The incremental information content of audit opinion

2016 ◽  
Vol 17 (2) ◽  
pp. 139-169 ◽  
Author(s):  
Panayiotis Tahinakis ◽  
Michalis Samarinas
Keyword(s):  
Stock Returns ◽  
Information Content ◽  
Value Relevance ◽  
Future Research ◽  
Content Type ◽  
Audit Opinion ◽  
Valuation Model ◽  
A Value ◽  
Incremental Information ◽  
Firm Data

Purpose – The purpose of this paper is to examine the incremental information content of audit opinion while considering opinion determinants, such as auditor and auditee size, or a firm’s financial state. Design/methodology/approach – A market valuation model is employed using US firm data collected over 30 years. The model relates stock returns to earnings and incorporates as additional variables auditors’ opinion types, opinion determinants and their interactions with audit expression. Findings – The findings suggest that audit opinion has a significant market impact. The estimated positive or negative information content of the audit opinion types is associated with certain opinion determinants, such as auditor and auditee size and a firm’s financial state. Research limitations/implications – Additional firm-year observations regarding certain opinion qualifications could benefit future research. Practical implications – This study offers useful insights by demonstrating the importance of auditing profession to the users of financial statements. It examines investors’ perception of each audit opinion type and the conditions under which this expression has the most serious effects. The results demonstrate the role of audit opinion and its cause-effect relationship with various economic events, allowing regulators not only to track the efficiency of various audit policy changes but also act preventively and amend the regulatory framework. Originality/value – This paper empirically supports the significance of the auditing process and audit opinions by examining investor perceptions. It employs a value relevance model, in contrast to market-based research that adopts an event study methodology.

Value creation of EVA and traditional accounting measures: Indian evidence

2016 ◽  
Vol 65 (4) ◽  
pp. 436-459 ◽  
Author(s):  
Vijay Kumar Gupta ◽  
Ekta Sikarwar
Keyword(s):  
Stock Returns ◽  
Information Content ◽  
Performance Measures ◽  
Value Creation ◽  
Economic Value ◽  
Value Added ◽  
Performance Measure ◽  
Content Type ◽  
Financial Measures ◽  
Incremental Information

Purpose – The purpose of this paper is to examine the superiority of economic value added (EVA) over the traditional accounting performance measures, i.e. earnings per share, return on assets and return on equity. For this purpose, the relative and incremental information content of EVA and accounting measures are tested by examining the relationship of these measures with stock returns. Design/methodology/approach – The analysis is performed for a sample of 50 Indian companies selected from the index Nifty 50 for the period of 2008-2011. The penal regression models are applied to examine the relative and incremental information content of EVA and traditional performance measures. Findings – The study finds that EVA has more relevant and incremental information content than accounting measures for analyzing shareholder value creation. These results confirm that EVA is better performance measure than traditional accounting measures. Research limitations/implications – The study could be further extended for the sample of other firms covering the specific industries and sectors. The calculation of EVA could be modified with respect to the adjustment in profit after tax and the calculation of cost of capital. Practical implications – The study has implications for the managers who are responsible to generate the wealth of shareholders by formulating the corporate financial policies. The findings also help investors who are closely concerned with the financial health of the firm while taking their investment decisions. Originality/value – The novelty of this study is that it relates total return of firm’s stock with the financial measures unlike the previous literature.

Value relevance of earnings and book values in the Qatari Stock Exchange

2019 ◽  
Vol 14 (1) ◽  
pp. 62-75 ◽  
Author(s):  
Hesham I. Almujamed ◽  
Mishari M. Alfraih
Keyword(s):  
Empirical Evidence ◽  
Value Relevance ◽  
Stock Exchange ◽  
Emerging Market ◽  
Financial Statements ◽  
Future Research ◽  
Content Type ◽  
Valuation Model ◽  
Book Values ◽  
Practical Implications

