scholarly journals Investor Reaction to the Discovery of Accounting Fraud: The Period from the Discovery of the Fraud to the Completion of the Correction

2021 ◽  
Vol 10 (6) ◽  
pp. 171
Author(s):  
Syed Raziuddin Ahmad ◽  
Nabil Ahmed Mareai Senan ◽  
Ijaz Ali ◽  
Kashif Ali ◽  
Imran Ahmad Khan ◽  
...  
Keyword(s):  
Stock Price ◽  
Cash Flows ◽  
Accounting Fraud ◽  
News Release ◽  
Price Decline ◽  
Release Of Information ◽  
Future Cash Flows ◽  
Investor Reaction

This paper examines the period from the discovery of accounting fraud to the completion of correction and examines the reaction of investors on the date of the first news release suggesting accounting manipulation, the date of the subsequent release of information related to the amount of profit correction that was not disclosed on the date of the first news release, and the date of the submission of the correction report. The verification results show that the stock price falls sharply on the day of the first news release and the day when the information about the amount of profit revision is disclosed, that when the amount of profit revision is large and it takes time to disclose information about the amount of profit revision, there is a rebound in the stock price on the day when the correction report is submitted because investors like the resolution of uncertainty, and that there is a relationship between the amount of profit revision and the size of stock price decline. However, when there is no information about the amount of correction on the first day of the news release, investors react uniformly, and the reaction to a large (small) amount of correction is underreaction (overreaction). These results indicate that investors were misled by the misstatements until the fraud was discovered and made decisions based on overestimates of future cash flows, so they suffered unexpected losses when the fraud was discovered, and during the period from the fraud discovery to the completion of correction.   Received: 3 August 2021 / Accepted: 6 October 2021 / Published: 5 November 2021

scholarly journals Operating Cash Flows, Cash Recovery Rates And Internal Rates Of Return

2010 ◽  
Vol 8 (8) ◽  
Author(s):  
Christine Andrews ◽  
Joseph C. Rue ◽  
Ara Volkan
Keyword(s):  
Financial Reporting ◽  
Stock Price ◽  
Market Price ◽  
Cash Flows ◽  
Financial Accounting ◽  
Sufficient Information ◽  
Financial Accounting Standards Board ◽  
Historical Cost ◽  
Value Stocks ◽  
Future Cash Flows

<p class="MsoNormal" style="text-align: justify; line-height: normal; margin: 0in 0.5in 0pt; mso-pagination: none;"><span style="font-family: &quot;Times New Roman&quot;,&quot;serif&quot;; color: black; font-size: 10pt; mso-themecolor: text1;">Investors depend on financial reporting to assess the amounts and timing of future cash flows. Unfortunately, the historical cost basis may not provide sufficient information to judge future cash flows. The Financial Accounting Standards Board argues that the market price of common stock incorporates the market estimate of discounted future cash flows. This paper illustrates the calculation of operating cash flow on a per share (CFPS) basis and measures a firm&rsquo;s internal rate of return by dividing the CFPS by the beginning of the year stock price reported by the Dow Jones Industrials. Although this measure may be affected by other market events, we believe it has potential information content and may provide investors with a tool to value stocks.</span></p>

The Financial Implications of In-Substance Defeasance

1987 ◽  
Vol 2 (1) ◽  
pp. 79-89 ◽  
Author(s):  
Peyton Foster Roden
Keyword(s):  
Interest Rates ◽  
Stock Price ◽  
Cash Flows ◽  
Financial Accounting ◽  
Financial Accounting Standards Board ◽  
Corporate Managers ◽  
Earnings Per Share ◽  
Equity Ratio ◽  
Reported Earnings ◽  
Future Cash Flows

In November 1983, the Financial Accounting Standards Board issued Statement No. 76, Extinguishment of Debt. The Statement permits corporations completing an in-substance defeasance to recognize an increase in earnings and earnings per share. High interest rates in 1984 and the Statement encouraged corporate managers to defease debt in substance and to show the associated increase in earnings per share. The financial impact contrasts with those of accounting. Although in-substance defeasance leads to an increase in reported earnings, financial theory suggests that it leads to a decrease in the price of the defeasing corporation's common stock by doing the following: decreasing the amount of future cash flows, decreasing corporate liquidity, redistributing wealth from common shareholders to bondholders, and decreasing the debt-equity ratio. Only the change in the debt-equity ratio may lead to an expected increase in stock price. The other three influences lead to an expected decrease.

scholarly journals Managerial Ability and Income Smoothing

2019 ◽  
Vol 95 (4) ◽  
pp. 1-22 ◽  
Author(s):  
Bok Baik ◽  
Sunhwa Choi ◽  
David B. Farber
Keyword(s):  
Stock Prices ◽  
Stock Price ◽  
Cash Flows ◽  
Income Smoothing ◽  
High Ability ◽  
Managerial Ability ◽  
Price Informativeness ◽  
Future Performance ◽  
Stock Price Informativeness ◽  
Future Cash Flows

ABSTRACT In this study, we investigate whether managerial ability is related to income smoothing and, if so, whether smoothing associated with managerial ability improves the informativeness of earnings and stock prices about future performance. Using a large sample of firms, we find that managerial ability is positively related to smoothing. More importantly, we show that high-ability managers incorporate more forward-looking information about cash flows into current earnings through smoothing, thereby enhancing earnings informativeness. We also find that smoothing associated with high-ability managers improves stock price informativeness about future cash flows. Our study should be of interest to researchers, practitioners, and others concerned with understanding the determinants and usefulness of smoothing.

