Disclosures of Insider Purchases and the Valuation Implications of Past Earnings Signals

2011 ◽  
Vol 87 (1) ◽  
pp. 313-342 ◽  
Author(s):  
David Veenman
Keyword(s):  
Firm Value ◽  
Securities And Exchange Commission ◽  
Data Availability ◽  
Information Uncertainty ◽  
Market Reactions ◽  
Future Earnings ◽  
Earnings Information ◽  
Reported Earnings

ABSTRACT This study examines whether disclosures of insider equity purchases on Securities and Exchange Commission (SEC) Form 4 resolve uncertainty regarding the valuation implications of reported earnings. Defining information uncertainty as ambiguity about firm value arising from low earnings precision, I predict and find that insider purchase filings trigger more positive market reactions in firms with greater information uncertainty (lower quality accruals). After controlling for future earnings changes, I further find that market reactions to purchase filings are predictably associated with prior earnings changes. The strength of this effect is increasing in the magnitude of insider purchases, as well as the level of information uncertainty. Overall, these findings suggest that, in addition to signaling future earnings information, Form 4 purchase filings help investors learn about the valuation implications of past earnings signals. Data Availability: All data are available from public sources.

The Relationship between Aggressive Real Earnings Management and Current and Future Audit Fees

2016 ◽  
Vol 36 (1) ◽  
pp. 85-107 ◽  
Author(s):  
Adam Greiner ◽  
Mark J. Kohlbeck ◽  
Thomas J. Smith
Keyword(s):  
Earnings Management ◽  
Firm Value ◽  
Audit Fees ◽  
Cash Flows ◽  
Data Availability ◽  
Real Earnings Management ◽  
Increased Risk ◽  
Pricing Behavior ◽  
Reported Earnings ◽  
The Relationship

SUMMARY We examine the relationship between aggressive income-increasing real earnings management (REM) and current and future audit fees. Managers pursue REM activities to influence reported earnings and, as a consequence, alter cash flows and sacrifice firm value. We posit that the implications of REM are considered in auditors' assessments of engagement risk related to the client's economic condition and result in higher audit fees. We find that, with the exception of abnormal reductions in SG&A, aggressive income-increasing REM is positively associated with both current and future audit fees. Additional analyses provide evidence consistent with increased effort combined with increased risk contributing to the current pricing effect, with increased business risk primarily driving the future pricing effect. We, therefore, provide evidence that aggressive income-increasing REM activities have a significant influence on auditor pricing behavior, consistent with the audit framework associating engagement risk with audit fees. JEL Classifications: G21; G34; M41. Data Availability: The data in this study are available from public sources indicated in the paper.

scholarly journals Earnings Smoothing as Information Signaling or Garbling: A Review of Literature

2018 ◽  
Vol 10 (1) ◽  
pp. 131
Author(s):  
Nor Afifah Shabani ◽  
Saudah Sofian
Keyword(s):  
Private Information ◽  
Firm Value ◽  
Future Research ◽  
Journal Articles ◽  
Actual Performance ◽  
Future Earnings ◽  
Information Signaling ◽  
Earnings Smoothing ◽  
Reported Earnings

Earnings smoothing, which refers to the action of managers managing earnings to reduce fluctuations of reported earnings, is a special type of earnings management because while earnings smoothing may be used to distort shareholders and creditors’ view of corporate actual performance, it may also serve as a tool to communicate corporate private information of future earnings to the aforementioned stakeholders. Hence, it comes to no surprise when prior literatures reveal that the studies on the role of earnings smoothing are divided into two streams: as information signaling and information garbling. This paper aims to review prior literatures, specifically on the role of earnings smoothing either as information signaling or garbling based on four themes: firm value, financing need, compensation contract and outsiders’ intervention. This paper reviews journal articles gathered from Web of Science database. Based on the shortcomings of prior literatures, this paper highlights avenue for future research.