Purpose The study of developed capital markets suggests that information provided in financial statements has lost its value relevance to equity holders. The purpose of this paper is to explore this issue in the emerging market of Qatar. Design/methodology/approach Following other studies in the literature, the study examines the value relevance of earnings and book values using the price valuation model provided by Ohlson (1995). A total of 215 observations were collected from all firms listed on the Qatari Stock Exchange over a period of five years (2012–2016). Findings This study suggests that the value relevance of both earnings and book values has noticeably decreased over the sample period. However, its results show that the decline in the value relevance of earnings favored book values. Research limitations/implications Like other studies, this one has limitations that suggest areas for future research. For example, in Qatar, like other emerging markets, a lack of data prevents the performance of deep analysis. Additionally, the authors only use Ohlson’s (1995) model as a framework for evaluation. It would be interesting to explore the changes when examining alternative valuation models. Another limitation is that the authors examine only two accounting measures: earnings and book values. Further research could explore changes in the value relevance of other measures, such as cash flow. Practical implications These findings provide empirical evidence regarding the value relevance of earnings and book values in an emerging market. Originality/value To the authors’ knowledge, this paper provides the first empirical evidence regarding the value relevance of earnings and book values in the emerging capital market of Qatar.

Value relevance of accounting information during IFRS convergence period: comparative evidence between India and Indonesia

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Anubha Srivastava ◽  
Harjum Muharam
Keyword(s):  
Financial Reporting ◽  
Emerging Economies ◽  
Stock Prices ◽  
Value Relevance ◽  
Stock Exchange ◽  
Accounting Information ◽  
Future Research ◽  
Content Type ◽  
Valuation Model ◽  
Book Values

Purpose This study aims to examine the financial reporting quality during the International Financial Reporting Standards (IFRS) enforcement period in the emerging markets of India and Indonesia by using Ohlson’s (1995) valuation model. The study further endeavors to compare the quality of the reporting environment and its impact on stock prices for both these emerging economies by using a price model during the IFRS conversion period. Design/methodology/approach This paper aspires to obtain insights about the value relevance of accounting information during the IFRS enforcement period for India and its Southeast Asian neighbor, Indonesia which is identical in terms of inclusive growth and development. In that context, 3,325 Indian (National Stock Exchange indexed) and 815 Indonesian (Indonesian stock exchange indexed) firm-year observations were examined by using Ohlson’s price valuation model for five years, representing the IFRS adherence period. Findings The findings of the paper insinuated that the value relevance of book values and earnings, both, have increased throughout the IFRS enforcement period for both economies. However, the investigation revealed that the incremental interpretive power of earnings is more substantial and evident during the IFRS adherence phase than book values which indicates investor’s inclination toward earnings management over book values. Research limitations/implications The findings may assist the regulators, investors, firms and standard setters of both economies in examining the effectiveness of financial reporting curriculums as it brings forth informational improvement in the financial market. This study also outstretches the discussion on the subject in other emerging nations where the market is imperfect with insufficient information, poor enforcement and limited regulations. This investigation has few limitations such as limited data and period, only two emerging economies and two control variables, thus provide scope for future research. Social implications This paper endeavors to investigate and compare the value relevance of accounting information during IFRS convergence period between India and Indonesia with an aim to assist in improved decision making for both, regulatory bodies and market participants in both the countries. Originality/value The key contribution of the study is to examine whether the accounting information is value relevant during the IFRS convergence period for the two fastest-growing economies in Asia, India and Indonesia and it is the first such empirical research to the best of the author’s knowledge. The study is an extended contribution to the modest research administered in developing nations.

Regulation and information asymmetry

2008 ◽  
Vol 16 (1) ◽  
pp. 59-76 ◽  
Author(s):  
Robyn McLaughlin ◽  
Assem Safieddine
Keyword(s):  
Information Asymmetry ◽  
Stock Returns ◽  
Operating Performance ◽  
Cost Benefit ◽  
Future Research ◽  
Information Asymmetries ◽  
Cross Sectional ◽  
Industrial Firms ◽  
Content Type ◽  
Regulated Utilities

