Do firms use early guidance to disclose the effect of conservatism on future earnings?

2019 ◽  
Vol 18 (3) ◽  
pp. 432-455
Author(s):  
Carlo D’Augusta ◽  
Giulia Redigolo
Keyword(s):  
Voluntary Disclosure ◽  
Past Research ◽  
Financial Reports ◽  
Content Type ◽  
Future Earnings ◽  
The Difference ◽  
Earnings Trends ◽  
Annual Earnings ◽  
The Cost ◽  
Manager Incentives

Purpose By deferring profits and anticipating losses, conservatism makes earnings increases more persistent and earnings declines more likely to revert. Therefore, the level of conservatism in current earnings has implications for future earnings expectations. Past research shows that outsiders can fail to understand these implications. This paper aims to investigate whether firms help outsiders by voluntarily disclosing their expectations about how conservatism will affect future earnings trends. Design/methodology/approach The authors examine the likelihood and content of “early” earnings guidance – i.e. guidance about future earnings that is released around or before the announcement of current earnings. The sample is made of 8,820 annual earnings announcements, 62 per cent of which are combined with early guidance. Findings The authors find that the more conservative current earnings, the higher: the likelihood that the firm releases early guidance; the likelihood that the firm predicts a positive change in earnings; and the difference between the forecasted earnings and current earnings. The authors also find such guidance to be relevant to analysts, who use it to update their forecasts. Practical implications By showing that firms use early guidance to disclose the effect of conservatism on future earnings, the study is interesting to users and preparers because it shows that analysts need and use such disclosure; and regulators because it alleviates concerns about the information consequences of conservatism. Originality/value The findings show that firms do not refrain from committing to positive early guidance to disclose the earnings effects of conservatism. This is interesting in light of the difficulty of predicting such effects, the manager incentives to keep expectations low and the cost of committing to positive guidance instead of less risky qualitative disclosure alternatives. In this way, the authors contribute to the literature on the interrelation between voluntary disclosure and conservatism in financial reports.

Business uncertainty and financial leverage: should the firm double up on risk?

2019 ◽  
Vol 45 (4) ◽  
pp. 536-544
Author(s):  
Khaled Elkhal
Keyword(s):  
Financial Distress ◽  
Empirical Studies ◽  
Past Research ◽  
Optimum Level ◽  
Business Risk ◽  
Financial Leverage ◽  
Research Papers ◽  
Content Type ◽  
The Cost ◽  
The Relationship

Purpose The purpose of this paper is to examine the nature of the relationship between business risk and financial leverage. While past theoretical and empirical studies on this topic use similar variables, overall, their findings are inconclusive. In this paper, the author contends this is partially due to inappropriate proxies for business risk that are commonly used in these research papers. To correct for this misspecification, this paper proposes an alternative proxy for business risk that is isolated from the effects of financial leverage. Design/methodology/approach Past research on the relationship between business risk and financial leverage uses some variations in a firm’s operating cash flow as a proxy for business risk. This proxy cannot solely reflect business risk and may very well be affected by the level of financial leverage, especially for financially distressed firms. This paper proposes an alternative proxy for business risk that is isolated from the effects of financial leverage. This proxy is the cost of capital of an all-equity firm. The theoretical model developed in this paper is based on deriving the optimum level of debt as a function of business risk in the context of the Modigliani and Miller Proposition II model. Findings The findings show a positive linkage between business risk and financial leverage. This relationship is robust to the various forms the cost of financial distress function may take. Originality/value The mixed findings in past research papers regarding the relationship between business risk and financial leverage are mainly due to “inappropriate” measures of business risk that do not only reflect one firm attribute and are contaminated with other factors mainly financial leverage. As such, since the variable of interest is misspecified, the outcome of these studies cannot be credible. This paper attempts to correct for such misspecification by proposing a proxy that only reflects business risk. In addition, the proposed model is based on the widely acceptable Modigliani and Miller static theory of capital structure.

scholarly journals The cost efficiency of Vietnamese banks – the difference between DEA and SFA

