Changes over Time in the Revenue-Expense Relation: Accounting or Economics?

2011 ◽  
Vol 86 (3) ◽  
pp. 945-974 ◽  
Author(s):  
Dain C. Donelson ◽  
Ross Jennings ◽  
John McInnis
Keyword(s):  
Earnings Quality ◽  
Accounting Standards ◽  
Item Recognition ◽  
Earnings Persistence ◽  
Dramatic Decrease ◽  
Earnings Volatility ◽  
Special Items ◽  
Contemporaneous Correlation ◽  
Or Economics ◽  
Changes Over Time

ABSTRACT: Dichev and Tang (2008) document a dramatic decrease over the last 40 years in the contemporaneous correlation between revenue and expense, along with an associated increase in earnings volatility and a decline in earnings persistence, suggesting a decline in earnings quality. We document that these changes are primarily attributable to an increase in the incidence of large special items. We then examine the extent to which this increase in special items is due to either more frequent real economic events related to special item recognition or to the adoption of new accounting standards. Our evidence suggests that changes in the frequency of economic events associated with special items have played a more important and sustained role relative to the role played by adoption of individual accounting standards. Finally, we find that the changing incidence of these economic events is at least in part related to the well-documented increase in competition in the U.S. economy over the last four decades.

Matching and the Changing Properties of Accounting Earnings over the Last 40 Years

2008 ◽  
Vol 83 (6) ◽  
pp. 1425-1460 ◽  
Author(s):  
Ilia D. Dichev ◽  
Vicki Wei Tang
Keyword(s):  
Fair Value ◽  
Earnings Persistence ◽  
Economic Relation ◽  
Fair Value Accounting ◽  
Accounting Earnings ◽  
Earnings Volatility ◽  
Stated Goal ◽  
Contemporaneous Correlation ◽  
Empirical Tests ◽  
Over Time

ABSTRACT: We present a theory that poor matching manifests as noise in the economic relation of advancing expenses to earn revenues. As a result, poor matching decreases the correlation between contemporaneous revenues and expenses, increases earnings volatility, decreases earnings persistence, and induces a negative autocorrelation in earnings changes. The empirical tests document these effects in a sample of the 1,000 largest U.S. firms over the last 40 years. We find a clear and economically substantial trend of declining contemporaneous correlation between revenues and expenses, increased volatility of earnings, declining persistence of earnings, and increased negative autocorrelation in earnings changes. The combined evidence suggests that accounting matching has become worse over time and that this trend has a pronounced effect on the properties of the resulting earnings. This evidence also suggests that the standard-setters’ stated goal of moving away from matching and toward more fair-value accounting is likely to continue and deepen the identified trends in the properties of earnings.

Determinants and Consequences of Firms' Derivative Accounting Decisions

2020 ◽  
Vol 5 (1) ◽  
pp. 81-114 ◽  
Author(s):  
Spencer Pierce
Keyword(s):  
Financial Reporting ◽  
Accounting Standards ◽  
Fair Value ◽  
Financial Accounting ◽  
Firm Risk ◽  
Accounting Firms ◽  
Earnings Volatility ◽  
Hedge Accounting ◽  
Reported Earnings ◽  
Jel Classifications

ABSTRACTFinancial accounting standards require derivatives to be recognized at fair value with changes in value recognized immediately in earnings. However, if specified criteria are met, firms may use an alternative accounting treatment, hedge accounting, which is intended to better represent the underlying economics of firms' derivative use. Using FAS 161 disclosures, I examine determinants of hedge accounting use and the effects of hedge accounting on financial reporting and capital markets. I find variation in firms' hedge accounting use and provide evidence that compliance costs of applying hedge accounting affect firms' decision to use hedge accounting. Firms decrease their reported earnings volatility via derivatives that receive hedge accounting and could further decrease their earnings volatility if hedge accounting were applied to all their derivatives. Inconsistent with arguments given for using hedge accounting, I fail to find a decrease in investors' assessments of firm risk from using hedge accounting.JEL Classifications: M40; M41; G32.

