Discretionary Risk Disclosures

2003 ◽  
Vol 78 (2) ◽  
pp. 449-469 ◽  
Author(s):  
Bjorn N. Jorgensen ◽  
Michael T. Kirschenheiter
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Voluntary Disclosure ◽  
Cash Flows ◽  
Share Price ◽  
Risk Disclosure ◽  
Share Prices ◽  
Ex Post ◽  
Partial Disclosure ◽  
Future Cash Flows

We model managers' equilibrium strategies for voluntarily disclosing information about their firm's risk. We consider a multifirm setting in which the variance of each firm's future cash flow is uncertain. A manager can disclose, at a cost, this variance before offering the firm for sale in a competitive stock market with risk-averse investors. In our partial disclosure equilibrium, managers voluntarily disclose if their firm has a low variance of future cash flows, but withhold the information if their firm has highly variable future cash flows. We establish how the manager's discretionary risk disclosure affects the firm's share price, expected stock returns, and beta, within the framework of the Capital Asset Pricing Model. We show that whereas one manager's discretionary disclosure of his firm's risk does not affect other firms' share prices, it does affect the other firms' betas. Also, we demonstrate that a disclosing firm has lower risk premium and beta ex post than a nondisclosing firm. Finally, we show that ex ante, the expected risk premium and expected beta of each firm are higher under a mandatory risk disclosure regime than in the partial disclosure equilibrium that arises under a voluntary disclosure regime.

Earnings, Cash Flows, and Ex Post Intrinsic Value of Equity

2007 ◽  
Vol 82 (2) ◽  
pp. 457-481 ◽  
Author(s):  
K. R. Subramanyam ◽  
Mohan Venkatachalam
Keyword(s):  
Stock Returns ◽  
Intrinsic Value ◽  
Market Price ◽  
Cash Flows ◽  
Cost Of Equity ◽  
Operating Cash Flows ◽  
Ex Post ◽  
Reported Earnings ◽  
Future Cash Flows ◽  
Value Measure

We reexamine the relative importance of earnings and operating cash flows in equity valuation. In contrast to previous studies that use stock returns (Dechow 1994) or future operating cash flows (Barth et al. 2001), we use ex post intrinsic value of equity as the criterion for comparison. We determine ex post intrinsic value of equity by discounting future dividends over a three-year horizon and market price at the end of the horizon by industry cost of equity. The advantage of the ex post intrinsic value measure over stock returns is that it is not contaminated by the stock market's fixation on reported earnings (Sloan 1996). Also, unlike finite horizon future operating cash flows, ex post intrinsic values better reflect the magnitude, timing, and uncertainty of investors' future cash flows (SFAC No. 1, FASB 1978). Our results suggest that accrualbased earnings dominate operating cash flows as a summary indicator of ex post intrinsic value.

scholarly journals Do corporate bond rating revisions convey information about earnings and dividend changes?

2012 ◽  
Vol 9 (3) ◽  
pp. 373-393 ◽  
Author(s):  
Steven T. Anderson ◽  
Gurmeet Singh Bhabra ◽  
Harjeet S. Bhabra ◽  
Asjeet S. Lamba
Keyword(s):  
Stock Returns ◽  
Cash Flows ◽  
Corporate Bond ◽  
Bond Rating ◽  
Future Earnings ◽  
Rating Agencies ◽  
Abnormal Stock Returns ◽  
Rating Changes ◽  
Future Cash Flows ◽  
Rating Downgrades

We study the information content of corporate bond rating changes regarding future earnings and dividends. Consistent with previous findings, rating downgrades are associated with negative abnormal stock returns, while rating upgrades appear to be nonevents. For downgrades, earnings decline in the two years prior to and the year of the rating change announcement but increase in the year after the rating review. We also find that rating downgrades are followed by a subsequent downward adjustment in dividends. While rating upgrades follow a period of rising earnings, they do not signal any increase in future earnings and no subsequent dividend adjustments are observed. Overall, our results indicate that rating agencies respond more to permanent changes in cash flows and provide little information, if any, about future cash flows.

Dispersion in Analysts' Earnings Forecasts as a Measure of Uncertainty

1998 ◽  
Vol 13 (3) ◽  
pp. 245-270 ◽  
Author(s):  
Orie E. Barron ◽  
Pamela S. Stuerke
Keyword(s):  
Stock Returns ◽  
Earnings Forecasts ◽  
Positive Association ◽  
Cash Flows ◽  
Financial Reports ◽  
Forecast Dispersion ◽  
Additional Information ◽  
Price Reactions ◽  
Daily Stock Returns ◽  
Future Cash Flows

