Do changes in gross margin percentage provide complementary information to revenue and earnings surprises?

2015 ◽  
Vol 14 (3) ◽  
pp. 239-261 ◽  
Author(s):  
Camillo Lento ◽  
Naqi Sayed
Keyword(s):  
Abnormal Returns ◽  
Informational Content ◽  
Market Returns ◽  
Gross Margin ◽  
Earnings Announcement ◽  
Content Type ◽  
Announcement Date ◽  
Income Statement ◽  
Earnings Surprises ◽  
Prior Literature

Purpose – The purpose of this paper is to investigate the association between gross profit percentage, abnormal market returns, revenue surprises and earnings surprises. Gross margin is relied upon by various market participants, as its predictive power is incremental and distinct from revenue and earnings signals; however, gross margin has received little researcher attention. Design/methodology/approach – General regression specifications found in the prior literature are extended to assess the informational content of changes in gross margin percentage. In addition, various portfolios are created based around the nature of the signals (positive or negative), provided by each income statement metrics (revenue, gross margin and earnings). A sample of 5,582 quarterly observations of S & P 500 firms is compiled. The main regressions are exposed to three robustness tests that focus on industry sub-groupings, institutional ownership and fourth-quarter observations. Findings – The main findings reveal that gross margin percentage changes and earnings surprises are significantly related to abnormal market returns in the short window around the earnings announcement date and persist into a wider window measured as the quarter after the earnings announcement date. The relationship between gross margin percentage changes and abnormal returns is more pronounced when positive (negative) changes in gross margin percentage are accompanied by positive (negative) revenue and earnings surprises. Research limitations/implications – This study relies upon S & P 500 firms which are all relatively large firms. Therefore, the results may not be generalizable to smaller firms. In addition, the gross margin change is measured as the quarter-over-quarter percentage change because there is no analyst expectation for gross margin. Originality/value – This paper extends the prior literature by developing three testable hypotheses that investigate the linkages between abnormal market returns, gross margin and revenue and earnings surprises. This is the first known study to investigate the informational content of changes in gross margin percentage.

Transaction-based lending and accrual quality

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Stephen Gray ◽  
Arjan Premti
Keyword(s):  
Earnings Quality ◽  
Financial Statements ◽  
Financial Statement ◽  
Cost Of Debt ◽  
Accrual Quality ◽  
Content Type ◽  
Income Statement ◽  
Prior Literature ◽  
The Cost

PurposeThis study examines how lenders modify their behavior and their use of traditional, transaction-based lending models in credit decisions when faced with low earnings quality.Design/methodology/approachTo measure the earnings quality, following Bharath, Sunder and Sunder (2008), the authors use three measures of accrual quality and combine them into a simple parsimonious measure of accrual quality. Subsequently, the authors apply the incremental R-square approach used by Kim and Kross (2005) to determine the degree to which lenders modify their reliance on financial statement ratios when faced with low accrual quality.FindingsConsistent with prior literature, this study shows that the cost of debt is higher when accrual quality is low. In addition, this study extends prior literature by showing that lenders decrease their reliance on income statement data to make credit decisions as accrual quality decreases.Originality/valueThis paper broadens existing literature on the pricing of information risk in capital markets by being the first to show that lenders modify their reliance on financial statement data when faced with low-quality accruals. In addition, this paper extends the findings of Billings and Morton (2002) and demonstrates to managers the futility of using accrual manipulations to obtain more favorable credit terms. Lastly, this paper aids regulators and standard setters who seek to improve the usefulness of financial statements by showing that creditors do not appear to be misled by reporting choices that lower the quality of accruals.

Asymmetric information and opportunism in insider share-pledging

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Michael R. Puleo ◽  
Steven E. Kozlowski
Keyword(s):  
Private Information ◽  
Abnormal Returns ◽  
Risk Assessments ◽  
Corporate Policies ◽  
Market Reactions ◽  
Content Type ◽  
Hurdle Models ◽  
Cumulative Abnormal Returns ◽  
Earnings Surprises ◽  
The Us