The true and fait view concept: the palette of controversial points (of “worth banning” to “worth keeping”)

2021 ◽  
Vol 2 (1) ◽  
pp. 39-47
Author(s):  
Yana Ustinova
Keyword(s):  
Cultural Context ◽  
Practical Knowledge ◽  
Accounting Standards ◽  
Financial Statements ◽  
Scientific Interest ◽  
Scientific Publications ◽  
Main Research ◽  
Accounting Scandals ◽  
State Of Affairs ◽  
Changes Over Time

Dynamic changes and observed crisis phenomena in the economy, as well as high-profile accounting scandals of recent decades and subsequent revisions of accounting standards, necessitate a critical assessment of the conceptual framework for preparing financial statements that are adequate to the real state of affairs. At the same time, the accumulated practice of applying the true and fair view concept revealed some shortcomings. In this situation, the center of attraction of researchers' interest is the question of whether this concept meets the modern challenges of accounting, whether it is advisable to preserve and develop it. The aim of the article: an overview of the main research trends describing the significance of this concept for the current state of accounting, an assessment of the stages of their development. The analysis was carried out through research of scientific publications. The result was the identification of the main researching areas of the true and fair view concept, an analysis of their changes over time, an overview of the current increment of scientific knowledge, and the factors that led to such an increment for the last few years. In the course of the work, the areas of emerging scientific interest, as well as areas of maintaining scientific interest, were noted from the position of enriching theoretical and practical knowledge about the applicability of the concept. Special attention was drawn to the following issues: the relationship between overrides from accounting standards and the quality of financial statements, options for interpreting the concept by various groups of users of financial statements in settings of the legal and socio-cultural context differences, the role of auditors in assessing of the compliance with this concept. In conclusion were called the arguments of supporters to recognize this concept as worthy of banning, as well as the arguments of supporters to recognize this concept as worthy of keeping. Prospective directions of future scientific research in this direction were proposed.

Accounting Standards and Earnings Quality — Evidence from Registered ADRs

2018 ◽  
Vol 21 (04) ◽  
pp. 1850022
Author(s):  
Yaseen S. Alhaj-Yaseen ◽  
Kean Wu ◽  
Leslie B. Fletcher
Keyword(s):  
Financial Reporting ◽  
Earnings Quality ◽  
Accounting Standards ◽  
Securities And Exchange Commission ◽  
High Quality ◽  
Reporting Standard ◽  
International Financial Reporting Standard ◽  
The Us ◽  
Us Gaap

This paper examines the changes in earnings quality of registered American Depositary Receipts (ADRs) as a result of switching accounting standards. We aim to shed light on the potential impact of International Financial Reporting Standard (IFRS) adoption on US firms. A suboptimal approach to achieve this goal is through examination of US firms’ surrogates such as ADRs. Unlike previous studies, we made a distinction between registered and unregistered ADRs and affirmed that registered ADRs are the closest surrogates with which to conduct our analysis because they are exclusively required to adhere to the Securities and Exchange Commission (SEC)’s stringent disclosure requirements. When cross-listing their equity on the US exchanges, foreign issuers can file their financial reports with the SEC using IFRS, US GAAP (generally accepted accounting principles), or their domestic GAAP with reconciliation to US GAAP. An improvement in earnings quality is documented when ADRs adopt US GAAP or IFRS versus domestic GAAP. However, when the comparison is made between US GAAP and IFRS, no difference in earnings quality is documented. These results indicate that switching to high-quality accounting standards is likely to improve earnings quality. This improvement is maximized when the difference between reporting standards is high and minimized if otherwise. Our conclusion is that the adoption of IFRS in the US is unlikely to change earnings quality of local issuers. Moreover, we drew a distinction between reconciliation with and adoption of high-quality accountings standards and find that while the former can enhance earnings quality, the latter can further improve it.

