The Value Relevance of Earnings in the Presence of Earnings Management: Indonesia as Evidence

This study examines the influence of earnings management on the value relevance of earnings, that is, the value relevance of level and changes of earnings. The sample consists of manufacturing companies listed on the Indonesia Stock Exchange (IDX), comprising 606 observations. By using panel data regression, this study provides evidence that the level of earnings has no value relevance; conversely, changes in earnings have value relevance, indicating that earnings have less value relevance. Furthermore, the results of the relevance test of earnings value with the presence of earnings management show that the relevance of the value of the earnings level increases with the presence of earnings management; on the contrary, the relevance of earnings changes decreases with the presence of earnings management. Based on the value of earnings response coefficient, the impact of earnings management on the value relevance of level and changes of earnings appears to indicate that earnings management reduces the value relevance of earnings.

Attention to dividends, inattention to earnings?

We examine whether dividends serve as substitutes or complements to accounting information in firm valuation. Consistent with dividends substituting for earnings information, we find that dividend paying firms have 11%–15% lower earnings response coefficients (ERCs) than non-payers. We find more substitution when the dividend provides a stronger signal of permanent earnings: when the firm is less likely to cut the dividend, when the firm is likely to fund the dividend out of earnings rather than cash reserves, or when the dividend is larger. We then show that dividend payers have lower absolute returns, less trading volume, and fewer analyst forecasts at the earnings announcement (EA), suggesting that dividend payers attract less attention to their less informative EAs. Finally, we show that the lower EA attention translates into less earnings management and fewer earnings-related disclosures for dividend payers relative to non-payers. Collectively, this evidence suggests that dividends supply information about permanent earnings and, although costly, could be an efficient way for some firms to satisfy investors’ demand for earnings information.

Earnings Response Coefficient, Sharia Online Trading System, and Firm Value

This research aims to examine the nexus between Earnings Response Coefficient (ERC), Sharia Online Trading System (SOTS), and firm value. The research sample was all companies listed on the Jakarta Islamic Index (JII). The research model used path analysis employing the regression with common, fixed and random effect models as well as the robustness check through Generalized Method of Moment (GMM). The result demonstrates that ERC and SOTS can’t determine the level of firm values. This research found no effects of ERC and SOTS on firm value, but nexus between ERC and SOTS was found. These findings indicate that ERC and SOTS have no effect at all on the firm value, meanwhile ERC has the negative effect on SOTS. Nevertheless, the result of this research found no intervening effect of SOTS on the ERC and firm Value. It shows that SOTS can’t mediate the nexus between ERC and firm value.

Managerial ability, earnings quality and ISIS: evidence from Iraq

PurposeThis study investigates the association between managerial ability and earnings quality in firms listed on the Iraq Stock Exchange and how the emergence of the Islamic State of Iraq and Syria (ISIS) influences the association.Design/methodology/approachThis study uses a sample of firms listed on the Iraq Stock Exchange over the period 2012–2018. Managerial ability is quantified using data envelopment analysis, and earnings quality is measured by earnings restatement, earnings persistence, accruals quality and earnings response coefficient. Panel regression analysis is used to examine the research hypotheses.FindingsThe findings indicate that managerial ability positively affects earnings quality of Iraqi firms and that ISIS weakens the relationship between managerial ability and earnings quality. These findings are robust to the alternative measures of managerial ability, as well as to various approaches used to address endogeneity including propensity-score matching and a difference-in-differences analysis.Originality/valueThis study provides insight into the impact of managerial ability on earnings quality in an under-studied emerging market. Furthermore, this study broadens the existing literature about the financial consequences of a modern terrorist group, ISIS.