2020 ◽  
Vol 22 (2) ◽  
pp. 209-227
Author(s):  
Phong Hoang Nguyen ◽  
Duyen Thi Bich Pham
Keyword(s):  
Cost Efficiency ◽  
Stochastic Frontier Analysis ◽  
Random Noise ◽  
Stochastic Frontier ◽  
Time Consistency ◽  
Efficiency Frontier ◽  
Content Type ◽  
Frontier Analysis ◽  
The Difference ◽  
The Cost

PurposeThe paper aims to enrich previous findings for an emerging banking industry such as Vietnam, reporting the difference between the parametric and nonparametric methods when measuring cost efficiency. The purpose of the study is to assess the consistency in issuing policies to improve the cost efficiency of Vietnamese commercial banks.Design/methodology/approachThe cost efficiency of banks is assessed through the data envelopment analysis (DEA) and the stochastic frontier analysis (SFA). Next, five tests are conducted in succession to analyze the differences in cost efficiency measured by these two methods, including the distribution, the rankings, the identification of the best and worst banks, the time consistency and the determinants of efficiency frontier. The data are collected from the annual financial statements of Vietnamese banks during 2005–2017.FindingsThe results show that the cost efficiency obtained under the SFA models is more consistent than under the DEA models. However, the DEA-based efficiency scores are more similar in ranking order and stability over time. The inconsistency in efficiency characteristics under two different methods reminds policy makers and bank administrators to compare and select the appropriate efficiency frontier measure for each stage and specific economic conditions.Originality/valueThis paper shows the need to control for heterogeneity over banking groups and time as well as for random noise and outliers when measuring the cost efficiency.

A costing study of the document supply service at a Chinese research library: the case of Wuhan University Library

2008 ◽  
Vol 36 (2) ◽  
pp. 86-90 ◽  
Author(s):  
Xia Liu ◽  
Ting Lei
Keyword(s):  
Design Methodology ◽  
Unit Cost ◽  
Research Library ◽  
Cost Study ◽  
Content Type ◽  
University Library ◽  
Costing Study ◽  
The Difference ◽  
The Cost ◽  
The University

PurposeThis paper aims to report on a cost study of document supply at Wuhan University Library, and to investigate the difference in costs over time and the cost‐effectiveness for the university.Design/methodology/approachA quantitative approach is employed.FindingsThe borrowing unit cost and lending unit cost decreased by 27 percent and 60 percent, respectively, between 2002 and 2004, but showed a small increase in 2006.Originality/valueThe paper reveals the cost of document supply in a Chinese research library and proves that the cost could be lowered rapidly by taking effective measures. The paper also demonstrates that document supply is an effective way to resolve the library budgetary crisis as well as satisfying end‐users' needs.

Does corporate ethics help investors forecast future earnings?

2017 ◽  
Vol 13 (1) ◽  
pp. 62-77 ◽  
Author(s):  
Hsuan-Chu Lin ◽  
Chuan-San Wang ◽  
Ruei-Shian Wu
Keyword(s):  
Stock Returns ◽  
Financial Reporting ◽  
Voluntary Disclosure ◽  
Control Variable ◽  
Equity Capital ◽  
Current Debate ◽  
Common Belief ◽  
Content Type ◽  
Future Earnings ◽  
Correct Information

Purpose A firm’s ethical behavior is commonly perceived beneficial to the firm and its investors in the literature. However, activities of corporate social responsibility (CSR) are often delivered with multiple purposes, and their expenses are aggregated with other expenditures in financial statements. These two features motivate the authors to hypothesize and find that investors’ ability to predict future earnings of ethical firms may not be improved through observing the CSR activities. The study aims to suggest that CSR spending should be expressed separately from other expenses in financial reports to help investors predict the future performance of CSR firms. Design/methodology/approach The authors use future (forward) earnings response coefficients (FERC) to testing whether current stock returns reflect correct information about future earnings. The basic specification of FERC framework, initially developed by Collins et al. (1994), is a regression of current-year stock returns on past, concurrent and future reported earnings with future stock returns as a control variable. A significantly positive FERC provides evidence that investors have rich and correct information about future earnings. Findings The authors find less future earnings information contained in current stock returns for firms with higher intensity of CSR activities. The association is also negative between current stock returns and future earnings reported by firms with a higher degree of CSR spending aggregated with selling, general and administrative expenses (SG&A). In additional analyses, the intensity of CSR activities is positively associated the uncertainty of benefits, measured by the standard deviation of future earnings over the next five years. This future earnings variability does not exist, even though CSR spending is aggregated with SG&A, consistent with the basic principle that accounting expenses create no future economic impacts. Originality/value The authors contribute to the current debate over consequences of CSR activities and accounting for CSR spending from a different angle. A common belief is that voluntary disclosure on CSR activities would aid in reducing costs of equity capital and financial reporting errors. These studies provide corporate managers with good reasons and motivations to expect beneficial consequences of voluntary disclosure. The results show that general investors are less capable of predicting future earnings when there is a higher degree of CSR spending aggregated with SG&A. It also highlights potential problems in the disclosure of general-purpose financial reporting to accounting standard setters.