Zar, Inc.: A Case in Earnings Quality

2002 ◽  
Vol 17 (4) ◽  
pp. 419-429 ◽  
Author(s):  
Jimmy W. Martin
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Earnings Quality ◽  
Accounting Standards ◽  
Controversial Issue ◽  
High Tech ◽  
Additional Information ◽  
The Future ◽  
The Way

Zar, Inc., a high-tech company, has recently experienced turnover in its CEO and CFO positions. Zar, like other firms in its industry, is undergoing a down year due to the declining economy. Thomas Brown, who has recently been hired as the CFO, quickly realizes that there is little he can do to avoid the firm's first loss in many years. However, Thomas also understands that there are things that he can do to pave the way toward greater profits in the future. You are invited to listen in on three separate conversations that the CFO has with the CEO, the firm's audit committee, and finally with Zar's independent auditor. After hearing each conversation, you will be asked to evaluate the CFO's ideas as well as those of other parties to the dialogue. Some of the questions are rather straightforward and can be answered by recalling or researching specific accounting standards. Other questions are more open-ended and will require your best judgment based on the facts given in the case. Some questions may require you to provide additional information before making a definite decision. All of the scenarios focus on earnings quality and should enhance your understanding of this critical and controversial issue that pervades financial reporting today.

scholarly journals The Impacts of Earnings Quality on Dividend Policy of Listed Enterprises in Vietnam

2020 ◽  
Vol 11 (3) ◽  
pp. 200
Author(s):  
Dau Hoang Hung ◽  
Dang Ngoc Hung ◽  
Nguyen Viet Ha ◽  
Vu Thi Thuy Van
Keyword(s):  
Structural Equation ◽  
Dividend Policy ◽  
Earnings Quality ◽  
Positive Influence ◽  
Equation Modeling ◽  
Earnings Persistence ◽  
Research Results ◽  
Intermediate Variable ◽  
Multiple Dimensions ◽  
The Impact

The paper examines the impact of earnings quality (EQ) on the dividend policy of enterprises in Vietnam. We consider the EQ in terms of multiple dimensions such as accruals quality, earnings persistence, revelance and timeliness of earning information. The study uses regression method according to Structural Equation Modeling (SEM), with EQ as an intermediate variable, data collected at enterprises listed on the stock market in Vietnam in the period of 2010 - 2018, with 4541 observations. The research results have found that EQ has a positive influence on dividend policy on all aspects of EQ. The empirical research results are a useful basis to help enterprises improve EQ, thereby helping business in implementing appropriate dividend policy.

The impact of the global economic crisis of 2008 on earnings quality in Mexico

2019 ◽  
Vol 9 (3) ◽  
pp. 407-421
Author(s):  
Jose Miranda-Lopez ◽  
Ivan Valdovinos-Hernandez
Keyword(s):  
Earnings Management ◽  
Economic Crisis ◽  
Earnings Quality ◽  
Accounting Standards ◽  
Previous Literature ◽  
Income Smoothing ◽  
Accounting Quality ◽  
Content Type ◽  
Global Economic Crisis

Purpose The purpose of this paper is to examine the earnings quality of companies listed on Mexico’s primary stock market, the Bolsa Mexicana de Valores (Bolsa) before and during the global economic crisis of 2008. Previous research has shown that these economic events can have potentially conflicting effects on the quality of earnings of listed companies in capital markets around the world. Design/methodology/approach This paper operationalizes earnings quality based on earnings management. Therefore, four constructs to proxy for earnings quality are developed from previous literature, and multiple regression analysis along with tests of differences across two time periods, 2005–2007 and 2008–2010, are used to determine if there is a significant change in the accounting quality of companies listed on the Bolsa before and after the start of the global economic crisis. Findings Results indicate a statistically significant decrease of earnings quality on three out of the four constructs used to proxy for earnings management. There is only one construct in this category that shows a significant increase of earnings quality. Research limitations/implications There are different number of constructs and methodologies used to test for earnings quality. This study draws on four different constructs on two dimensions of earnings quality from previous literature, but other methodologies and constructs can potentially be used as well, such as discretionary accruals. Furthermore, there is a chance that there can be confounding factors affecting the results of this study besides the effects of the global economic crisis. Finally, the sample used in this study comprises non-financial public companies listed on the Bolsa, which can affect the generalization of the results to countries other than Mexico. Practical implications The results of this study can be of interest to Mexican and foreign investors, standard setters and regulators of the Bolsa, as the results show a strong incentive to manage companies’ earnings using income smoothing in an emerging economy during an economic crisis even after converging to a higher-quality set of accounting standards. Results can also be of interests to investors and regulators in other Latin-American countries with economies similar to that of Mexico. Originality/value This is the first study to test the quality of earnings of Mexican companies before and during the global economic crisis of 2008. Thus, this study contributes to the accounting quality literature by offering evidence showing a significant increase of income smoothing during the global economic crisis for companies listed in a developing economy with a relevant history of economic crises, even when these companies were using recently converged, higher-quality accounting standards.