Corporate Governance Disclosure and Earnings Quality: Study on Companies Listed on The ASEAN Star Financial Times Stock Exchange (FTSE)

The governance mechanism is different for each company. Therefore, companies need an indicator to measure the quality of governance and one of them is the ASEAN Scorecard. This indicator is used as a standard for measuring the quality of corporate governance in the ASEAN region. The corporate governance mechanism can be a factor in price changes in the stock market. Investors will react to any issues related to it. Price changes that occur on the stock market are a measure of the size of investors in investing because they can affect expected earnings. Although there is quite a lot of research related to it, research on earnings quality that discusses market response to price changes that occur due to the influence of governance mechanisms is limited. This study aimed to examine the effect of corporate governance on earnings quality using companies listed on the Financial Time Stock Exchange ASEAN Star (FTSE ASEAN Star). The study was conducted by examining financial ratios of companies using a cross-sectional data regression model with the Earnings Response Coefficient (ERC) as a proxy. The results showed that corporate governance affected ERC, especially on the disclosure of corporate governance and shareholder rights. Keywords: ASEAN scorecard, corporate governance, earnings response coefficient, disclosure, fraud

How does reciprocal rent-seeking between politicians and auditors influence audit quality? - Evidence from China

In this study, we propose a reciprocal rent-seeking game between politicians and individual auditors with political connections, and examine how these auditors' political connections influence their audit quality. Using hand-collected data from the Chinese market from 2008 to 2013, we find that politically connected auditors have a significantly lower tendency to issue modified audit opinions (MAOs). In addition, we also find that politicians' career prospects are significantly adversely influenced by MAOs being issued in their jurisdictions, while auditors' political connections enable them to charge higher audit fees, acquire larger market share, and reduce the likelihood of encountering regulatory sanctions. Further evidence suggests that compared with their non-connected counterparts, the politically connected auditors tend to issue less accurate audit opinions, reduce client firms' earnings response coefficients (ERCs), and increase client firms' capital costs. Collectively, our study results suggest that individual auditors' political connections facilitate the reciprocal rent-seeking activities between these auditors and politicians, which ultimately undermines audit quality.

Voluntary Disclosure of Disaggregated Balance Sheet and Cash Flow Information Around Restatements

We examine changes in voluntary disclosure of balance sheet and cash flow (BS/CF) information in earnings releases after restatement announcements. We consider these disclosures to be particularly relevant in the restatement context since they help investors interpret accruals and assess reporting quality at a time when information uncertainty is high. We find that BS/CF disclosures drop significantly for at least five quarters following restatement announcements, particularly for severe restatements and those restatements more likely to lead to litigation, and less for firms likely to benefit from reputation-repairing activities. We next consider the impact of BS/CF changes on earnings informativeness and find significantly lower post-restatement earnings response coefficients for firms ceasing BS/CF disclosure, but not otherwise. Overall, we argue that litigation concerns provide a strong disincentive for disclosure following restatement announcements. Our findings add to a growing literature on the importance of disaggregated BS/CF information in interpreting accruals.

Visuals and attention to earnings news on twitter

We propose the visual attention hypothesis that visuals in firm earnings announcements increase attention to the earnings news. We find that visuals in firms’ Twitter earnings announcements are associated with more retweets, consistent with greater user engagement with announcements that have visuals. This result holds for earnings tweets sent by the same firm and on the same day in firm-level and tweet-level analyses. Consistent with managerial opportunism, firms are more likely to use visuals in their earnings tweets when performance is good but less persistent. Consistent with visuals increasin g investor attention, the initial return response to earnings news is stronger and the post-announcement response is lower when visuals are used. Our evidence of a post-announcement return reversal indicates that visuals can be a double-edged sword. Furthermore, the higher earnings response coefficient from visuals is more pronounced on days with high investor distraction (when many other firms are also announcing earnings). Graphical abstract

Powerful CEOs and earnings quality

PurposeThis study explores the effect of CEO power on earnings quality. If powerful CEOs make the information environment more opaque, they can easily conceal information to hide self-dealing behavior through earnings manipulation. Conversely, if powerful CEOs who are well-protected create a transparent information environment, they will provide better quality earnings.Design/methodology/approachThe author constructs a composite index for CEO power by combining seven CEO characteristics and employs two variables including discretionary accruals and earnings response coefficient as proxies for earnings quality.FindingsThe author’s main results show a significant negative relation between CEO power and the firm's earnings quality. In addition, CEOs with stronger structural power and expert power are more likely to generate lower earnings quality, while those with stronger ownership power are more likely to provide higher earnings quality.Originality/valueThe findings suggest that CEO power reduces the firm's earnings quality because CEOs with structural power or expert power may destroy governance monitoring mechanisms.