When the rainy day is the worst hurricane ever: the effects of governmental policies on SMEs during COVID-19

We investigate the impact of COVID-19 on 42,401 UK SMEs and how government intervention affects their capability to survive the pandemic. The results show that, without governmental mitigation schemes, 59% of UK SMEs report negative earnings and that their residual life is reduced from 164 to 139 days. The analysis shows that government support scheme reduces the number of SMEs with negative earnings to 49% and allows extending the residual life for SMEs with negative earnings to 194 days. In addition, the support scheme reduces the number of jobs at risk in our sample by around 20%. However, our results suggest that weaker firms benefit more than strong ones. Besides, industries that are worst hit by COVID-19 are not those that benefit most from the government support scheme. We ascribe this result to the fact that the schemes do not discriminate between those firms that deserve support and those that do not deserve it.

Earnings instability and child protection: Evidence from state administrative data

Given previous inconclusive results on unemployment and involvement with the child welfare system (CPS) and the growing attention on precarious labor market conditions, this article relies on administrative data on wage and social benefits from the state of Wisconsin to investigate the relationship between employment instability and subsequent child maltreatment investigations. Using an event history approach, this study analyzes earnings instability—measured by one-time wage shocks, cumulative wage shocks, and stable earnings duration—on child maltreatment risk. It also pays attention to the role of safety net programs on buffering the risk of adverse wage shocks on child welfare involvement. I find that experiencing a negative earnings shock of 30% or more increases the likelihood of CPS involvement by approximately 18%. The effect diminishes and becomes nonsignificant when an earnings decline is compensated by benefit receipt. Each additional earnings drop is associated with a 15% greater likelihood of CPS involvement. Each consecutive quarter with stable income is associated with 5% lower probability of a CPS report. The results are more pronounced for abuse than neglect and are marginally significant for neglect reports. The findings suggest that accessing sufficient social benefits as supplemental income when negative earnings shocks occur serves to effectively buffer against the risk of child maltreatment, particularly among families with young children. This study confirms income support as an important instrument to reduce child maltreatment risk; it indicates that policies aimed at boosting income and stabilizing low-income family economics could substantially increase children’s safety and well-being.

Earnings Surprises and Stock Price Reactions of Quoted Companies in Nigeria

This study focuses on examining the relationship between stock prices and earnings surprises in quoted companies of Nigeria. This study applied a longitudinal research design which studies the effect of earnings surprises on stock prices using panel data. A sample of 64 companies was chosen to study in all sectors of the Nigerian Stock Exchange. The research data were obtained from secondary sources of the annual reports for the selected companies covering the period from 2013 to 2017. The measurement for earnings surprises used in the study is the residual or unexplained component of earnings persistence model commonly referred to as first-order autoregressive AR (1) regression of reported earnings. Were, the data analysis was carried out by regression using the generalised least squares technique. The regression results for positive earnings surprise shows that share prices react negatively to positive surprises with a coefficient of (-2.4109) in tandem with the return news hypothesis which suggests that positive earnings news results in a negative stock-price reaction. The negative earnings surprise results show that stock prices react positively to negative earnings surprises with a positive coefficient of (0.1136). This is in line with the premise of return news, which indicates that negative earnings news leads to a positive reaction to the share price. The study recommends that there is a need to regulate the stock market to improve the level of market efficiency in stock markets. This will improve the rate at which earnings news will be reserved at stock prices. Secondly, there is a need to improve investor confidence in the disclosed profits made by companies.

Moderating Role of Negative Earnings on Firm Size and Corporate Social Responsibility Relationship: Evidence from Listed Firms on Nigeria Stock Exchange

The fight against coronavirus disease (COVID-19) has called for corporate social responsibility (CSR). Thus, Nigerian businesses, such as in the petroleum and financial industries, have provided hospital donations and $30 million assistance among others to mitigate COVID-19. We investigated the moderating role of negative earnings in firm size–CSR relationship. We used content and logistic panel regression analyses on a sample of 100 firms listed on Nigerian Stock Exchange (NSE). First, we confirmed a positive firm size–CSR relationship (stakeholders’ expectation hypothesis). Second, we found that earnings loss negatively affects stakeholders’ expectation hypothesis. The study suggests that big firms are likely to negatively respond to the clarion call for donations for COVID-19 due to negative earnings. However, our robustness test revealed that old firms positively respond to CSR activities despite earnings loss. Our study results contribute important insights into the current debate concerning the effect of earnings loss on CSR activities. Corporate managers are encouraged to participate in social activities by contributing their resources for human race sustainability and community development, hence enabling stakeholders to highly value their work, money, support, and societal acceptance.