This study examines whether dispersion in analysts' earnings forecasts reflects uncertainty about firms' future economic performance. Prior research examining this issue has been inconclusive. These studies have concluded that forecast dispersion is likely to reflect factors other than uncertainty about future cash flows, such as uncertainty about the price irrelevant component of firms' financial reports (Daley et al. [1988]; Imhoff and Lobo [1992]). Abarbanell et al. (1995) argue that, if forecast dispersion after (i.e., conditional on) an earnings announcement reflects uncertainty about firms' future cash flows and this uncertainty causes investors to desire additional information, then dispersion will be positively associated with both (a) the level of demand for more information and (b) the magnitude of price reactions around the subsequent earnings release. In this study, we construct a measure of informational demand using the incidence of analyst forecast updating after dispersion is measured. We find a positive association between dispersion in earnings forecasts after an earnings release and this measure of informational demand. We also find a positive association between forecast dispersion and the magnitude of price reactions around subsequent earnings releases. These associations are most apparent when potentially stale (or outdated) forecasts are removed from measures of forecast dispersion. These associations also persist after controlling for other measures of uncertainty (e.g., beta and the variance of daily stock returns), consistent with dispersion in analysts' earnings forecasts serving as a useful indicator of uncertainty about the price relevant component of firms' future earnings.

scholarly journals Does Audit Quality Moderate the Relationship between Accounting Information and the Share Price? Evidence from Jordan

2019 ◽  
Vol 12 (3) ◽  
pp. 58
Author(s):  
Yazan Oroud ◽  
Md. Aminul Islam ◽  
Tunku Salha Tunku Ahmad ◽  
Anas Ghazalat
Keyword(s):  
Panel Data ◽  
Financial Crisis ◽  
Firm Size ◽  
Audit Quality ◽  
Accounting Information ◽  
Listed Companies ◽  
Cash Flows ◽  
Share Price ◽  
Share Prices ◽  
The Relationship

Effect of accounting information on the share price has been having the share of attention from researchers for over six decades owing to the increasing of global financial crisis. Hence, this study attempts to contribute to literature by investigating such relationship in Jordan, a developing country. Specifically, this study investigates the relationship between the cash flow and accruals on share price of listed companies on Amman Stock Exchange for the year 2002 to 2014 also the effect of financial crisis on the share price before and after 2008. The model of this study was theoretically founded on both the agency and the signaling theories. To examine the developed model, the required data were gathered from the annual reports of 236 listed Companies. In analyzing the data, this study utilized the panel data methodology on 117 companies with 1521 observations. Moreover, this study used audit quality (audit firm size and audit tenure) as moderating variable. Based on the panel data results, the fixed effect model was used to examine the effect of the cash flows and accruals on the share price. The accruals and cash flows combined have significant effects on the share prices of the Jordanian companies listed on ASE. Audit quality, whether auditor’s firm size or auditor’s tenure, has significant moderating effect on associations of the share prices with accruals and with cash flows and the 2008 financial crisis had negative effects on share prices of the Jordanian companies listed on ASE. This study provides deep insights into relative usefulness of cash-based and accrual-based accounting measures and assist investors, regulators, analysts, and other stakeholders in evaluating the liquidity and financial performance of Jordanian companies listed on ASE, which may result in better allocation of economic resources by enabling the investors to take informed investment decisions, thus promoting a more efficient Jordanian capital market.

scholarly journals Investment sensitivity and managerial decision making behaviour of Indian firms

2013 ◽  
Vol 61 (7) ◽  
pp. 2157-2162
Author(s):  
Pankaj Kumar Gupta ◽  
Jasjit Bhatia
Keyword(s):  
Stock Returns ◽  
Stock Prices ◽  
Information Structure ◽  
Imperfect Information ◽  
Investment Decisions ◽  
Theoretical Models ◽  
Cash Flows ◽  
Agency Conflicts ◽  
Managerial Decision ◽  
Future Cash Flows

Contemporary models of the financial theory support the proposition that the stock prices should be fundamentally a reflection of the discounted value of earnings. Accordingly the investors and analysts should base their expectations on the expected future cash flows that are logically correlated or have a carry over effect vis-ŕ-vis present stream of cash flows. This logically implies that the managers would have an incentive to manipulate investor’s expectation of future cash flows. The zeal to maximize the firm’s value based on market capitalization is expected to have a detrimental effect on the investment decisions leading to sub optimality. Given the imperfect information structure and market pressures, the Indian firms suffer from mispricing and as such the conventional robust theoretical models of agency conflicts cannot be refuted. This motivates us to examine the interrelation ship between the concerns for valuation and investment sensitivity. We use a sample statistics of selected listed firms that represent the CNX Nifty Index and test for the dependence of the investment behavior of the firm, on the sensitivity of the firms’ share prices to its current cash flow represented by surprise earings. We use the earnings response coefficient (ERC) framework proposed by Ball and Brown (1968) for 11 key industries in India. We find that the surpise in accounting earnings announcements is negatively associated with abnormal stock returns and the investment decisions taken by the firms are negatively sensitive to changes in investment opportunities.

scholarly journals Firm attributes and share price fluctuation of deposit money banks listed in Nigeria

2019 ◽  
Vol 15 (2) ◽  
pp. 77-92
Author(s):  
Adamu Adamu Idris ◽  
Oyindamola Olusegun Ekundayo ◽  
Abdulateef Yunusa
Keyword(s):  
Ordinary Least Squares ◽  
Share Price ◽  
Least Squares Regression ◽  
Share Prices ◽  
Explanatory Variables ◽  
Ex Post ◽  
Ex Post Facto ◽  
Asset Growth ◽  
Combined Impact ◽  
Firm Attributes

This paper examined firms’ attributes impact on the fluctuation of share prices of listed deposit money banks in Nigeria. Ex-post facto research design was employed, and 13 deposit money banks firms were selected out of 15 from 2006-2016. Descriptive statistics were presented, and correlation analysis was conducted to understand the degree of relationship among the variables. Ordinary least Squares regression was used to ascertain the combined impact of the explanatory variables on the share prices. The study finds four firms’ attributes (dividend ratios, book value, growth and liquidity) to have statistically significant effect on share prices. Companies with high dividends and asset growth as well as low liquidity and book values are more likely to experience higher share prices; hence, the need for investors to be aware of these attributes in making investment decisions. The findings contribute to the existing literature by extending the study to the banking industry.

