Accounting Adjustments and the Valuation of Financial Statement Note Information in 10-K Filings

2011 ◽  
Vol 86 (5) ◽  
pp. 1577-1604 ◽  
Author(s):  
Gus De Franco ◽  
M. H. Franco Wong ◽  
Yibin Zhou
Keyword(s):  
Stock Returns ◽  
Stock Prices ◽  
Data Availability ◽  
Financial Statement ◽  
Target Price ◽  
Equity Analysts ◽  
Jel Classifications

ABSTRACT We examine the valuation of financial statement note information at the time of 10-K filings. We find that stock returns around 10-K filings are positively related to accounting adjustments calculated from financial statement note information. We further document that the likelihood of equity analysts issuing a report and updating their target price estimates at the 10-K dates is increasing in the magnitude of the adjustments. Those analysts who do update their target prices at this time revise their estimates consistent with the sign and magnitude of the adjustments. These findings are consistent with financial statement users utilizing financial statement note information to make accounting adjustments, thereby incorporating this information into stock prices. JEL Classifications: G14, G29, M40, M41, M44. Data Availability: All data are publicly available from the sources identified in the article.

Interim Reporting Frequency and the Mispricing of Accruals

2018 ◽  
Vol 32 (3) ◽  
pp. 29-47
Author(s):  
Shou-Min Tsao ◽  
Hsueh-Tien Lu ◽  
Edmund C. Keung
Keyword(s):  
Financial Reporting ◽  
Stock Prices ◽  
Data Availability ◽  
Financial Reports ◽  
Regulatory Changes ◽  
Sample Composition ◽  
Reporting Frequency ◽  
Over Time ◽  
Jel Classifications ◽  
Accrual Mispricing

SYNOPSIS This study examines the association between mandatory financial reporting frequency and the accrual anomaly. Based on regulatory changes in reporting frequency requirements in Taiwan, we divide our sample period into three reporting regimes: a semiannual reporting regime from 1982 to 1985, a quarterly reporting regime from 1986 to 1987, and a monthly reporting regime (both quarterly financial reports and monthly revenue disclosure) from 1988 to 1993. We find that although both switches (from the semiannual reporting regime to the quarterly reporting regime and from the quarterly reporting regime to the monthly reporting regime) hasten the dissemination of the information contained in annual accruals into stock prices and reduce annual accrual mispricing, the switch to monthly reporting has a lesser effect. Our results are robust to controlling for risk factors, transaction costs, and potential changes in accrual, cash flow persistence, and sample composition over time. These results imply that more frequent reporting is one possible mechanism to reduce accrual mispricing. JEL Classifications: G14; L51; M41; M48. Data Availability: Data are available from sources identified in the paper.

Understanding the Determinants of Analyst Target Price Implied Returns

2020 ◽  
Vol 95 (6) ◽  
pp. 125-149
Author(s):  
Patricia M. Dechow ◽  
Haifeng You
Keyword(s):  
Stock Returns ◽  
Investment Decision ◽  
Optimistic Bias ◽  
Target Price ◽  
Expected Return ◽  
Cross Sectional ◽  
Empirical Risk ◽  
Investment Decision Making ◽  
The Cross ◽  
Jel Classifications

ABSTRACT We investigate the determinants of analysts' target price implied returns and the implication of our findings for investment decision-making. We identify four broad sets of factors that help explain the cross-sectional variation in target price implied returns: future realized stock returns, errors in forecasting fundamentals, errors in forecasting the expected return to risk, and biases relating to analysts' incentives. Our results suggest that all four sets help explain target price implied returns, with errors in forecasting the expected return to empirical risk proxies having the greatest impact. Collectively, these variables explain nearly a quarter of the cross-sectional variation in target price implied returns. We use our model to predict the optimistic bias in target price implied returns and evaluate whether investors correctly ignore the predictable bias. The results suggest that investors make similar valuation errors to analysts and/or do not perfectly back out the predicted bias in target prices. JEL Classifications: M40; M41; G14.

Revisiting the (Mis)Pricing of Accruals

2019 ◽  
Vol 4 (1) ◽  
pp. 141-156
Author(s):  
Bradley Lail ◽  
Robert C. Lipe ◽  
Han S. Yi
Keyword(s):  
Stock Returns ◽  
Null Hypothesis ◽  
Statistical Tests ◽  
Cash Flows ◽  
Data Availability ◽  
Investor Behavior ◽  
Reliability Measures ◽  
Accrual Anomaly ◽  
Earnings Components ◽  
Jel Classifications

Our paper examines inconsistent conclusions regarding the accrual anomaly and demonstrates the importance of aligning regression specifications with hypotheses. Richardson, Sloan, Soliman, and Tuna (2005) conclude that accruals are mispriced and the mispricing seems to increase as accrual reliability decreases. Barone and Magilke (2009) and Ball, Gerakos, Linnainmaa, and Nikolaev (2016) conclude that cash flows rather than accruals are mispriced. We show that the divergent conclusions come from misalignment between the null hypothesis and regression specification in Richardson et al. (2005) . In addition, analysis of the contemporaneous relations between stock returns and components of earnings supports an initial underreaction to cash flows by investors. We fail to detect links between the reliability measures in Richardson et al. (2005) and investor behavior once we align the statistical tests with the null hypothesis. Our reexamination of prior findings benefits accounting academics, standard setters, and others interested in how investors use earnings components. JEL Classifications: M41. Data Availability: All data used in this study are publicly available from the sources identified in the text.