The accuracy of cross-country valuation by multiples using comparables – the cultural aspect

We study the accuracy of using traditional multiples valuation method in a global setting. The method of comparables refers to the valuation of companies based on multiples of comparable (similar) companies, preferably from same industry. While this may lead to accurate valuations of comparables from one country, it is often not the case for global comparables due to cross-country differences in culture, economics and accounting practice. We selected all listed non-financial companies with non-negative earnings and equity from the global ORBIS-database, i.e. 16,898 companies from 112 countries. PWC’s publication on contemporaneous adoption and use of IFRS, helped us categorise each country’s accounting regime as requiring, permitting or disallowing IFRS for listed companies. Hofstede’s cultural indexes adapted to Gray’s accounting values where used to categorise cultural differences. Finally, we chose the P/E, P/B, P/S, EV/S and EV/EBITDA ratios as our multiples. We find that the traditional focus on industry alone is not the best way to estimate a company’s value based on multiples. Different attitudes towards selection of comparables lead to differences in valuation precision due to differences in accounting tradition and culture in various countries. Consequently, the cultural aspect should be taken into consideration when choosing comparables across countries.

THE APPRAISAL OF THE COMPANIES WITH NEGATIVE EARNINGS / PROCJENA VRIJEDNOSTI PREDUZEĆA KOJA POSLUJU S GUBITKOM

A large body of valuation literature comes from the theoretical assumption that businesses operate on a going-concern principle and earn profit in the long-term, except for the liquidation method. When assumptions about going-concern principle and profit-earning are met, it is not too difficult to make cash flow projections and determine the entity’s estimated value. However, for businesses with negative earnings, the problems and concerns of valuation are multiplied. The research aims to point out the specificities of companies with negative earnings and possible ways of overcoming the barriers in valuing such businesses. For companies with temporary problems, it is assumed they will earn profits again in the short term, and instead of losses, stabilized earnings will be generated. One possible solution is in adjusting the expected growth rate in the future period and the other assumes the estimation based on stabilized earnings. In the other group of companies, losses are a manifestation of larger and more serious problems, and it is necessary to estimate whether the problems will be overcome and, if so, when that will occur. Poor strategic decisions, business inefficiencies and over-indebtedness can be the causes of long-term problems in companies. According to the depth of crisis: the liquidation method should be applied if the problems are permanent and serious, and other valuation methods in opposite cases. The first part of the empirical research relates to the comparative analysis of 20 companies’ valuations in Republic of Srpska, and the second part to the analysis of the data collected by the questionnaire method, on a sample of 78 appraisers who hold the license of the certified appraiser. Methods from the domains of correlation analysis, descriptive statistics and statistical inference are used to quantify and process the data and to calculate the qualitative indicators. The results show that in practice, in most cases, three or four valuation methods are applied. For companies with negative earnings, the adjusted book value was determined in 100% and the liquidation value in 87.5% of appraisals. For firms with temporary problems, 94% of appraisers prefer adjusting growth rates and 86% stabilizing earnings when applying income approach methods. Examining influential factors that can affect solving of operational problems in companies with long-term problems, four groups of factors were identified, the most significant being the nature of inefficiencies and the quality of top management. In the valuation of companies where over-indebtedness is the cause of problems, and which are operationally sound, the most used method is a modification of debt ratios, in 76.9% of cases. APV method is used in 35.9% of these companies’ valuations. Valuation of companies whose bankruptcy is almost a certain option is done by liquidation method in almost 98.7% of appraisals. We conclude that in the appraisal of companies with negative earnings, it is crucial to identify the causes of problems and the possibilities of eliminating them, recognizing the ability of entities to continue operating on a going-concern principle and assumptions related to the inactive capital market in BiH.

Valuation of Negative Earning Firms

This book mostly concentrates on firms with positive earnings, but this chapter focuses on the negative earnings firms or firms with very low earnings. It is easier to value a positive earning firm than a company with negative earnings. Analyzing negative earning firms has always created problems for researchers and analysts. In case of a negative earning firm, growth rates cannot be predicted or used in the valuation of firms. When current income of the firms is negative, growth rate will make it more negative. Tax computation becomes more complicated and the Going Concern Assumption does not apply properly. Authors start with complications in valuing negative earning firms, discuss the causes of negative earnings, and whether the problem is short-term, long-term, or cyclical in nature. Finally, authors provide the appropriate valuation technique for each case.

Capital Management Using Stock Sales

Based on a large sample of publicly listed and non-listed US commercial banks from 1996 to 2011, we find robust evidence consistent with banks using realized available for sale (AFS) securities gains and losses to smooth earnings and increase low regulatory capital. We also find that (i) banks with positive earnings smooth earnings, and banks with negative earnings generally take big baths; (ii) regulatory capital constrains big baths; (iii) banks with more negative earnings and more unrealized beginning-of-quarter losses (gains) take big baths (smooth earnings); and (iv) banks with low regulatory capital and more unrealized gains realize more gains. Also, banks with negative earnings tak big baths (avoid or reduce the earnings loss) if their unrealized gains are insufficient (sufficient) to offset the negative earnings. Our inferences apply to listed and non-listed banks, which indicates that the earnings management incentives do not derive solely from public capital markets. Our findings reveal that the accounting for AFS securities gains and losses enables banks to manage regulatory capital and earnings in a variety of ways.