scholarly journals Calculating a Consistent Terminal Value in Multistage Valuation Models

2017 ◽  
Vol 7 (1) ◽  
pp. 1
Author(s):  
Larry C Holland
Keyword(s):  
Growth Rate ◽  
Stock Price ◽  
Cash Flows ◽  
Step Function ◽  
Value Drivers ◽  
Relative Level ◽  
Common Assumption ◽  
Valuation Model ◽  
Future Cash Flows

Valuation analysis based on the present value of future cash flows often requires a multistage valuation model which includes a terminal value.  An accurate calculation of the terminal value is very important, particularly if it represents a significant portion of the stock price.  A typical analysis would include a finite forecast of cash flows for a five to ten-year period followed by a terminal value that represents all the cash flows thereafter.  A common assumption is that the valuation cash flows beyond the finite horizon simply continue to grow at a lower long-term growth rate.  The analysis in this paper demonstrates that such an assumption is rarely appropriate except under very restrictive assumptions, if consistent accounting relationships are maintained.  Using dividends as the valuation cash flows in an example calculation, the dividend at the point that the growth rate declines is shown to increase by a step function rather than simply growing at a lower, mature growth rate.  The size of the step function increase is then shown to change when the values of various key value drivers in the analysis are also allowed to change.  Such value drivers include the EBIT margin, the asset intensity, and the relative level of debt. The step function increase in dividends can have a significant effect on the size of the terminal value and highlights the importance of maintaining consistent accounting relationships when forecasting future cash flows in a multistage valuation model.

scholarly journals Stock Valuation: Dividend Discount Models

2011 ◽  
Author(s):  
Syrgak Kydyraliev ◽  
Anarkül Urdaletova
Keyword(s):  
Stock Price ◽  
Supply And Demand ◽  
Cash Flows ◽  
Securities Market ◽  
Present Value ◽  
Stock Valuation ◽  
Stock Value ◽  
The Future ◽  
Definition Of ◽  
Future Cash Flows

One of the most widespread problems on a securities market is the problem of definition of an estimated stock value. It is necessary to note, that the stock price as well as the price of any good in the market is defined as the result of supply and demand interaction. Our task is to offer the mechanism, which allows making decision on purchase or sale. For this purpose the method of asset estimation by future cash flows will be used – i.e. we believe that the estimated value of an asset is equal to present value of the future cash flows which are provided by the asset. In our paper we will introduce methods for the valuation of stocks with arithmetic and pseudo-arithmetic growth of dividends.

Does the Mandatory Adoption of IFRS Improve the Association between Accruals and Cash Flows? Evidence from Accounting Estimates

2018 ◽  
Vol 33 (1) ◽  
pp. 39-59
Author(s):  
Jimmy F. Downes ◽  
Tony Kang ◽  
Sohyung Kim ◽  
Cheol Lee
Keyword(s):  
Financial Reporting ◽  
Cash Flows ◽  
Data Availability ◽  
The European Union ◽  
Accounting Quality ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Accounting Estimates ◽  
Accounting Accruals ◽  
Future Cash Flows

SYNOPSIS We investigate the effect of mandatory International Financial Reporting Standards (IFRS) adoption in the European Union on the association between accounting estimates and future cash flows, a key concept of accounting quality within the International Accounting Standard Board conceptual framework. We find that the predictive value of accounting estimates improves after IFRS adoption. This improvement is largely driven by specific types of accounting estimates, such as accounts receivable, depreciation, and amortization expense. We also find that the improvement is concentrated in countries with larger differences between pre-IFRS domestic GAAP and IFRS. Our findings suggest that IFRS allow managers to exercise their judgment to provide information about future cash flows through the more subjective/judgmental portion of accounting accruals. JEL Classifications: M16; M49; O52. Data Availability: The data used in this study are from public sources identified in the study.

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.

An Analysis of the Sources of Value Loss Following Financial Restatements

2021 ◽  
pp. 0148558X2198991
Author(s):  
Philip K. Hong ◽  
Jaywon Lee ◽  
Sang-Hyun Park ◽  
Sukesh Patro
Keyword(s):  
Stock Returns ◽  
Cash Flow ◽  
Discount Rate ◽  
Stock Price ◽  
Cash Flows ◽  
Financial Fraud ◽  
Earnings Persistence ◽  
Flow Component ◽  
Financial Restatements ◽  
Value Loss

We decompose the total value loss around firms’ announcements of financial restatements into components arising from investors’ revisions in cash flows and discount rates. First, relative to population benchmarks, restatements represent circumstances in which the cash flow component becomes more important in explaining valuations. While we find significant contributions from both sources, with the cash flow component explaining more than 33% of the variation in stock returns surrounding restatement announcements, this component explains only 13% to 22% in comparable non-restating firms. When restatements are caused by underlying financial fraud, the discount rate impact becomes more important, explaining about 88% of return variation. On the contrary, the cash flow impact is relatively larger for firms with higher earnings persistence or restatements associated with errors. Our decomposition of the value loss helps explain returns in the post-announcement period. Firms with a higher relative discount rate impact experience a significant downward stock price drift after the initial announcement-related price decline. For firms with a higher relative cash flow impact, the evidence suggests the initial impact of the restatement announcement is more complete with no subsequent drift pattern. Our findings close gaps in the evidence on financial restatements and extend the literature on the drivers of stock price movements.

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