What Information in Financial Statements Could Be Used to Predict the Risk of Equity Investment?

Theoretically, accounting earnings could be used to estimate the intrinsic value of equity. If accounting earnings could be predicted accurately, then, so could be the value of equity, thereby, creating much less risk in equity investment. However, earnings surprises are common, and therefore so is the risk in equity investment. To quantify the risk in the investment implied from accounting earnings, I propose to use financial statements to construct abnormal sales growth rates (ABG) and abnormal changes in profit margins (ABPM) to measure the uncertainty embedded in the accounting earnings. I measure ABG (ABPM) as the difference between the current value of sales growth rate (profit margin) and its benchmark, a weighted value of the three preceding years’ sales growth rate (profit margin). Then, I quantify whether and to what extent the news of ABG and ABPM are material enough to change the expected earnings (proxied by analysts’ forecasted earnings revisions [FREV] and predicted unexpected earnings [UE], and future stock returns [SAR]). Fama–MacBeth regression results show that, together, solely ABPM and ABG could explain 8.2% (2.3%) (5.4%) of the variation of FREV (UE) (SAR). The risk-predictability of ABPM and ABG is robust to the presence of abnormal growth in net operating assets and accruals quality, which, suggested by previous literature, might influence unexpected earnings. Further contingent analyses indicate that the capital market reacts more strongly to the bad news embedded in the ABPM/ABG (with negative signs) than the good news in ABPM/ABG (with positive signs).

REAKSI INVESTOR TERHADAP PENGUMUMAN LABA DAN UNEXPECTED EARNING PADA SEKTOR INFRASTRUKTUR SAAT MENGHADAPI KOS STICKINESS

The purpose of this study is to determine investors reactions to earnings announcements and unexpected earnings when facing stickiness cost. Sampling in this study used a purposive sampling technique with a total of 10 infrastructure companies listed on the IDX during 2015-2019. The analysis technique in this study uses panel regression analysis using EVIEWS 9. The results of this study indicate that there is no investor reaction to earnings announcements in infrastructure companies when there are low and high stickiness cost. However, when the company has a combined stickiness cost, there is an investor's reaction to the earnings announcement by seeing a positive CAR value which means good earnings quality. Unexpected Earning has no effect on companies that are facing stickiness cost, so the results of this study indicate that there is no investor reaction to unexpected earnings in infrastructure companies that have low, high, and combined stickiness cost. The conclusion of this study is that earnings information becomes less important in predicting future earnings.

Pengaruh Akuntansi Akrual dan Pengungkapan Lingkungan terhadap Koefisien Respon Laba pada Perusahaan Terindeks JII

This research is aimed to identify whether accrual accounting and environmental disclosure influence Earning Response Coefficient (ERC). The data were collected by using document and library method. The dependent variable in this research is ERC that measured by the market response to the unexpected earnings. The independent variable is accrual accounting and environmental disclosure, which was tested on the firm’s total information disclosure of Corporate Social Responsibility (CSR. This research used Panel Data Regression. A total sample of 16 companies listed in Jakarta Islamic Index (JII) for five years (2014-2018) was used to perform the analysis and hypotheses testing. The result of this research is that accrual accounting has no significant relationship with the ERC, and CSR information disclosure has a positive and significant relationship with the ERC.

Tick Size Tolls: Can a Trading Slowdown Improve Earnings News Discovery?

This study examines how an increase in tick size affects algorithmic trading (AT), fundamental information acquisition (FIA), and the price discovery process around earnings announcements (EAs). Leveraging the SECs randomized Tick Size Pilot experiment, we show a tick size increase results in a decline in AT and a sharp drop in absolute cumulative abnormal returns and volume around EAs. More importantly, we find increased FIA in the pre-announcement period. Specifically, we show: (a) treatment firms pre-announcement returns better anticipate next quarters standardized unexpected earnings; (b) these firms experience an increase in EDGAR web traffic prior to EAs; and (c) they exhibit a drop in price synchronicity with index returns. Taken together, our evidence suggests that while an increase in tick size reduces AT and abnormal market reaction after EAs, it also increases FIA activities prior to EAs.

Is Accounting Information Still Relevant in the Internet Age? Research on the Determination of the Effect of Google Trends Data on Earnings Response Coefficient: Case of Vietnam

When determining the role of accounting information, earnings response coefficient (ERC) is usually used for discovering the relationship between new earning information and unexpected share returns in relation to the event of releasing financial statements. In the context that most of the firm-related information is now available for investors via Internet platform, this study addresses the question how the public attention of the company through the Internet affects the response of the market to the accounting information releasing, or in other words, how market reaction to the firm’s unexpected earnings is affected by Internet information trends. Using a sample of VN30 baskets of Vietnamese listed firms (excluding the financial institutions) in the Ho Chi Minh Stock Exchange (HOSE) from 2015 to 2018 and the Google trends data from the same period, the study examines investigate the possible relationship between Google trend and the earnings response coefficient. The results from regression indicate that the ERCs of Vietnamese firms is positive and the interest of the firms on the Internet has no significant impact on ERC. The main findings expecting to contribute to providing direct support that the relevance of accounting information are still valuable in the Internet age. This paper is expected to make a contribution to research of accounting information relevance in terms of extending to sample in developing countries like Vietnam.