The Revolving Door of Sell-Side Analysts

2018 ◽  
Vol 94 (1) ◽  
pp. 249-270 ◽  
Author(s):  
Ben Lourie
Keyword(s):  
Revolving Door ◽  
Data Availability ◽  
Equity Analysts ◽  
Strategic Bias ◽  
Jel Classifications

ABSTRACT Equity analysts are often hired by firms they cover. I document the extent to which this revolving door phenomenon impairs analysts' independence. I do this by examining the presence of biased research reports issued during the year before analysts are employed by a firm they cover. I find that during their final year, revolving door analysts bias their EPS forecasts, their target prices, and their recommendations in a direction that suggests that they are attempting to gain favor from their prospective employers. Specifically, relative to other analysts, revolving door analysts issue more optimistic reports on the firms that hire them, and they issue more pessimistic reports on firms that do not hire them. These results suggest the presence of strategic bias, although more innocuous interpretations cannot be completely ruled out. JEL Classifications: G14; G17; G24; G28; M41. Data Availability: Data are available from public sources identified in the text.

Office-Client Balance and Metro Area Audit Market Competition

2020 ◽  
Vol 39 (4) ◽  
pp. 113-141
Author(s):  
Michael L. Ettredge ◽  
Matthew G. Sherwood ◽  
Lili Sun
Keyword(s):  
Relative Abundance ◽  
Audit Quality ◽  
Market Competition ◽  
Data Availability ◽  
Financial Statement ◽  
Audit Market ◽  
Metro Area ◽  
Big 4 ◽  
Jel Classifications

SUMMARY We propose a new audit supplier competition construct, the Office-Client Balance (OCB), which consists of the relative abundance of competing audit offices and audit clients in a metropolitan (metro) area. From this construct, we derive a metro level audit competition proxy reflecting surpluses or shortfalls of total metro audit office numbers relative to the national metro OCB norm: the OCB_TOT. Consistent with the predictions of Porter's Five Forces theory, we find that OCB_TOT is associated with lower fees, more auditor turnover, and more (less) office exits (entrances) in metro audit markets. These findings validate OCB_TOT as a proxy for audit market competition. Our results indicate that greater metro level competition among auditors (more positive OCB_TOT) is associated with higher audit quality, proxied by fewer financial statement misstatements. Several additional analyses suggest that OCB_TOT is useful in explaining clients' choices of local (versus remote) audit offices and Big 4 (versus non-Big 4) offices. Data Availability: Data used in this study are available from public sources. JEL Classifications: G18; L10; M42.

Customer-Base Concentration: Implications for Firm Performance and Capital Markets

2011 ◽  
Vol 87 (2) ◽  
pp. 363-392 ◽  
Author(s):  
Panos N. Patatoukas
Keyword(s):  
Firm Performance ◽  
Stock Returns ◽  
Stock Prices ◽  
Data Availability ◽  
Rates Of Return ◽  
Customer Base ◽  
Conventional View ◽  
Supply Chain Relationships ◽  
Abnormal Stock Returns ◽  
Stock Market Valuation

ABSTRACT This study investigates whether and how customer-base concentration affects supplier firm fundamentals and stock market valuation. I compile a comprehensive sample of supply chain relationships and develop a measure (CC) to capture the extent to which a supplier's customer base is concentrated. In contrast to the conventional view of customer-base concentration as an impediment to supplier firm performance, I document a positive contemporaneous association between CC and accounting rates of return, suggesting that efficiencies accrue to suppliers with concentrated customer bases. Consistent with a cause-and-effect link between customer-base concentration and supplier firm performance, analysis of intertemporal changes demonstrates that CC increases predict efficiency gains in the form of reduced operating expenses per dollar of sales and enhanced asset utilization. Using stock returns tests, I find that investors underreact to the implications of changes in customer-base concentration for future firm fundamentals when setting stock prices. A trading strategy that exploits investors' underreaction yields abnormal stock returns over the 30-year period studied. JEL Classifications: M41; L25; G14. Data Availability: Data are available from the sources indicated in the text.

scholarly journals A neural network approach for fundamental investment analysis: a case of Athens Stock Exchange

2020 ◽  
Vol 182 (3-4) ◽  
pp. 56-63
Author(s):  
Safwan Mohd Nor ◽  
◽  
Nur Haiza Muhammad Zawawi ◽  
Keyword(s):  
Stock Returns ◽  
Stock Prices ◽  
Stock Exchange ◽  
Investment Analysis ◽  
Financial Statement ◽  
Trading Costs ◽  
Network Approach ◽  
Neural Network Approach ◽  
Data Source ◽  
Athens Stock Exchange

This paper explores investment profitability in an emerging European stock market using fundamental analysis enhanced by artificial neural networks. Using a set of accounting-based financial ratios from publicly available data source, we find that these ratios possess useful information in forecasting future stock returns of Athens Stock Exchange (ATHEX) constituent firms. By combining long and short rules, the neurally reinforced fundamental strategy surpasses the unconditional buy-and-hold rule in the holdout subperiod in terms of returns (total and annualized) and risk (volatility, downside volatility and drawdown) measures. Overall results remain consistent even in the presence of trading costs. Our findings suggest that stock prices in Greece do not fully incorporate financial statement information and thus inconsistent with the principle of market efficiency at the semi-strong form.