Limits to Voluntary Disclosure in Efficient Markets

1996 ◽  
Vol 11 (3) ◽  
pp. 361-387 ◽  
Author(s):  
Madhav V. Rajan ◽  
Bharat Sarath
Keyword(s):  
Voluntary Disclosure ◽  
Relevant Information ◽  
Cash Flows ◽  
Dual Role ◽  
Efficient Markets ◽  
Equity Offerings ◽  
Voluntary Disclosures ◽  
Maximal Level ◽  
Tax Loss ◽  
Future Cash Flows

In competitive markets, prices offered by investors play a dual role: they must induce the firm to make truthful disclosures about its expected cash flows and they must also be efficient, i.e., equal the expected future cash flows to the buyer conditional on the disclosed information. We show that these requirements may exert opposing influences resulting in equilibrium disclosures being partial; that is, they might cause firms to reveal some, but not all, of the valuation relevant information possessed by the firm. We then characterize the maximal level of information that can be elicited through efficient prices. We apply our analysis to the study of voluntary disclosures in the context of equity offerings, leases and sale of tax-loss carry-forwards and compare these to the level of currently mandated disclosures under GAAP.

How Do Earnings Numbers Relate to Stock Returns? A Review of Classic Accounting Research with Updated Evidence

2004 ◽  
Vol 18 (4) ◽  
pp. 263-286 ◽  
Author(s):  
D. Craig Nichols ◽  
James M. Wahlen
Keyword(s):  
Stock Returns ◽  
Empirical Evidence ◽  
Financial Reporting ◽  
Academic Research ◽  
Cash Flows ◽  
Share Prices ◽  
Earnings Information ◽  
Post Earnings Announcement Drift ◽  
Using Data ◽  
The Impact

An extensive body of academic research in accounting develops theory and empirical evidence on the relation between earnings information and stock returns. This literature provides important insights for understanding the relevance of financial reporting. In this article, we summarize the theory and evidence on how accounting earnings information relates to firms' stock returns, particularly for the benefit of students, practitioners, and others who may not yet have been exposed to this literature. In addition, we present new empirical evidence on the relation between earnings and returns by replicating and extending three classic studies using data from 1988 through 2002. Specifically, we first demonstrate the relation between earnings changes and stock returns, replicating Ball and Brown (1968), and we compare that relation to the relation between changes in cash flows from operations and stock returns. Second, we demonstrate the impact of earnings persistence on stock returns, extending findings from studies such as Kormendi and Lipe (1987), and highlighting the effects of differences in persistence across earnings increases and decreases. Third, we provide evidence to assess the efficiency with which the capital markets impound quarterly earnings information into share prices, showing that the post-earnings-announcement-drift results of Bernard and Thomas (1989) extend to recent data.

scholarly journals Managers’ Investment Decisions: Incentives and Economic Consequences Arising from Leases

2021 ◽  
Vol 14 (4) ◽  
pp. 165
Author(s):  
Tim V. Eaton ◽  
Craig Nichols ◽  
James Wahlen ◽  
Matthew Wieland
Keyword(s):  
Stock Returns ◽  
Financial Reporting ◽  
Cash Flows ◽  
Economic Consequences ◽  
Share Price ◽  
Investment Efficiency ◽  
Sales Growth ◽  
Earnings Growth ◽  
Future Earnings ◽  
Free Cash Flows

What incentives do managers face that might give rise to inefficient investments in leases? If managers make inefficient investments in leases, what economic consequences arise for those managers and their firms? We develop a model of expected investments in leased assets and use the residuals from the model as proxies for inefficient investments. We find that, in contrast to investments in capital expenditures, leasing appears to be a mechanism through which managers can seemingly over-invest, even among firms with high quality financial reporting and negative free cash flows. Examining economic consequences, we predict and find that unexpected investments in leased assets trigger increasing future sales growth but declining future earnings growth for as long as three years ahead. We also find a negative relation with contemporaneous stock returns, suggesting investors view unexpected investments in leases as value destructive. Finally, despite negative returns consequences, we find that unexpected investments in leases are associated with higher CEO compensation driven primarily by future sales growth. Our study suggests that compensation contracts that reward growth may give managers’ incentives to drive sales growth with larger-than-expected investments in leased assets, which lead to slower future earnings growth and negative share price consequences for investors. Our results should inform managers and board members, investors, and researchers interested in investment efficiency, corporate governance, and leases.

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