scholarly journals Does the choice of stock selection criteria affect the performance of Sharīʿah-compliant equity portfolios?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Muhammad Wajid Raza
Keyword(s):  
Risk Factors ◽  
Financial Performance ◽  
Transaction Cost ◽  
Selection Criteria ◽  
Stock Selection ◽  
Content Type ◽  
Screening Guidelines ◽  
Equity Portfolios ◽  
The Difference ◽  
The Cost

Purpose There are a number of differences in the current Sharīʿah screening guidelines formulated by Sharīʿah scholars associated with world-renowned index providers and financial institutions. The purpose of this study is to highlight the consequences of such differences on the portfolio level outcomes for Sharīʿah-compliant investors. This study also investigates the cost of adopting an alternative stock selection methodology. Design/methodology/approach Seven Sharīʿah-compliant equity portfolios (SCEPs) are created from the active constituents of the S&P 500. Size, sector allocation and financial performance of the resulting seven portfolios are evaluated for the period 1984–2019. Style analysis is performed to attribute the difference in financial performance caused by the choice of selection criteria to different risk factors. The cost of switching the selection criteria is evaluated with turnover analysis and break-even transaction cost. Findings The choice of stock selection criteria has a significant effect on the size, sector bets and financial performance of the portfolios. Those portfolios which are constructed with market capitalization-based screens outperform portfolios constructed with total assets-based screens. The turnover analysis revealed that SCEPs are relatively costly in practice. Originality/value This study investigates the performance of Sharīʿah-compliant portfolios in the context of seven different screening guidelines. The effects of transaction cost and performance attribution to different risk factors represent the key contributions of this study.

Factors associated with the voluntary disclosure of the integrated report in Brazil

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ruhama Bezerra Fernandes ◽  
Alexandro Barbosa
Keyword(s):  
Voluntary Disclosure ◽  
Stock Exchange ◽  
Multinomial Logistic Regression ◽  
Positive Association ◽  
Cultural Dimensions ◽  
Board Structure ◽  
Integrated Reporting ◽  
Financial Reports ◽  
Content Type ◽  
Factors Associated

Purpose This paper aims to investigate the factors associated with the voluntary disclosure of integrated reporting (IR) in Brazil of the companies listed on the stock exchange – Brasil, Bolsa, Balcão. The cultural dimensions of a nation reflect different priorities in accounting practices. The Brazilian case, therefore, becomes significant, as Brazil is increasingly important in world markets. Design/methodology/approach As an explanatory econometric model, multinomial logistic regression was used (Y = 2 to describe the probability of the IR disclosure; Y = 1 to describe the occurrence of reports with practices similar to the IR and Y = 0 to describe the occurrence of non-disclosure of non-financial reports). Applied to panel data with random effects (chosen for best performance) in the period from 2016 to 2019. Findings Reveals the positive association of the company’s profitability and market-to-book with the probability of the IR disclosure. Regarding the board composition, it is suggested that size does not make a difference, with the greater participation of women and independence of directors associated with better probabilities of adopting the IR in Brazil. Originality/value This work is the first to characterize the Brazilian reality of voluntary disclosure, specifying the implementation of IR, compared to publishing reports similar to the IR and not reporting structured non-financial statements. It can also be considered the first study on the relevance of the board structure in the disclosure of IR by Brazilian companies. Finally, it contributes to the literature on IR adoption, bringing practical results in understanding the most favorable conditions in which the IR framework will be fully implemented.