PurposeThis paper seeks to examine the potential for regulation to reduce information asymmetries between firm insiders and outside investors.Design/methodology/approachExtensive prior research has established that there are substantial effects of information asymmetry in seasoned equity offers (SEOs). The paper tests for a mitigating effect of regulation on such information asymmetries by examining differences in long‐run operating performance, changes in that performance, and announcement‐period stock returns between unregulated industrial firms and regulated utilities that issue seasoned equity. The authors also segment the samples by firm size, since smaller firms are likely to have greater asymmetries.FindingsConsistent with regulated utility firms having lower levels of information asymmetry, they have superior changes in abnormal operating performance than industrial firms pre‐ to post‐issue and their announcement period returns are significantly less negative. These findings are most pronounced for the smallest firms, firms likely to have the greatest information asymmetries and where regulation could have its greatest effect.Research limitations/implicationsThe paper does not examine costs of regulation. Thus, future research could seek to measure the cost/benefit trade‐off of regulation in reducing information asymmetry. Also, future research could examine cross‐sectional differences between different industries and regulated utilities.Practical implicationsRegulation reduces information asymmetry. Thus, regulation or mandated disclosure may be appropriate in industries/markets where information asymmetry is severe.Originality/valueThis paper is the first to compare the operating performance of regulated and unregulated SEO firms.

The value relevance of capital expenditures and the business cycle

2018 ◽  
Vol 35 (3) ◽  
pp. 386-406 ◽  
Author(s):  
Sungsoo Kim ◽  
Brandon byunghwan Lee
Keyword(s):  
Business Cycles ◽  
Stock Returns ◽  
Value Relevance ◽  
Financial Data ◽  
Capital Expenditures ◽  
Capital Investments ◽  
Content Type ◽  
Market Participants ◽  
Business Conditions

Purpose This paper aims to clarify the relationship between corporate capital investments and business cycles. Specifically, a major purpose of this paper is to investigate whether there are inherent differences in corporate investment patterns and whether the stock market exhibits different reactions to the value relevance of capital expenditures across different business conditions. Design/methodology/approach The authors use pooled ordinary least square regressions with archival stock price data and financial data from CRSP and Compustat. The authors regress buy and hold returns on the main test variables and control variables that are identified to be related to the investment literature. Findings This paper provides empirical evidence that US firms’ capital expenditures are more value relevant to capital market participants during expansionary business cycles and, conversely, less value relevant during contractionary business cycles. This evidence validates previous literature that has found the information content of capital expenditures to be uncertain and cyclical in nature. Research limitations/implications The main limitation of this paper, as with other work dealing with stock returns and archived financial data, is that the authors try to match stock returns with contemporaneous financial data in an association study context. The precise mapping in this methodology is always challenging and has been questioned in the literature. Practical implications This paper has various implications for capital market participants. Capital expenditures are good news for investors, but they will make a better investment when firms make capital investments during an expansionary period. Creditors deciding whether to extend credit to firms would benefit from more accurate information on the viability of long-term investment. The results also suggest to creditors that an excessive number of loans during the contractionary period may be suboptimal because firms’ returns on capital investment are smaller in that period than in the expansionary period. Social implications Given the valuation of implications of long-term capital investments across different business conditions, this paper sheds light on asset allocations for mutual funds, institutional investors who are entrusted with investors’ investments including retirement funds. Originality/value This paper fulfils an identified need to study how capital investments are valued differently across different business conditions.

Internet gambling stock returns: empirical evidence from the UK

2017 ◽  
Vol 13 (1) ◽  
pp. 36-49
Author(s):  
Daniel Perez Liston
Keyword(s):  
Stock Returns ◽  
Multivariate Garch ◽  
Online Gambling ◽  
Future Research ◽  
Time Varying ◽  
Conditional Correlation ◽  
Socially Responsible ◽  
Content Type ◽  
Starting Point ◽  
The Uk

