed to debtholders has approximately the same persistence level as accruals. The results from our pricing models support the naïve investor hypothesis and show both that future stock returns have the strongest positive correlation with the most persistent cash subcomponent of earnings and that investors can devise a profitable investment strategy by investing in companies that have high cash distributions to equity holders. Our results are consistent across subperiods - when controlling for changes in financial reporting standards and the economic environment - and across different size groupings.
Author: Peng-Chia Chiu
Publisher:
ISBN: 9781303167850
Category :
Languages : en
Pages : 137
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Book Description
This dissertation includes three chapters, which are about empirical investigation of the return earnings relation. Chapter 1 explores the differential timing in stock price incorporation of industry and firm-specific earnings. I find that on average stock returns anticipate industry revenue and expense components earlier than the respective firm-specific components. Further analysis shows that the timing difference between industry versus firm-specific information about revenue or expense is inversely related to product market competition and accounting reporting quality. Additionally, the timing difference between industry versus firm-specific information about expense line-items varies across line-items. Overall, these results aid in our understanding of the price discovery process with respect to accounting earnings information. Chapter 2 examines a new dimension, the effect of seasonality, on the relation between expected earnings (EE) and subsequent price drift. The key finding is that the relation between EE proxied by analyst forecasts and future returns is positive in non-January months but negative in January. This reverse January relation is observed among different types of stocks, domestic and international markets, and cannot be explained away by other variables associated with January returns. Further analysis suggests that the reverse January relation is a result of a temporary price drift away from fundamental value. The results illustrate the importance of controlling for the calendar-time dimension when studying market efficiency with respect to expected earnings. Chapter 3 investigates whether seasonally-differenced quarterly gross margin, a component of earnings, predicts future stock returns incremental to previously documented pricing anomalies based on financial accounting variables. A long/short trading strategy based on the gross profit surprises yields monthly returns over 115 basis points and generates positive returns in 113 out of 136 calendar quarters spanning 1977-2010. Further analysis shows that the return spread is larger for firms in industries characterized by low levels of capital expenditures and R & D intensity. Since 2000, gross profit surprise hedge portfolios yield returns of 91 basis points per month compared to 42 basis points per month for earnings surprise-based hedge strategies. The results suggest that gross margin contains information about future core profitability that is incremental to reported earnings and that information is reflected in stock prices with a delay.
Author: Robert Avakian
Publisher:
ISBN:
Category :
Languages : en
Pages : 100
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Book Description
Author: Kenneth Reichelt
Publisher:
ISBN:
Category : Business cycles
Languages : en
Pages : 134
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Book Description
Author: Linda H. Chen
Publisher:
ISBN:
Category :
Languages : en
Pages : 39
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Book Description
This paper examines the effect of income smoothing on information uncertainty, stock returns, and cost of equity. I show that income smoothing through both total accruals and discretionary accruals tends to reduce firms' information uncertainty, as measured by stock return volatility, analyst earnings forecast dispersion, and analyst earnings forecast error. Further, I provide evidence that stocks of income smoothing firms are priced with a premium. Controlling for earnings shocks and other firm characteristics, income smoothing firms have significantly higher abnormal returns around earnings announcement. In addition, I show that income smoothing reduces firms' implied cost of equity or expected returns. The result is more robust over short horizons up to two years.