Disclosure, ownership structure, earnings announcement lag and cost of equity capital in emerging markets

2015 ◽  
Vol 16 (1) ◽  
pp. 28-57 ◽  
Author(s):  
Hichem Khlif ◽  
Khaled Samaha ◽  
Islam Azzam
Keyword(s):  
Ownership Structure ◽  
Voluntary Disclosure ◽  
Equity Capital ◽  
Annual Reports ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Government Ownership ◽  
Earnings Announcement ◽  
Content Type ◽  
The Cost

Purpose – The purpose of this paper is to examine the effect of voluntary disclosure, ownership structure attributes and timely disclosure on cost of equity capital in the emerging Egyptian capital market. Design/methodology/approach – A content analysis of annual reports is used to measure the extent of voluntary disclosure. Earnings announcement lag (EAL) is used to measure the quality of voluntary disclosure (i.e. timely disclosure). Finally, the Capital Asset Pricing Model (CAPM) framework is used to estimate cost of equity capital. Findings – The authors find a negative relationship between the level of voluntary disclosure and cost of equity capital. More specifically, the authors document that this association is strongly significant under high ownership dispersion, low government ownership and shorter EAL. Finally, EAL is positively associated with cost of equity capital. Research limitations/implications – The authors use the CAPM framework as a proxy for the cost of equity since forecasted earnings per share are not communicated by financial analysts in the Egyptian Stock Exchange. Practical implications – The findings demonstrate for managers that the increased levels of voluntary and timely disclosure reduce the cost of external finance and improve the marketability of firms’ equities, which may directly impact growth opportunities especially when information is communicated to investors in a timely fashion. For regulators, it provides evidence that high government ownership reduces the value relevance of voluntary disclosure among investors, while free float as a proxy for high ownership dispersion improves it. Originality/value – The findings show that corporate disclosure policy depends more on the managers’ incentives to provide informative annual reports than on standards and regulations. The study also represents a first attempt that demonstrates how ownership structure and timely disclosure influence the relationship between disclosure and cost of equity capital.

Corporate ethical behavior and the cost of equity capital: evidence from the world’s most ethical companies

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Rim Zouari-Hadiji ◽  
Yamina Chouaibi
Keyword(s):  
Sustainable Development ◽  
Business Ethics ◽  
Cost Estimation ◽  
Voluntary Disclosure ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Content Type ◽  
Ethical Approach ◽  
The Cost

Purpose This paper aims to examine the effect of the corporate ethical approach on the cost of equity capital. This study is conducted on a large international sample on behalf of the world’s most engaged firms from an ethical point of view in 2015. Design/methodology/approach The multivariate linear regression model is used to meet the purpose of this study and research hypotheses are also examined using a sample of 80 of most ethical firms in the world during the year 2015. Moreover, three variables (i.e. business ethics, corporate social responsibility and executive compensation based on the achievement of sustainable development goals) are used to reflect the corporate ethical approach and the implied cost of equity capital is used for estimating the cost of equity. In this regard, equity cost estimation is the most appropriate approach to test the effect of business ethics on the cost of financing firms. Findings Based on a sample of 80 firms emerging as the world’s most ethical firms in 2015, the results revealed that firms with better ethics scores are significantly associated with a reduced cost of equity capital. This paper also demonstrates that the executive incentive pays that are based on the objectives of sustainable development are able to explain different outcomes regarding the relation between corporate ethical behaviors and the cost of equity. These findings support arguments in the literature that firms with socially responsible practices have a higher valuation and lower risk. Originality/value This study provides implications for global regulators and policymakers when setting social reporting standards, suggesting that corporate ethical engagement reduces the cost of equity capital by decreasing the information asymmetry and thereby reducing the firms’ risk. Therefore, the findings may be informative to international managers and investors when considering the effect of business ethics on the firm’s ex-ante cost of equity. In this perspective, the voluntary disclosure of information makes it possible to mitigate the problems of asymmetry of information and conflict of interest between the firm and its main providers of capital, which could reduce the cost of equity.