Purpose The purpose of this paper is to quantify beta for an online gambling portfolio in the UK and investigates whether it is time-varying. It also examines the dynamic correlations of the online gambling portfolio with both the market and socially responsible portfolios. In addition, this paper documents the effect of important UK gambling legislation on the betas and correlations of the online gambling portfolio. Design/methodology/approach This study uses static and time-varying models (e.g. rolling regressions, multivariate GARCH models) to estimate betas and correlations for a portfolio of UK online gambling stocks. Findings This study finds that beta for the online gambling portfolio is less than 1, indicative of defensiveness toward the market, a result that is consistent with prior literature for sin stocks. In addition, the conditional correlation between the market and online gambling portfolio is small when compared to the correlation of the market and socially responsible portfolios. Findings suggest that the adoption of the Gambling Act 2005 increases the conditional correlation between the market and online gambling portfolio and it also increases the conditional betas for the online gambling portfolio. Research limitations/implications This paper serves as a starting point for future research on online gambling stocks. Going forward, studies can focus on the financial performance or accounting performance of online gambling stocks. Originality/value This empirical investigation provides insight into the risk characteristics of publicly listed online gambling companies in the UK.

The relative information content of cash flows and earnings affected by their extremity

2014 ◽  
Vol 40 (7) ◽  
pp. 646-661 ◽  
Author(s):  
Wael Mostafa
Keyword(s):  
Stock Returns ◽  
Information Content ◽  
Statistical Significance ◽  
Explanatory Power ◽  
Cash Flows ◽  
Content Type ◽  
Nested Models ◽  
Relative Information ◽  
Security Returns ◽  
Relative Information Content

Purpose – Many studies examine the relative information content of earnings and cash flows from operations. Most studies find that earnings have higher information content than cash flows. An interesting question that follows is whether these findings hold after controlling the extremity of earnings and cash flows. The purpose of this paper is to examine the relative information content of earnings and cash flows in the following four different cases: first, moderate earnings vs moderate cash flows, second, extreme earnings vs moderate cash flows, third, moderate earnings vs extreme cash flows, and fourth, extreme earnings vs extreme cash flows. Design/methodology/approach – To assess the relative information content of earnings and cash flows for each of the four cases mentioned above, the authors compare the explanatory power for regression of returns on unexpected earnings relative to regression of returns on unexpected cash flows. Therefore, the author compares the adjusted R2 of the model with earnings variables and the model with cash flows variables using Vuong's test, that examines the statistical significance of the difference between adjusted R2s of the rival (non-nested) models, and interpret a statistically higher adjusted R2 as an indicator for higher relative information content. Findings – The results show that: first, when both earnings and cash flows are moderate, earnings are more highly associated with stock market price changes than cash flows, second, when both earnings and cash flows are extreme, earnings also have greater relative information content than cash flows, third, when the extremity differs between earnings and cash flows, the moderate variable is superior to the other extreme variable in explaining security returns. These results suggest that earnings are definitely more value relevant than cash flows. However, only in cases when cash flows from operations are moderate and earnings are extreme, cash flows possess higher information content than earnings. Practical implications – The explanatory power for stock returns will be higher for earnings or cash flows depending on which is more highly persistent. This result reverses the conventional finding of the superiority of earnings over cash flows in explaining security returns. Originality/value – In contrast to previous studies, the authors control for the extremity of earnings and cash flows when evaluating the relative information content of earnings and cash flows from operations.

Comparing the informativeness of sustainability disclosures versus ESG disclosure ratings

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Li Li Eng ◽  
Mahelet Fikru ◽  
Thanyaluk Vichitsarawong
Keyword(s):  
Information Content ◽  
Firm Value ◽  
Stock Price ◽  
Market Value ◽  
Content Type ◽  
Company Valuation ◽  
Incremental Information ◽  
The Impact ◽  
Different Sources ◽  
Practical Implications

