scholarly journals Depreciation Choice and Future Operating Performance

2019 ◽  
Vol 9 (1) ◽  
pp. 89
Author(s):  
Marcus L. Caylor ◽  
Scott Whisenant
Keyword(s):  
Information Asymmetry ◽  
Adverse Selection ◽  
Operating Performance ◽  
Signaling Theory ◽  
Cash Flows ◽  
Future Prospects ◽  
Future Earnings ◽  
Accounting Choices ◽  
Straight Line ◽  
Accelerated Depreciation

In this study we test the argument that information asymmetry and the problems of adverse selection provide incentives for managers to use accounting choices to signal relatively higher future prospects. Specifically, we contend that firms use accelerated depreciation to credibly signal higher future earnings and cash flows, consistent with signaling theory. Compared to straight-line depreciation, accelerated depreciation reduces earnings in the earlier years of asset lives and produces more variability in earnings. Despite these drawbacks, hundreds of firms voluntarily use accelerated depreciation for at least some of their depreciable assets. Our results indicate that the use of accelerated depreciation foreshadows higher future earnings and cash flows for horizons of one, two, and three years ahead.

The Effect of Firms' Depreciation Method Choice on Managers' Capital Investment Decisions

2008 ◽  
Vol 83 (2) ◽  
pp. 351-376 ◽  
Author(s):  
Scott B. Jackson
Keyword(s):  
Financial Reporting ◽  
Capital Investment ◽  
Investment Decision ◽  
Investment Decisions ◽  
Cash Flows ◽  
Method Choice ◽  
Straight Line ◽  
Replacement Decisions ◽  
Accelerated Depreciation ◽  
Executive Managers

This study examines whether straight-line depreciation, relative to accelerated depreciation, causes non-executive managers to make non-value-maximizing capital investment decisions. To do this, I conduct experiments in which managers must decide whether to continue using an existing asset or invest in a replacement asset. By design, replacing the existing asset yields higher cash flows and managers are aware of this fact. However, if the asset is replaced, then the greater remaining book value under straight-line depreciation relative to accelerated depreciation causes earnings to be lower. Lower earnings and psychological forces may push managers of firms that use straight-line depreciation away from making the economically efficient capital investment decision. The results suggest that managers of firms that use straight-line depreciation are less likely to invest in a replacement asset than are managers of firms that use accelerated depreciation. Further, the results suggest that managers perceive that an asset depreciated using straight-line depreciation has provided less retrospective utility than an asset depreciated using accelerated depreciation. In turn, I find that depreciation method-induced differences in managers' retrospective utility perceptions influence their prospective utility perceptions, which, in turn, influence managers' asset replacement decisions. By theoretically and empirically linking firms' depreciation method choice to managers' capital investment decisions, I provide evidence that a seemingly innocuous choice made for external financial reporting purposes can cause managers to make non-value-maximizing capital investment decisions.

Regulation and information asymmetry

2008 ◽  
Vol 16 (1) ◽  
pp. 59-76 ◽  
Author(s):  
Robyn McLaughlin ◽  
Assem Safieddine
Keyword(s):  
Information Asymmetry ◽  
Stock Returns ◽  
Operating Performance ◽  
Cost Benefit ◽  
Future Research ◽  
Information Asymmetries ◽  
Cross Sectional ◽  
Industrial Firms ◽  
Content Type ◽  
Regulated Utilities

PurposeThis paper seeks to examine the potential for regulation to reduce information asymmetries between firm insiders and outside investors.Design/methodology/approachExtensive prior research has established that there are substantial effects of information asymmetry in seasoned equity offers (SEOs). The paper tests for a mitigating effect of regulation on such information asymmetries by examining differences in long‐run operating performance, changes in that performance, and announcement‐period stock returns between unregulated industrial firms and regulated utilities that issue seasoned equity. The authors also segment the samples by firm size, since smaller firms are likely to have greater asymmetries.FindingsConsistent with regulated utility firms having lower levels of information asymmetry, they have superior changes in abnormal operating performance than industrial firms pre‐ to post‐issue and their announcement period returns are significantly less negative. These findings are most pronounced for the smallest firms, firms likely to have the greatest information asymmetries and where regulation could have its greatest effect.Research limitations/implicationsThe paper does not examine costs of regulation. Thus, future research could seek to measure the cost/benefit trade‐off of regulation in reducing information asymmetry. Also, future research could examine cross‐sectional differences between different industries and regulated utilities.Practical implicationsRegulation reduces information asymmetry. Thus, regulation or mandated disclosure may be appropriate in industries/markets where information asymmetry is severe.Originality/valueThis paper is the first to compare the operating performance of regulated and unregulated SEO firms.