PurposeAmid growing attention from investors, regulators and advisory firms in recent years, this study assesses whether managers exploit private information to time share-pledge transactions and extract personal benefits while avoiding unintended market scrutiny.Design/methodology/approachWe use hand-collected pledging data for a random sample of S&P 1500 firms to examine whether private information influences insider share-pledging activity using Heckman selection and two-part hurdle models of the pledge decision. We also conduct an event study analysis of announcement returns to measure market reactions to pledging news and determine whether share-pledge disclosures affect investor risk assessments.FindingsConsistent with insiders timing pledges prior to anticipated performance declines, both the likelihood and level of pledging increase significantly with negative earnings surprises. New share-pledges precede significant decreases in abnormal returns, and public announcement of new pledging corresponds with significant negative cumulative abnormal returns. The evidence suggests that insiders exploit private information to time pledges, and that investors update risk assessments and value estimates based on information conveyed by these transactions.Practical implicationsOur findings hold important implications for governance and regulation of pledged shares, indicating that permissive reporting requirements in the US facilitate informed pledging and may undermine incentive alignment between managers and shareholders. The analysis promotes transaction-specific disclosures and transparent corporate policies for insider share-pledging.Originality/valueOurs is among the first empirical analyses of share-pledging in US firms and the first to examine the role of private information in pledging decisions. We offer novel evidence on the opportunistic use of pledged shares and provide insight to predictors of share-pledging behavior.

When no news is good news: failing to increase dividends

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
David Michayluk ◽  
Karyn Neuhauser ◽  
Scott Walker
Keyword(s):  
Contrast Effect ◽  
Design Methodology ◽  
Abnormal Returns ◽  
Good News ◽  
Sample Design ◽  
Market Returns ◽  
Content Type ◽  
Dividend Announcements ◽  
Effect Hypothesis ◽  
Dividend Increases

PurposeThe study's purpose is to examine market returns around dividend announcements that contrast with a pattern of prior dividend announcements.Design/methodology/approachThe paper identifies firms that have a smooth dividend pattern of once-a-year dividend increases but at some point break that pattern and announce an unchanged dividend. The sample design allows the opportunity to investigate the market reaction to unchanged dividend announcements when an increase was likely to have been expected.FindingsThe results indicate that failing to increase the dividend is associated with significantly positive abnormal returns that are greater in magnitude for more entrenched dividend-increase records, supporting a contrast-effect hypothesis.Originality/valueThe results indicate that dividends are interpreted not only relative to the immediate dividend amount but also how the decision contrasts with dividends over a prolonged period. This finding suggests that the information content of the announcement of an unchanged dividend can vary according to the prior dividend pattern.

Voluntary accounting changes and post-earnings announcement drift

2015 ◽  
Vol 23 (1) ◽  
pp. 2-16 ◽  
Author(s):  
Yi-Ching Chen ◽  
Tawei Wang ◽  
Jia-Lang Seng
Keyword(s):  
Design Methodology ◽  
Accounting Choice ◽  
Filing Date ◽  
Market Reactions ◽  
Earnings Announcement ◽  
Content Type ◽  
Post Earnings Announcement Drift ◽  
Announcement Date ◽  
The Us ◽  
Accounting Changes

Purpose – The purpose of this paper is to investigate the relation between voluntary accounting changes (VACs) and post-earnings announcement drift. In addition, the authors examine how accounting choice heterogeneity moderates such association. Design/methodology/approach – The authors collect VAC firms in the US in the period from 1994 to 2008 and identify the heterogeneity of accounting choices between VAC and non-VAC firms. To test the hypotheses, the authors consider a 10-Q filing window and a post-filing drift window. The 10-Q filing window begins from one trading day before and ends on one trading day after the quarterly report filing date. The post-filing drift window begins from two trading days after the filing date and ends on 60 trading days with respect to the earnings announcement date. Findings – The results demonstrate that, overall, VAC does not affect the three-day market reactions to 10-Q filings. However, after taking into account the accounting choice heterogeneity, the authors observe that VAC is positively related to the market reactions to surprises and negatively associated with the post-filing period drift. Originality/value – The paper contributes to the literature by showing that VACs affect the market’s responses to 10-Q filings only when such change results in different accounting practices compared to the VAC firm’s major competitors. Furthermore, given the change with heterogeneity requires more time to process, VACs are related to post-filing announcement drift.