Purpose The purpose of this paper is to examine the impact of sustainability disclosures and disclosure ratings on firm value. This paper compares the informativeness of sustainability disclosures in company reports versus environmental, social and governance (ESG) disclosure ratings. The authors examine the extent to which they provide incremental information. Design/methodology/approach The sample consists of panel data from over 2,600 publicly-listed non-financial US companies for the period 2014–2018. The authors obtain sustainability disclosures from Sustainability Accounting Standards Board (SASB) Navigator and ESG disclosure scores from Bloomberg. The authors regress market value and/or stock price on sustainability disclosures and ESG scores to evaluate information content. Findings ESG scores are positively associated with market value and price. Sustainability disclosures in the form of metrics and company-tailored narratives provide incremental information content on market value and/or price. Boilerplate disclosures reduce market value and price. Sustainability disclosures and ESG scores provide incremental information, suggesting that it would be beneficial to harmonize standards for reporting sustainability disclosures. Research limitations/implications The limitation is that the authors have only considered sustainability disclosures for a sample of US companies from two sources – SASB Navigator and Bloomberg. Practical implications The paper provides some evidence that may be pertinent to the debate on whether to harmonize the guidance on reporting sustainability issues. Social implications The paper provides evidence on the benefits to firms for reporting sustainability issues. Originality/value This paper is among the first to analyze company sustainability disclosures obtained from two different sources – SASB Navigator and ESG disclosure ratings – and compare them for relevance for company valuation. With SASB Navigator, the authors obtain further refinement into the nature of the information provided in the sustainability disclosures, that is, boilerplate, company-tailored or metrics disclosures.

Disclosure of interim review reports: Do interim going concern conclusions have information content?

2021 ◽  
Author(s):  
Matthew Grosse ◽  
Tom Scott
Keyword(s):  
Information Content ◽  
Annual Report ◽  
Market Reaction ◽  
Financial Statements ◽  
Relevant Information ◽  
Audit Opinion ◽  
Going Concern ◽  
Significant Difference ◽  
Incremental Information ◽  
Review Reports

This paper examines the information content of interim review assurance in the Australian mandatory disclosure setting. First, we find a strong negative market reaction to interim going concern conclusions (IGCC) contained in the review of interim financial statements. Second, we find no significant difference between the market reaction to IGCCs and annual going concern opinions (AGCO) received at the annual report audit. Finally, we show IGCCs are significant predictors of subsequent AGCOs, and provide incremental information from the previous annual report audit opinion. Overall, these results contribute to the literature on the benefits of mandatory interim assurance by showing that going concern conclusions contained in interim financial statements provide investors with new and relevant information.

The emerging role of coopetition within inter-firm relationships

2019 ◽  
Vol 30 (2) ◽  
pp. 414-437 ◽  
Author(s):  
Zach Zacharia ◽  
Michael Plasch ◽  
Usha Mohan ◽  
Markus Gerschberger
Keyword(s):  
Resource Dependence ◽  
Empirical Support ◽  
Resource Dependence Theory ◽  
Structured Interview ◽  
Future Research ◽  
Multiple Perspectives ◽  
Content Type ◽  
Capital Costs ◽  
Interview Process ◽  
A Value

Purpose Increasing environmental uncertainty, more demanding customers, rapid technological growth and rising capital costs have all forced firms to evolve from collaborating with buyers and suppliers to collaborating with their competitors and that is called coopetition. The purpose of this paper is to better understand the antecedents and outcomes associated with coopetition. Design/methodology/approach Building from the existing literature and three theoretical foundations, resource-based theory, resource dependence theory and game theory, the authors develop a model showing the antecedents and outcomes of coopetition and associated propositions of coopetition. Using a semi-structured interview process of 21 industry executives, the authors offer empirical support for the proposed coopetition model and propositions. Findings Firms are increasingly dependent on the knowledge and expertise in external organizations to innovate, solve problems and improve supply chain performance. This research suggests that there is a value for firms to consider coopetition as a part of their inter-firm strategies. Research limitations/implications The semi-structured interview process used in this research provided a wealth of information and executive experiences in coopetition. The interviews, however, only provide a single perspective of collaborative engagements with competitors. Multiple perspectives of each project would add value to this research. Originality/value Collaboration among buyers and suppliers have been well researched; however, there has not been as much research on coopetition. This research provides a new area for future research for academics and offers suggestions for managers to improve the effectiveness and efficiency of their coopetition projects.

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