Reported Earnings Quality Under Conservative Accounting and Auditing

2005 ◽  
Vol 20 (3) ◽  
pp. 229-256 ◽  
Author(s):  
Pradyot K. Sen
Keyword(s):  
Firm Value ◽  
Informational Efficiency ◽  
High Quality ◽  
Cost Estimates ◽  
Future Earnings ◽  
Current Period ◽  
Conservative Accounting ◽  
Reported Earnings ◽  
Investment Firm ◽  
Investment Growth

While conservatism may lead to a reduction of the current period's income, a consistent use of conservative accounting builds a hidden reserve that can inflate future earnings when investment growth slows down. For the same reason, reported earnings may be of a lower quality in terms of predictability of future cash flow when investments are growing. Managers of a growing firm, therefore, must choose to report a conservative but lower quality number or to undo the effects of conservatism by less conservative current-period cost estimates to improve the quality of reported earnings. Such departure from conservatism in the current period may lead to a conflict with the auditor, which may affect firm value as well as the manager's own wealth. Managers of a steady-state investment firm, on the other hand, have an opportunity either to report conservative and high quality earnings or to slow down its investments and/or choose less conservative current period cost estimates to report higher earnings in order to effectively mimic the (high quality) report of the growing firm. In this environment, an increase in auditor's conservatism may improve the informational efficiency of the market by reducing the incentives of the nongrowing firms to mimic a growing firm's disclosure. An increase in incentives that are based on firm value tends to increase a growing firm manager's propensity to report higher quality earnings while increasing the nongrowing firm's manager's propensity to cut back investment. Thus, we are faced with a situation where improving incentives for reporting higher quality earnings may be associated with an incentive to reduce investments by some firms.

scholarly journals Earnings Predictability of Quoted Firms in Nigeria

2020 ◽  
Vol 2 (1) ◽  
pp. 23-32
Author(s):  
Taiwo Azeez Olaniyi ◽  
Segun Abogun ◽  
Mudathir Olanrewaju Salam
Keyword(s):  
Secondary Data ◽  
Financial Statements ◽  
Method Of Moment ◽  
Future Earnings ◽  
Earnings Information ◽  
Dynamic Panel Regression ◽  
Earnings Predictability ◽  
Reported Earnings ◽  
Generalized Method Of Moment ◽  
The Impact

The inability of investors to predict future earnings of firms exposes them to further risk such that potential investors may be scared away while existing ones may be prompted to withdraw their investment. Thus, it becomes imperative to evaluate the earnings predictability of Nigerian quoted firms with a view to establish the ability or inability of earnings to predict itself. Also, the study examined the impact of volatility on earnings predictability of Nigerian quoted firms. The total number of seventy three (73) quoted Nigerian firms constitutes the population of this study and the entire 73 firms were studied. The causal relationship research design was adopted. The secondary data used were collected from the financial statements of the quoted firms for the period 1996 to 2015. The system generalized method of moment (GMM) was used to estimate the dynamic panel regression models of the study. The study found that earnings of firms are predictable. The study also found that volatility has adverse effect on earnings predictability. It was therefore recommended more interest/investment in Nigerian firms since earnings information is available and is predictable while managements of firms should reduce instability in reported earnings.  

Earnings Shortfalls and Strategic Profit Allocations in Segment Reporting

2019 ◽  
Vol 33 (4) ◽  
pp. 37-58 ◽  
Author(s):  
Timothy D. Haight
Keyword(s):  
Firm Value ◽  
Data Availability ◽  
Segment Reporting ◽  
Market Responses ◽  
Earnings Components ◽  
The Future ◽  
Earnings Performance ◽  
Profit Rates

SYNOPSIS I examine whether firms strategically classify earnings components when reporting bad earnings news. Specifically, I examine whether firms reporting small earnings shortfalls allocate profits across their business segments in a manner that understates the future implications and within-firm drivers of disappointing earnings performance. I find that firms reporting small earnings shortfalls transfer profits toward segments in which profit rates are more informative for firm value and away from segments that operate in industries with higher frequencies of bad earnings news. In addition, I find that shortfall shifting initially tempers negative market responses to shortfall news, but pricing effects reverse in the months following shortfall announcements. My findings suggest that firms strategically classify earnings components when reporting small earnings shortfalls and that strategic classifications temporarily affect the pricing of shortfall news. Data Availability: Data are available from public sources identified in this paper.