Empirical Evidence on Repeat Restatements

2013 ◽  
Vol 28 (1) ◽  
pp. 93-123 ◽  
Author(s):  
Rebecca Files ◽  
Nathan Y. Sharp ◽  
Anne M. Thompson
Keyword(s):  
Empirical Evidence ◽  
Internal Control ◽  
Stock Prices ◽  
Data Availability ◽  
Future Research ◽  
Accounting Quality ◽  
Ex Ante ◽  
Internal Control Weaknesses ◽  
Market Consequences ◽  
Jel Classifications

SYNOPSIS This study examines the characteristics and market consequences of repeat restatements. We find that 38 percent of the restating companies in our sample restate at least twice between 2002 and 2008, and 31 percent of repeat restatement firms restate three or more times during the same period. Our tests identify several auditor and restatement characteristics that distinguish single from repeat restatements at the time of the first restatement. Repeat restatements are more likely among clients of non-Big N auditors and those with lower ex ante accounting quality. However, firms that switch auditors between the end of their misstatement period and the restatement announcement are less likely to experience repeat restatements. Although subsequent restatements tend to be less severe than the first in a series of restatements, firms suffer similar declines in stock prices with up to three restatement announcements. In addition, firms often restate the same fiscal periods multiple times, and these “overlapping” restatements are more frequent when managers are distracted by other difficulties, such as discontinued operations or internal control weaknesses. Our findings should be valuable to investors, regulators, and other parties interested in repeat restatements. We provide research design recommendations for researchers to incorporate in future research. JEL Classifications: M41; M42; G34. Data Availability: All data used in this study are publicly available from the sources indicated.

Strategic Management Forecasts and Accounting Choices: A Case of Employee Downsizing in Japan

2020 ◽  
Vol 19 (3) ◽  
pp. 91-109
Author(s):  
Keishi Fujiyama ◽  
Makoto Kuroki
Keyword(s):  
Stock Returns ◽  
Data Availability ◽  
Financial Statement ◽  
Fiscal Year ◽  
Forecast Errors ◽  
Management Forecasts ◽  
Reporting Practices ◽  
Accounting Choices ◽  
Using Data ◽  
Labor Negotiations

ABSTRACT Prior research shows that managers make income-decreasing accounting choices around labor negotiations and predicts that managers disclose bad news during labor negotiations. This study extends the literature by investigating whether disclosure and financial statement reporting practices are consistent during employee downsizing years. Using data from Japanese domestic firms during the period 2002–2016, we find that beginning-of-period management forecasts (i.e., disclosure) are positively associated with during-period negative stock returns for downsizing firms but not for non-downsizing firms. Also, downsizing firms report more conservative earnings at the end of the fiscal year (i.e., financial statement reporting). Our supplementary analyses show no difference in an association between management forecast errors and stock returns between downsizing and non-downsizing firms with during-period negative stock returns, nor in an association between discretionary accruals and employee downsizing. These results suggest that managers strategically inform firms' prospects during employee downsizing years. JEL Classifications: G34; J51; M41. Data Availability: Data are available from the public sources cited in the text.

Noncompliance with Mandatory Disclosure Requirements: The Magnitude and Determinants of Undisclosed Permanently Reinvested Earnings

2014 ◽  
Vol 90 (1) ◽  
pp. 59-93 ◽  
Author(s):  
Benjamin C. Ayers ◽  
Casey M. Schwab ◽  
Steven Utke
Keyword(s):  
Accounting Standards ◽  
Data Availability ◽  
Financial Statement ◽  
Mandatory Disclosure ◽  
Cross Sectional ◽  
Foreign Earnings ◽  
Disclosure Requirements ◽  
Deferred Tax ◽  
Jel Classifications

ABSTRACT We develop estimates of a firm's foreign earnings designated as permanently reinvested (PRE) and the unrecorded deferred tax liability (TAX) associated with PRE that are independent of whether a firm explicitly discloses this information. We then investigate firms' noncompliance with Accounting Standards Codification (ASC) 740 provisions that require financial statement disclosure of PRE and either the tax associated with PRE or a statement that calculating the tax is not practicable. We find that a nontrivial portion of firms do not comply with the PRE disclosure requirements and that the amounts of undisclosed PRE and the related tax are substantial in magnitude. Cross-sectional evidence suggests managers opportunistically choose when to disclose PRE and TAX and that compliance with PRE disclosure requirements increased following the American Jobs Creation Act of 2004, which increased incentives to disclose PRE. JEL Classifications: M40; M41; H25; K34. Data Availability: Data used in this study are available from public sources identified in the paper.

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