The Determinant Factors of Earnings Persistence

The purpose of this research is to provide empirical evidence about the effect of operating cash flow, sales volatility, cash flow volatility, operating cycle, and book tax difference on earnings persistence. The company used in this research is manufacturing company listed in Indonesia Stock Exchange (IDX) from 2016 until 2020. Samples of this research were selected based on the purposive sampling method and resulted in 43 companies, therefore the data used for this research amounting to 215 data. The data obtained from these samples were analyzed using multiple regression method. The result of this research show that operating cycle have influence on earnings persistence. While operating cash flow, sales volatility, cash flow volatility, and book tax difference have no influence on earnings persistence.

Corporate Governance and the Relationship between Default Risk and the Earning Response Coefficient

<p>This study examines the effect of corporate governance on the relationship between default risk and the earnings response coefficient (ERC). Using a sample of 2,004 firm-years comprising 334 firms listed on the Bursa Malaysia over a six year period from 2002 to 2007, this study tests whether corporate governance mitigates the effect of default risk on ERC while controlling for the established determinants of ERC — beta, growth, earnings persistence and size. Using reverse regression, the study confirms that beta is negatively related to ERC and that growth, earnings persistence and size are positively related to ERC. Default risk is found to be negatively related to ERC thus confirming that beta is only a partial measure of risk relevant to ERC. Corporate governance — as indicated by audit quality, audit committee expertise and independence, and board independence and board shareholding — mitigates the negative effect of default risk on ERC. The results of the study hold both for the pooled sample of 2,004 firm-year observations and on a year by year basis for the 334 firms in the sample. The results are also found to be robust to various sensitivity tests including to alternative measures of the variables. The study thus provides systematic and comprehensive additional evidence on the determinants of ERC. Of itself this is an important contribution to the literature but especially so given that the evidence comes from Malaysia — an emerging economy — whereas the existing empirical literature relates mainly to developed countries.</p>

Corporate Governance and the Relationship between Default Risk and the Earning Response Coefficient

<p>This study examines the effect of corporate governance on the relationship between default risk and the earnings response coefficient (ERC). Using a sample of 2,004 firm-years comprising 334 firms listed on the Bursa Malaysia over a six year period from 2002 to 2007, this study tests whether corporate governance mitigates the effect of default risk on ERC while controlling for the established determinants of ERC — beta, growth, earnings persistence and size. Using reverse regression, the study confirms that beta is negatively related to ERC and that growth, earnings persistence and size are positively related to ERC. Default risk is found to be negatively related to ERC thus confirming that beta is only a partial measure of risk relevant to ERC. Corporate governance — as indicated by audit quality, audit committee expertise and independence, and board independence and board shareholding — mitigates the negative effect of default risk on ERC. The results of the study hold both for the pooled sample of 2,004 firm-year observations and on a year by year basis for the 334 firms in the sample. The results are also found to be robust to various sensitivity tests including to alternative measures of the variables. The study thus provides systematic and comprehensive additional evidence on the determinants of ERC. Of itself this is an important contribution to the literature but especially so given that the evidence comes from Malaysia — an emerging economy — whereas the existing empirical literature relates mainly to developed countries.</p>

Impact of Leverage and Firm Size on Earnings Persistence with Managerial Ownership as Moderating Variables

This study aims to examine and analyze the effect of leverage and firm size on earnings persistence with managerial ownership as a moderating variable. The population in this study is manufacturing companies listed on the Indonesia Stock Exchange in 2016-2019. The sample selection method used purposive sampling criteria, while the data analysis methods used in this study were multiple regression analysis and moderated regression analysis. Before analysing the data, first perform the classical assumption test, after the data is declared to meet the test criteria, then a hypothesis test is carried out consisting of multiple regression analysis, coefficient of determination test (R-squares), simultaneous significance test (F-test), significance test partial test (t-test) and moderated regression analysis (MRA). The results showed that leverage had a positive effect on earnings persistence, and firm size had no effect on earnings persistence, while managerial ownership was unable to moderate the effect of leverage and firm size on earnings persistence.