Retroactive Tax Legislation, Reported Earnings, and Investors' Responses to Earnings “Surprises”: Evidence from R&D Credit Extensions

2016 ◽  
Vol 38 (2) ◽  
pp. 87-109 ◽  
Author(s):  
Brian Bratten ◽  
David S. Hulse
Keyword(s):  
Financial Reporting ◽  
Stock Prices ◽  
Unintended Consequences ◽  
Data Availability ◽  
Substantial Part ◽  
Tax Rates ◽  
Financial Reporting Standards ◽  
Average Decrease ◽  
Tax Legislation ◽  
Reported Earnings

ABSTRACT When Congress retroactively extends a temporary tax rule, the effect on earnings is complex because financial reporting standards require firms to apply the integral method using enacted tax law to determine quarterly income tax expense. We model this effect and examine earnings announcements following retroactive extensions of the federal R&D tax credit to test how investors incorporate the effect into stock prices. We find that investors respond when earnings are announced, even though the effect could have been determined several weeks earlier. We also show that in recent years, the effects of retroactive extensions of the credit are a substantial part of the average decrease in effective tax rates (ETRs) from the third to fourth quarter for calendar-year firms. Our results have implications for investors and researchers examining earnings and ETRs around retroactive extensions of temporary tax rules and suggest that congressional delays and GAAP interact to produce unintended consequences. JEL Classifications: M41; M48; G14; H25. Data Availability: Data used in this study are available from the sources identified in the text.

Market Reactions to a High-Quality Auditor and Managerial Preference for Audit Quality

2019 ◽  
Vol 38 (4) ◽  
pp. 131-149 ◽  
Author(s):  
Patrick J. Hurley ◽  
Brian W. Mayhew
Keyword(s):  
Loss Aversion ◽  
Audit Quality ◽  
Data Availability ◽  
Quality Competition ◽  
High Quality ◽  
Market Reactions ◽  
Comprehensive Theory ◽  
Audit Reports ◽  
The Impact ◽  
Quality Theory

SUMMARY We insert an automated high-quality (HQ) auditor into established experimental audit markets to test the impact of high-quality competition on other auditors' supply of and managers' demand for audit quality. Theory predicts that managers will demand high levels of audit quality to avoid investors' price-protecting behavior. This demand should result in the HQ auditor dominating the market and increase other auditors' audit quality provision to compete with the HQ auditor. However, we find that the HQ auditor does not dominate the market—despite holding audit costs constant and investors placing a premium on HQ auditor reports. We also find that adding an HQ auditor results in other auditors lowering audit quality. Additional analyses indicate some managers demand lower audit quality to avoid negative audit reports, consistent with loss aversion as a potential explanation. Our findings indicate a need to develop a more comprehensive theory of the demand for auditing. Data Availability: The laboratory market data used in this study are available from the authors upon request.

Special Items: A Descriptive Analysis

2011 ◽  
Vol 25 (3) ◽  
pp. 511-536 ◽  
Author(s):  
Peter M. Johnson ◽  
Thomas J. Lopez ◽  
Juan Manuel Sanchez
Keyword(s):  
Firm Value ◽  
Temporal Frequency ◽  
Descriptive Analysis ◽  
Financial Statements ◽  
Comprehensive Analysis ◽  
The Other ◽  
Future Earnings ◽  
Special Items ◽  
Increasing Function ◽  
Frequency Magnitude