Stakeholders influence on voluntary disclosure practices by listed companies in Nigeria

2018 ◽  
Vol 60 (2) ◽  
pp. 267-283 ◽  
Author(s):  
Samson Iliya Nyahas ◽  
Joseph Mpeera Ntayi ◽  
Nixon Kamukama ◽  
John Munene
Keyword(s):  
Voluntary Disclosure ◽  
Listed Companies ◽  
Future Research ◽  
Design Data ◽  
Cross Sectional ◽  
Financial Reports ◽  
Content Type ◽  
Listed Firms ◽  
Regulatory Bodies ◽  
Stakeholder Needs

PurposeThe purpose of this paper is to investigate stakeholders influence on voluntary disclosure practices of listed firms in Nigeria from the perspective of managers.Design/methodology/approachThe study used a cross-sectional research design. Data were collected using a survey questionnaire for the constructs of power, legitimacy and urgency. The data for the voluntary disclosure practices were obtained from financial reports of 92 listed companies. The data were analysed using partial least squares.FindingsThe results indicate that managers’ perception of stakeholders’ power and urgency are associated with voluntary disclosure. Legitimacy, firm size and industrial category are not significant predictors of voluntary disclosure. It was concluded that stakeholders who are in control of critical resources such as the financial community, customers and creditors should put more pressure on companies to disclose information to meet various stakeholder needs. This will complement the efforts of regulatory agencies in promoting transparency in voluntary disclosure.Research limitations/implicationsThe cross-sectional nature of the study means that it does not capture changes in perceptions of managers overtime. Future research may consider a longitudinal study. The study is not industry-specific as such and may capture industry differences. However, in this study, the authors controlled for industry category.Practical implicationsThe result has implications for a number of interested parties such as shareholders, regulatory bodies, labour union, academics and mangers.Originality/valueThe study has contributed to the authors’ understanding of managers’ perception of stakeholder attributes that matter in voluntary disclosure decision from the perspective of a developing country like Nigeria.

Number-location bias: do consumers correctly process the number on the product package?

2019 ◽  
Vol 28 (1) ◽  
pp. 80-94
Author(s):  
Jihye Park ◽  
Yoon Jin Ma
Keyword(s):  
Past Research ◽  
Product Packaging ◽  
Content Type ◽  
Product Categories ◽  
Volume Weight ◽  
Visual Frame ◽  
The Difference ◽  
Numeric Information ◽  
The Right ◽  
Product Package

Purpose This study aims to investigate the following three issues: whether consumers process numeric information with locational cues, which locations (horizontal vs vertical) are more influential in processing numbers and whether a number-location association is weakened or strengthened when a visual reference frame moves up or down. Design/methodology/approach A field study and a series of three lab experiments were conducted to examine the location effect of numeric information on the package façade on the perceived magnitude of a number. Findings The authors found that a number at the right was perceived as larger than one at the left only when the number is located at the bottom. Also, placing numeric information at the bottom rather than the top of a product package façade was more powerful in processing the numeric information, but this is true only when the visual frame is set lower. Practical implications This study provides practical insights for product managers in placing core numeric information on product packaging to effectively communicate product value to consumers. Optimal locations can be deliberately considered along with types of numeric information and product categories. For healthy products that promote fewer calories, the top area of the package façade may be a better position for placing information on calories per serving to make the product more appealing to those who follow a healthy diet. Heavier, more voluminous products (e.g., refrigerator) better position their volume/weight information at the bottom than at the top or at the right of the bottom than at the left of the bottom on the product facade. Either the left side or right side of the top position may be beneficial for thinner, lightweight products (e.g., television). Originality/value The present work adds valuable empirical findings; inconsistent with past research, left-right location-number associations are not always true. People tend to associate smaller numbers with left-side locations and larger numbers with right-side locations only when the number is located at the bottom. Also, the study reported that top-small, bottom-large associations are not always true. The difference in perceived magnitude of the number between a number at the top and one at the bottom within the visual frame is significant only when the visual frame is set close to the ground.

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