Psychology and behavioral finance

Purpose The purpose of this paper is to detect quantitatively the existence of anchoring bias among financial analysts on the Tunisian stock market. Both non-parametric and parametric methods are used. Design/methodology/approach Two studies have been conducted over the period 2010–2014. A first analysis is non-parametric, based on observations of the sign taking by the surprise of result announcement according to the evolution of earning per share (EPS). A second analysis uses simple and multiple linear regression methods to quantify the anchor bias. Findings Non-parametric results show that in the majority of cases, the earning per share variations are followed by unexpected earnings surprises of the same direction, which verify the hypothesis of an anchoring bias of financial analysts to the past benefits. Parametric results confirm these first findings by testing different psychological anchors’ variables. Financial analysts are found to remain anchored to the previous benefits and carry out insufficient adjustments following the announcement of the results by the companies. There is also a tendency for an over/under-reaction in changes in forecasts. Analysts’ behavior is asymmetrical depending on the sign of the forecast changes: an over-reaction for positive prediction changes and a negative reaction for negative prediction changes. Originality/value The evidence provided in this paper largely validates the assumptions derived from the behavioral theory particularly the lessons learned by Kaestner (2005) and Amir and Ganzach (1998). The authors conclude that financial analysts on the Tunisian stock market suffer from anchoring, optimism, over and under-reaction biases when announcing the earnings.

Do letters to shareholders have information content?

PurposeThe purpose of this paper is to investigate the information content in letters to shareholders in terms of business content, tone and types of business vocabulary.Design/methodology/approachThe study uses multiple regression models to test the information content concerning business content, tone, and types of business vocabulary in letters to shareholders. Two textual analyses in accounting research dictionaries are used. Loughran and McDonald’s (2011) dictionary is used as a scheme to identify the positive and negative words, and Kothariet al.’s (2009) dictionary is used to identify the business vocabulary.FindingsLetters to shareholders contain incremental information for investors. First, the results show that the market reacts negatively to the content of these letters. The more that business content is disclosed, the lower the abnormal returns. It can be seen that investors catch additional information from letters to shareholders. Second, investors in negative unexpected earnings firms tend to not trust the concentration of positive tone in the letters. Third, some types of business vocabulary in the letters have an influence on investors’ decisions. In addition, larger amounts of business content are seen to be negatively related to firms’ future performance.Practical implicationsDue to the effect of the content of letters to shareholders, the Securities Exchange Commission may wish to consider the results of this study before setting new disclosure regulations. Specifically, some inside information might have a negative effect on market returns.Originality/valueThe study indicates that letters to shareholders are a disclosure venue between companies and investors, where investors react to certain business vocabulary. Some business words are associated with lower future performance. Therefore, the market reacts negatively when these words are reported in the letters.

Stock price crash risk and unexpected earnings thresholds

Purpose The purpose of this paper is to examine stock price crash risk (SPCR) as a function of meeting or missing three earnings thresholds – reporting a profit (earnings level), reporting an earnings increase (earnings change) and meeting analysts’ forecasts (earnings expectation). Design/methodology/approach The authors rely upon the research design of Herrmann et al. (2011) to identify the incremental impact of the earnings level and earnings change benchmarks on SPCR, after controlling for the effects of meeting or missing analysts’ expectations. Findings The authors find that meeting analysts’ expectations is negatively associated with SPCR, and this relationship strengthens with the magnitude of the unexpected earnings. However, the authors find little evidence of incremental threshold effects to suggest that earnings level and earnings change benchmarks are critical thresholds with respect to SPCR. Our results are robust after including a number of control variables. Originality/value This study contributes to the literature that investigates determinants of SPCR while simultaneously providing new evidence to conclusions that analysts’ earnings forecast is at the top of the earnings benchmark hierarchy.

THE EFFECT OF VOLUNTARY DISCLOSURE UPON THE EARNINGS RESPONSE COEFFICIENT

This research aims to examine the effect of voluntary disclosure by calculating the unexpected earnings and being measured thru the voluntary disclosure index upon the earning response coefficient measured by cumulative abnormal return and leverage, price to book value and the size of a company which is controlled variable. This research has been covering all the emitents on the Syariah Share Index which is the Jakarta Islamic Index (JII) registered at the Indonesia Stock Exchange (BEI) in 2014. The indicator of the voluntary disclosure has adopted the index of Global Reporting Initiative (GRI) G4 version (the newest) refers to 3 (three) selected main components which is the Economic performance, social and environment performance. Data collection method has applied a documentation study which is by studying the evident, scientific paper, article, journal and website relating to the research objects. The result of the research has indicated that an empiric study can not describe the effects of the voluntary disclosure upon the earning response coefficient (ERC). The same conclusion has been obtained regarding each kind of voluntary disclosure which is the voluntary disclosure related to the financial information and the voluntary disclosure related to the social and environment information.