SYNOPSIS We provide a comprehensive analysis of special items and the characteristics of the firms that recognize them. Our analysis reveals that the temporal frequency, magnitude, and persistence of special items has increased significantly in the last 30 years, and that such increases are primarily driven by negative special items. More recently, however, our evidence is consistent with both a decline in frequency and magnitude of negative special items. On the other hand, we find that the frequency of reporting of positive special items, which remained relatively constant through 2002, has increased in more recent years. We also find strong evidence that subsequent special item reporting is an increasing function of the frequency of “prior” special item reporting. Using a random subsample of firms reporting special items, we document that 22 percent of the amounts reported in Compustat do not reconcile with the amounts reported on the firms' actual financial statements. Our comprehensive analysis should be of interest to regulators, academics, and managers interested in the implications of special items on firm-related consequences such as future earnings and firm value. Our examination can also serve as a catalyst for researchers interested in extending this important area of inquiry.

scholarly journals REAKSI INVESTOR TERHADAP PENGUMUMAN LABA DAN UNEXPECTED EARNING PADA SEKTOR INFRASTRUKTUR SAAT MENGHADAPI KOS STICKINESS

2021 ◽  
Vol 9 (2) ◽  
pp. 95-109
Author(s):  
Silvia Putri Faridayanti ◽  
Robiyanto Robiyanto
Keyword(s):  
Regression Analysis ◽  
Earnings Quality ◽  
Earnings Announcements ◽  
Sampling Technique ◽  
Panel Regression ◽  
Future Earnings ◽  
Earnings Information ◽  
Unexpected Earnings ◽  
Analysis Technique ◽  
Investor Reaction

The purpose of this study is to determine investors reactions to earnings announcements and unexpected earnings when facing stickiness cost. Sampling in this study used a purposive sampling technique with a total of 10 infrastructure companies listed on the IDX during 2015-2019. The analysis technique in this study uses panel regression analysis using EVIEWS 9. The results of this study indicate that there is no investor reaction to earnings announcements in infrastructure companies when there are low and high stickiness cost. However, when the company has a combined stickiness cost, there is an investor's reaction to the earnings announcement by seeing a positive CAR value which means good earnings quality. Unexpected Earning has no effect on companies that are facing stickiness cost, so the results of this study indicate that there is no investor reaction to unexpected earnings in infrastructure companies that have low, high, and combined stickiness cost. The conclusion of this study is that earnings information becomes less important in predicting future earnings.

scholarly journals Performance-Based Compensation and Firm Value—Experimental Evidence

2015 ◽  
Vol 29 (4) ◽  
pp. 777-798 ◽  
Author(s):  
Glenn M. Pfeiffer ◽  
Timothy W. Shields
Keyword(s):  
Private Information ◽  
Stock Prices ◽  
Firm Value ◽  
Data Availability ◽  
Equity Prices ◽  
Market Prices ◽  
Compensation Plans ◽  
Price Reactions ◽  
Performance Based Compensation ◽  
The Impact

SYNOPSISWe study equity price reactions to compensation contracting in experimental markets. Motivated by research reporting positive price reactions to adoption of performance-based compensation plans for executive managers, but postulating competing reasons as to why, we design an experiment that allows us to manipulate variables separately to examine the effect of adverse selection and moral hazard on equity prices. We find that managers select contracts based on their private information, sometimes differing from predicted choices, and that private information is conveyed to the market by the choice of compensation contract and is reflected in stock prices. We refer to this as the sorting effect. Additionally, we find that managers do not always exert costly effort in spite of favorable incentives to do so. The design also allows us to assess if the market rationally prices managers' actual choices. We find market prices are consistent with the empirically observed manager choices. Our results imply that to properly assess the impact of compensation plan on market prices, the sorting, as well as the incentive effects of compensation contracts, should be considered, and that the market anticipates errors in managers' choices.JEL Classifications: C92; D82; G12; J33; M52.Data Availability: Available upon request.

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