Securities-Based Crowdfunding by Startups: Does Auditor Attestation Matter?

2021 ◽  
Author(s):  
Jing Gong ◽  
Jayanthi Krishnan ◽  
Yi Liang
Keyword(s):  
Information Asymmetry ◽  
Small Businesses ◽  
Financial Statements ◽  
Future Prospects ◽  
Positive Effect ◽  
High Information

We examine financing outcomes for small businesses seeking to sell public securities in a setting characterized by high information asymmetry, weak requirements for auditor participation, and a complete absence of Big N auditors. Issuers that raise capital from small, unsophisticated investors through crowdfunding, under the Securities and Exchange Commission's Regulation Crowdfunding (RegCF), often need no auditor attestation or need only weak attestation in the form of reviews, not audits, of their financial statements. We find that auditor reviews are positively associated with both the probability of crowdfunding success and the total amount raised. Further, we compare outcomes for issuers that procure auditor reviews voluntarily and mandatorily, and document that issuers with voluntary reviews have better outcomes. We conjecture that, for issuers that voluntarily procure reviews, the reviews serve as signals of high future prospects. Finally, the positive effect of reviews is concentrated in PCAOB-registered auditors.

Does Financial Reporting Conservatism Mitigate Underinvestment?

2017 ◽  
Vol 34 (2) ◽  
pp. 258-283 ◽  
Author(s):  
Hyun A. Hong ◽  
Yongtae Kim ◽  
Gerald J. Lobo
Keyword(s):  
Information Asymmetry ◽  
Cash Flow ◽  
Financial Reporting ◽  
Cash Flows ◽  
Agency Conflicts ◽  
Negative Relation ◽  
Investment Projects ◽  
External Capital ◽  
Cash Flow Volatility

This study examines the role of financial reporting conservatism in mitigating underinvestment problems. Recognizing that volatile cash flows increase the need to access external capital markets and that agency conflicts and information asymmetry make external capital costlier than internal capital, which leads managers to forgo valuable investment projects, Minton and Schrand document a negative relation between cash flow volatility and investment. We draw on Minton and Schrand’s framework to isolate underinvestment problems and hypothesize and document that conservatism mitigates the negative relation between cash flow volatility and investment and that this mitigative effect is more pronounced for firms with ex ante more severe agency conflicts. We also document that conservatism mitigates the sensitivity of investment to cash flow volatility by facilitating access to external capital.

scholarly journals Kemampuan Laba dan Arus Kas Operasi dalam Memprediksi Laba dan Arus Kas Masa Depan

2018 ◽  
pp. 80
Author(s):  
Frans AP Dromexs Lumbantoruan ◽  
I Gusti Ngurah Agung Suaryana
Keyword(s):  
Cash Flow ◽  
Stock Exchange ◽  
Linear Regression Analysis ◽  
Flow Property ◽  
Multiple Linear Regression Analysis ◽  
Cash Flows ◽  
Future Earnings ◽  
Analysis Technique ◽  
Operating Cash Flow ◽  
Future Cash Flows

This study aims to determine the ability of earnings and operating cash flows in predicting earnings and future cash flows. This research was conducted on property and real estate companies listed on the Indonesia Stock Exchange. The samples used by 20 companies with 40 observations. The sampling was done by nonprobability samplingmethod with purposive samplingtechnique. The analysis technique used is multiple linear regression analysis. Based on the result of the analysis, earnings influences in predicting future earnings. Likewise, earnings and operating cash flow have an effect in predicting future cash flows. However, operating cash flow is not influential in predicting future earnings. Keywords: profitability, cash flow, property