The stock market’s reaction to accounting information: the cases of Chile and Peru

2016 ◽  
Vol 6 (3) ◽  
pp. 254-268 ◽  
Author(s):  
Mauricio Melgarejo ◽  
Eduardo Montiel ◽  
Luis Sanz
Keyword(s):  
Latin American ◽  
Stock Prices ◽  
Stock Markets ◽  
Stock Price ◽  
Small Firms ◽  
Accounting Information ◽  
Abnormal Returns ◽  
Earnings Announcement ◽  
Content Type ◽  
The Impact

Purpose – The purpose of this paper is to analyze the stock price and volume reactions around firms’ earnings announcement dates in two Latin American stock markets: Chile and Peru. Design/methodology/approach – This study uses multivariate regression analysis to determine the impact of accounting information on stock prices and volume traded around the firms’ earnings announcement dates. Findings – The authors find that quarterly earnings surprises explain stock abnormal returns and abnormal trading volumes around the earnings announcement dates in the Santiago (Chile) and Lima (Peru) stock exchanges. The authors also find that these two effects are driven by small firms. Originality/value – This is one of the first articles to study the price and volume reactions to accounting information in Latin American stock markets.

scholarly journals Does earnings surprise determine the timing of the earnings announcement? Evidence from earnings announcements of Indian companies

2020 ◽  
Vol 5 (1) ◽  
pp. 119-134
Author(s):  
Krishna Prasad ◽  
Nandan Prabhu
Keyword(s):  
Earnings Announcements ◽  
Earnings Announcement ◽  
Content Type ◽  
Quarterly Earnings ◽  
Earnings Surprise ◽  
Market Responses ◽  
Earnings Surprises ◽  
Study Methodology ◽  
The Difference ◽  
Reported Earnings

PurposeThe purpose of this study is to investigate whether the earnings surprise influences decision to make earnings announcements during or after the trading hours is influenced by the earnings surprise resulting from the difference between consensus earnings estimates and the actual reported earnings.Design/methodology/approachEvent study methodology was employed to test the hypotheses relating to earnings surprise and timing of earnings announcements. Twelve quarterly earnings announcements of 30 companies, drawn from BSE SENSEX of India, were studied to test the hypothesized relationships.FindingsThe study has found statistically significant differences in the market responses to the earnings announcements made during and after the trading hours. The market demonstrated a negative response to the earnings announcements made after the trading hours. Further, the results of the logistic regression have shown that the presence of significant earnings surprises is likely to induce firms to make earnings announcements after the trading hours. The results indicate that those firms that intend to reduce the overreaction and underreaction to earnings surprises are likely to make earnings announcements after the trading hours.Originality/valueThis paper highlights the market response to the earnings announcement made during and after the regular trading hour. Further, the paper examines if the earnings surprise influences the decision to announce the results.

Do Individual Investors Cause Post-Earnings Announcement Drift? Direct Evidence from Personal Trades

2008 ◽  
Vol 83 (6) ◽  
pp. 1521-1550 ◽  
Author(s):  
David A. Hirshleifer ◽  
James N. Myers ◽  
Linda A. Myers ◽  
Siew Hong Teoh
Keyword(s):  
Direct Evidence ◽  
Abnormal Returns ◽  
Individual Investors ◽  
Individual Investor ◽  
Earnings Announcement ◽  
Attention Effect ◽  
Post Earnings Announcement Drift ◽  
Earnings Surprises ◽  
Investor Trading ◽  
The Individual

ABSTRACT: This study tests whether nai¨ve trading by individual investors, or some class of individual investors, causes post-earnings announcement drift (PEAD). Inconsistent with the individual trading hypothesis, individual investor trading fails to subsume any of the power of extreme earnings surprises to predict future abnormal returns. Moreover, individuals are significant net buyers after both negative and positive extreme earnings surprises, consistent with an attention effect, but not with their trades causing PEAD. Finally, we find no indication that trading by individuals explains the concentration of drift at subsequent earnings announcement dates.

Stock price movements and trading behaviors around merger and acquisition announcements

2019 ◽  
Vol 15 (4) ◽  
pp. 593-610 ◽  
Author(s):  
Jin Young Yang ◽  
Reuben Segara ◽  
Jingwei Feng
Keyword(s):  
Stock Price ◽  
Abnormal Returns ◽  
Wealth Effects ◽  
Individual Investors ◽  
Cross Sectional ◽  
Foreign Investors ◽  
Content Type ◽  
Announcement Date ◽  
Target Firms ◽  
Price Movements

Purpose The purpose of this paper is to examine the relationship between price movements of target firms’ stocks and behaviors of local individual, local institutional and foreign investors in trading target firms’ stocks around mergers and acquisitions announcements in Korea. Design/methodology/approach This study uses event study methodology and cross-sectional regressions for abnormal returns. Findings Results reveal that the average abnormal return becomes significantly positive three days prior to the announcement date and becomes insignificant after the announcement date. Results also show that local individual investors tend to sell more intensely prior to announcements for target firms with larger wealth effects. In contrast, foreign investors tend to buy target stocks with larger wealth effects more intensely prior to the announcement date, and then they sell them more intensely in the post-announcement period. Originality/value This paper provides evidence that foreign investors are able to identify target stocks with large wealth effects prior to the announcement date and they realize short-term profits by selling them following the announcement.