Earnings quality and the adoption of IFRS‐based accounting standards

2013 ◽  
Vol 21 (1) ◽  
pp. 53-73 ◽  
Author(s):  
Wan Adibah Wan Ismail ◽  
Khairul Anuar Kamarudin ◽  
Tony van Zijl ◽  
Keitha Dunstan
Keyword(s):  
Earnings Quality ◽  
Accounting Standards

Earnings persistence, institutional investors monitoring and types of political connections

2020 ◽  
Vol 28 (3) ◽  
pp. 309-327
Author(s):  
Chwee Ming Tee ◽  
Puspavathy Rasiah
Keyword(s):  
Institutional Investors ◽  
Earnings Quality ◽  
Political Connections ◽  
Earnings Persistence ◽  
Ceo Power ◽  
Content Type ◽  
Audit Firm ◽  
Political Ties ◽  
Different Types ◽  
Big Four

PurposeThe purpose of this study is to examine whether institutional investors monitoring attenuate (exacerbate) weaker earnings persistence in politically connected firms (PCFs). In addition, it investigates whether earnings persistence do vary according to different types of political connections.Design/methodology/approachThis study employs earnings persistence as measure of earnings quality and ordinary least squares (OLS) model to examine: (1) the moderating effect of institutional investors’ ownership on the association between earnings persistence and PCFs and (2) the association between different types of political connections and earnings persistence.FindingsThis study finds that institutional investors' ownership attenuates weaker earnings quality in PCFs, indicating effective monitoring. However, stronger earnings persistence is associated with PCFs with longer political ties, audited by big four audit firm and with higher CEO power.Originality/valueThis study reveals the lower earnings persistence in PCFs can be attenuated by institutional investors monitoring. However, findings also suggest that earnings persistence in PCFs is affected by duration of political ties, big four audit firm and CEO power. This suggests that PCFs should not be viewed as a homogeneous group of firms.

How Would the Mandatory Adoption of IFRS Affect the Earnings Quality of U.S. Firms? Evidence from Cross-Listed Firms in the U.S.

2011 ◽  
Vol 25 (4) ◽  
pp. 837-860 ◽  
Author(s):  
Jerry Sun ◽  
Steven F. Cahan ◽  
David Emanuel
Keyword(s):  
Earnings Quality ◽  
Discretionary Accruals ◽  
Earnings Persistence ◽  
Listed Firms ◽  
Ifrs Adoption ◽  
The Cross ◽  
The Impact ◽  
Timely Loss Recognition ◽  
The U.S

SYNOPSIS We examine the impact of IFRS adoption on the earnings quality of foreign firms cross-listed in the U.S. from countries that have already adopted IFRS on a mandatory basis. We use the cross-listed firms as surrogates for the U.S. firms so we can observe the effect of IFRS adoption in the U.S. We examine five measures of earnings quality related to discretionary accruals, target beating, earnings persistence, timely loss recognition, and the earnings response coefficient (ERC). To isolate the effect of IFRS adoption, we use a matched sample design where each cross-listed firm is matched to a U.S. firm. We find the difference in earnings quality from the pre- to post-IFRS period is not different for the cross-listed and matched firms when earnings quality is measured by absolute discretionary accruals, timely loss recognition, or a long-window ERC. However, for the incidence of small positive earnings and earnings persistence, we find significant difference-in-differences, indicating that IFRS adoption led to an improvement in earnings quality for cross-listed firms relative to the matched firms. Our results are slightly surprising since U.S. GAAP is generally viewed as high-quality standards with little room for improvement.

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