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.

scholarly journals The ability of cash flows to predict the earning: Evidence from Jordan

2021 ◽  
Vol 18 (4) ◽  
pp. 36-44
Author(s):  
Mohammad Fawzi Shubita
Keyword(s):  
Stock Exchange ◽  
Predictive Ability ◽  
Cash Flows ◽  
Operating Cycle ◽  
Prediction Ability ◽  
Future Earnings ◽  
Industrial Companies ◽  
Amman Stock Exchange ◽  
Great Support ◽  
The Relationship

This study aims to investigate the ability of cash flows components to predict the earning and to know the extent of the relationship between accounting profits and cash flow measures. The study sample consisted of 77 industrial companies listed on the Amman Stock Exchange in Jordan for the period from 2006 to 2019. This study relied on the regression method to test the relationship between the study variables. The study findings showed that the cash flows from operating, investing, and financial activities have a statistically significant impact on predicting future earnings. The study also examined the effect of length of operating cycle and company’s size on the predictive ability of cash flows regarding future earnings. The main results for this aspect are that large companies and short operating cycle companies have higher prediction ability for future earnings than small and long operating cycle companies. This paper provides evidence of the information content of cash flows for future earnings in emerging markets like Jordan and is important for Jordanian shareholders by enabling them to evaluate company’s performance. AcknowledgmentsI would like to thank Amman Arab University for its great support, and for funding this study.

DESIGN AND VALUATION OF CORPORATE SECURITIES WITH STRATEGIC DEBT SERVICE AND ASYMMETRIC INFORMATION

1999 ◽  
Vol 02 (02) ◽  
pp. 201-219 ◽  
Author(s):  
YONGHUA PAN
Keyword(s):  
Asymmetric Information ◽  
Information Asymmetry ◽  
Risk Premium ◽  
High Growth ◽  
Cash Flows ◽  
Debt Service ◽  
Growth Potential ◽  
Unified Framework ◽  
Financing Decisions ◽  
Corporate Securities

This paper studies the effects of strategic debt service, asymmetric information and their interaction on the valuation of corporate securities and on corporate financing decisions. By introducing information asymmetry into a continuous-time setting, our model is able to integrate these two factors in a unified framework. Such a model allows for obtaining valuation results in a separating equilibrium. The basic results of this paper imply that the risk premium of debt could be partly contributed by information effect. This part of risk premium could be very significant for those good firms with a project which will produce much higher cash flows than what the market expects. We also find that a firm's financing decision depends on its primitives: firms are more apt to rely on equity if they have: (1) high growth potential, (2) riskier projects, (3) higher ratio of intangible assets to total assets and (4) lesser information asymmetry; firms would prefer debt, otherwise.

Usefulness of Accounting Estimates

2016 ◽  
Vol 32 (1) ◽  
pp. 123-135 ◽  
Author(s):  
Li Li Eng ◽  
Thanyaluk Vichitsarawong
Keyword(s):  
Cash Flow ◽  
Exploratory Study ◽  
Abnormal Returns ◽  
Cash Flows ◽  
Recent Period ◽  
Future Earnings ◽  
China And India ◽  
Accounting Estimates ◽  
Out Of Sample ◽  
Over Time

This is an exploratory study to examine the quality or usefulness of accounting estimates of companies in China and India over time. Specifically, we examine how well the accounting estimates are able to predict future earnings and cash flows during the period 2003-2013. The results for India indicate that the out-of-sample earnings and cash flow predictions derived are more accurate and more efficient in the more recent period (2010-2013) than the earlier period (2003-2006). In contrast, the out-of-sample earnings and cash flow predictions for China are generally more biased, less accurate, and less efficient. The results indicate abnormal returns earned on hedge portfolios formed on earnings (cash flow) predictions for India in the recent period. In contrast, none of the portfolios for China earn positive returns. The results suggest that the accounting estimates in India in recent years have become better predictors of future earnings and cash flow than accounting estimates in the earlier period. However, the accounting estimates in China are not relevant for predicting earnings and cash flows over the years in the sample period.

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