Excess offer premium and acquirers’ performance

2018 ◽  
Vol 35 (3) ◽  
pp. 407-425
Author(s):  
Won-Seok Woo ◽  
Suhyun Cho ◽  
Kyung-Hee Park ◽  
Jinho Byun
Keyword(s):  
Market Reaction ◽  
Abnormal Returns ◽  
Market Returns ◽  
Content Type ◽  
Acquiring Firms ◽  
Study Methodology ◽  
Long Term Performance ◽  
Term Performance ◽  
The Impact

PurposeThis paper aims to investigate the causes of mergers and acquisitions (M&A) deals that acquiring firms pay excess premium beyond the market-expected level and examine the relation between the announcement return and long-term performance of the acquiring firms.Design/methodology/approachBased on a sample of 1,767 US firms’ M&A deals from 2000 to 2014, the authors use the expectation model used by Ang and Ismail (2015) to measure normal offer premium in an M&A deal. They conduct the standard event study methodology to observe the market reaction for acquiring companies on the announcement day. Buy-and-hold abnormal returns are used for the main explanatory variable so as to find the impact of the premium paid on the long-term performance of the acquirer.FindingsFirst, acquiring firms are faced with negative market returns when acquiring firms pay excess premiums. Second, poor long-term performance of the acquiring firms is observed if acquiring firms pay excess premium. Finally, the negative relation between excess premium and acquiring firms’ long-term performance weakens, as the sample period becomes longer.Research limitations/implicationsThe hypotheses and results of the empirical study are as follows. First, the acquirer’s market reaction on the announcement day is negative when it pays an excess offer premium. This is because the market perceives the premium to be greater than the value of the deal, which damages the value of the market, as it is not perceived as a proxy for future synergy. Second, the acquirer’s long-term performance is low when it pays the excess offer premium. It is the same result as the acquirer’s market reaction on the announcement day. This shows that the excess premium does not result in either a short-term positive reaction or a long-term profit for the acquiring shareholders. However, it is found that the relationship between the excess premium and the long-term performance of the acquirer decreases with time. This is because the long-term performance of the acquirer is more affected by management and other events after the deal.Originality/valueThe authors divide the total premium paid into the normal offer premium and the excess premium, and their focus is on the excess premium part. The main contribution of this paper is that it analyzes how the excess premium affects the market reaction on the announcement day and the long-term performance of acquiring firms.

scholarly journals Can Mutual Fund Managers Pick Stocks? Evidence from Their Trades Prior to Earnings Announcements

2010 ◽  
Vol 45 (5) ◽  
pp. 1111-1131 ◽  
Author(s):  
Malcolm Baker ◽  
Lubomir Litov ◽  
Jessica A. Wachter ◽  
Jeffrey Wurgler
Keyword(s):  
Mutual Fund ◽  
Earnings Announcements ◽  
Abnormal Returns ◽  
Prior Work ◽  
Mutual Fund Managers ◽  
Earnings Announcement ◽  
Fund Managers ◽  
Earnings Surprises ◽  
Corporate Earnings ◽  
Stock Picking

AbstractRecent research finds that the stocks that mutual fund managers buy outperform the stocks that they sell (e.g., Chen, Jegadeesh, and Wermers (2000)). We study the nature of this stock-picking ability. We construct measures of trading skill based on how the stocks held and traded by fund managers perform at subsequent corporate earnings announcements. This approach increases the power to detect skilled trading and sheds light on its source. We find that the average fund’s recent buys significantly outperform its recent sells around the next earnings announcement, and that this accounts for a disproportionate fraction of the total abnormal returns to fund trades estimated in prior work. We find that mutual fund trades also forecast earnings surprises. We conclude that mutual fund managers are able to trade profitably in part because they are able to forecast earnings-related fundamentals.

Sign in / Sign up

Export Citation Format

Share Document