Earnings Quality: Impact of Income Smoothing, Earnings Persistence, Book Tax Difference with Good Corporate Governance as Moderation

This study has a purpose to determine the effect of Income Smoothing, Earnings Persistence, Book Tax Difference on Earnings Quality and moderating effect of Good Corporate Governance. Using 98 sample data from manufacturing entities on the Indonesia Stock Exchange in 2015-2020, a negative effect of earnings persistence on earnings quality, and a positive effect of differential book tax on earnings quality found in this study, while income smoothing does not. In addition, it was found that good corporate governance by institutional ownership as a proxy strengthens the effect of income smoothing on earnings quality and weakens the effect of book-tax differences on earnings quality. This finding can be used by investors in assessing the quality of earnings from financial information issued by issuers so that future earnings prediction analysis can be measured properly so that the desired return target is achieved.

Effect of Debt Level, Operating Cash Flow, Sales Volatility and Managerial Ownership on Earning Persistence

This study aims to examine the variables of debt level, operating cash flow, sales volatility and managerial ownership on earnings persistence in Property & Real Estate Sector Companies listed on the Indonesia Stock Exchange in 2017-2020. The research method used in this study is the method quantitative research. The sample was taken using a purposive sampling technique where the population was 63 companies and a sample that met the specified criteria was 11 companies listed on the Indonesia Stock Exchange in 2017-2020. The statistical analysis used in this study was multiple linear regression analysis. The results of this study indicate that debt level has no significant effect on earnings persistence in Property & Real Estate Sector Companies on the Indonesia Stock Exchange in 2017-2020. Operating cash flow has a positive and significant effect on earnings persistence in Property & Real Estate Sector Companies on the Indonesia Stock Exchange in 2017-2020. Sales volatility has a negative and significant effect on earnings persistence in Property & Real Estate Sector Companies on the Indonesia Stock Exchange in 2017-2020. Managerial ownership has no significant effect on earnings persistence in Property & Real Estate Sector Companies on the Indonesia Stock Exchange in 2017-2020. Keywords: Debt Level, Operating Cash Flow, Sales Volatility, Managerial Ownership, Earnings Persistence.

A study of the reliability of cross-sectional earnings forecasting models for estimating IPO firms’ implied cost of capital

Purpose This study aims to evaluate the earnings forecasting models of Hou et al. (J Account Econ, 53:504–526, 2012) and Li and Mohanram (Rev Account Stud, 19:1152–1185, 2014) in terms of bias and accuracy and validity of the implied cost of capital (ICC) estimates for a sample of initial public offerings (IPOs). Design/methodology/approach The authors use a sample of 1,657 NYSE, Amex and Nasdaq IPOs from 1972 to 2013. Findings The models of Hou et al. and Li and Mohanram produce relatively inaccurate and biased earnings forecasts, leading to unreliable ICC estimates, particularly for small and loss-making IPOs that constitute the bulk of new listings. As a remedy, the authors propose a new earnings forecasting model, a combination of Hou et al.’s and Li and Mohanram’s earnings persistence models, and show that it produces more accurate and less biased earnings forecasts and more valid ICC estimates. Originality/value The study contributes novel results to the literature on the validity of cross-sectional earnings models in forecasting IPO firm earnings and estimating the ICC. The findings are directly relevant for practitioners, who can improve their earnings forecasting accuracy for IPO firms and related ICC estimates. The insights can be extended to other settings where investors have limited access to financial information, such as acquisitions of private targets.

AGGREGATE EARNINGS AND RETURNS IN BRAZIL

We used the method employed in Kothari, Lewellen and Warner (2006) to show the relationship between aggregate earnings and market returns in Brazil in the period from 1995 to 2017. Considering the findings found by Kothari, Lewellen and Warnet (2006), our results indicate that the theory of Bernard and Thomas (1990) is more consistent with the US market than with the Brazilian market, signaling that the aggregate post-earnings announcement drift tends to be larger in markets with higher earnings persistence, like Brazil. Our findings also indicate that the relationship between aggregate returns and earnings in Brazil tends to be positive for the current period and the next two quarters, corroborating the Sadka and Sadka (2009) study. Considering that the predictability of earnings in the US market is higher than that in Brazil, our results also support the argument by He and Hu (2014) that the relationship between aggregate earnings and returns is linked to each country’s level of disclosure. However, new evidences reveal the influence of high interest rates on financial market results, suggesting that expectations of increased interest rates tend to reduce aggregate current returns in Brazil due to the possible migration of capital to lower risk, given the attractiveness of their returns in an environment of high inflation.