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Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings?
Abstract
This paper investigates whether stock prices reflect information about future earnings contained in the accrual and cash flow components of current earnings. The extent to which current earnings performance persists into the future is shown to depend on the relative magnitudes of the cash and accrual components of current earnings. However, stock prices are found to act as if investors "fixate" on earnings, failing to reflect fully information contained in the accrual and cash flow components of current earnings until that information impacts future earnings.
... Thus, analyzers use different proxies and determinants in the earnings process to estimate the quality of a company's earnings in the context of their interest. Such attributes to determine the quality of earnings in terms of financial statement analysis include the earnings quality ratio, persistence of earnings, accrual quality, etc. (Bergevin et al., 2018;Sloan, 1996;Dechow & Dichev, 2002;Dechow et al., 2010;Francis et al., 2004). On the contrary, the attributes for determining the quality of earnings in terms of returns on the stock are value relevance, conservatism, timeliness, etc. (Brown & Sivakumar, 2003;Penman & Zhang, 2002;Francis et al., 2004). ...
... According to this measure, a lower ratio indicates higher-quality earnings. The accepted threshold is between -10% and 10% for good-quality earnings, and if it is higher than that, there may be some accrual manipulation resulting in lower-quality earnings (Sloan, 1996). The ratio has also been used by Richardson et al. (2005), Allen et al. (2013), Dechow et al. (2008), and Asare (2019). ...
... Many researchers calculate earnings quality in terms of persistence by estimating the coefficient of current earnings toward future earnings. This method of evaluating persistence has been implemented by Lev and Thiagarajan (1993), Sloan (1996), Dichow and Dichev (2002), and others. As the mentioned method represents the simplest form of predicting the persistence of earnings, many researchers tried to implement other market attributes that may significantly affect earnings persistence. ...
The concept of earnings quality has been widely analyzed after several cases of companies reporting false earnings and experiencing dramatic collapses. Hence, the need for stakeholders to be knowledgeable about the current situation and future prospects of the companies they are involved with. To aid the system, this paper aims to find company-specific financial and corporate governance factors that can act as determinants of the quality of earnings. The researchers took a sample of the companies listed in the Spanish stock market under IBEX 35 over the period 2017–2021. To test the hypotheses, panel, and cross-sectional regressions were run on Stata with the different quality of earnings measured as the dependent variables. The results showed that a company’s earnings age and earnings growth positively impact earnings quality, while its performance and liquidity have a negative impact. Company size can have positive or negative effects based on the chosen quality of earnings measure. Moreover, the different measures of earnings quality reacted differently to independent variables.
... However, as a phenomenon contradicting the EMH, the accruals anomaly was initially discovered by Sloan (1996). Sloan (1996) conducted the Mishkin test (Mishkin, 1983) and presented evidence indicating that investors overvalue the persistence of accruals as if investors in the market appear to fixate on earnings. ...
... However, as a phenomenon contradicting the EMH, the accruals anomaly was initially discovered by Sloan (1996). Sloan (1996) conducted the Mishkin test (Mishkin, 1983) and presented evidence indicating that investors overvalue the persistence of accruals as if investors in the market appear to fixate on earnings. The error in this prediction is corrected in the subsequent financial statements, revealing an accruals anomaly indicating that firms with a high (low) level of accruals are likely to experience future negative (positive) stock returns. ...
... While numerous studies have validated the robustness of this discovery, the underlying causes of the accruals anomaly remain unclear. Following the discovery of the accruals anomaly by Sloan (1996), Xie (2001) identified that market investors tend to overestimate the persistence of discretionary (abnormal) accruals. Xie (2001) argued that investors in the market overprice discretionary accruals derived from managerial discretion. ...
Impact Statement
The accruals anomaly is a phenomenon that contradicts the EMH (efficient market hypothesis). This anomaly has been a compelling topic for accounting and finance scholars over the past quarter-century, as it pertains to fundamental issues, including the function of capital markets in pricing risk assets, allocating resources efficiently, and the institutional framework of information disclosure that affects the information environment of capital markets.
While numerous studies have validated the robustness of this phenomenon, the reasons behind its occurrence remain unclear. Assuming the presence of information asymmetry among investors, as described by market microstructure theory, uninformed investors are exposed to the risk of adverse selection. To compensate for such risk exposure, it is believed that these investors require a risk premium. Empirical analyses using the GRS test, its Bayesian framework, and HJ-Distance (Hansen-Jagannathan-Distance) support this theoretical prediction.
Excluding the role of the information structure when discussing market efficiency is akin to disregarding a crucial puzzle piece. Considering a more intricate structure makes it possible to rationally explain phenomena previously deemed anomalous. Therefore, it is believed that conducting analyses based on aspects of market microstructure theory, which specifically describe information asymmetry, is highly important for future research in accounting and finance.
... There are four theories that form the foundation of this study with respect to relating investing cashflow volatility to the market values of public companies in general and those listed at the NSE in particular. These are the Efficient Market Hypothesis of Fama (1970); the Functional Fixation Theory of Sloan (1996); the Random Walk Theory of Burton (1973) and Value Relevance Theory of Miller and Modigliani (1961). In its classical form, the Efficient Market Hypothesis of Fama (1970) theorizes that when security markets are efficient from an information point of view, then the securities in that market correctly represent the fundamental information available about the companies that have issued those securities and the macro-economic environment they operate in. ...
... The penultimate theory in this paper is that proposed by Hand (1990) and expounded on by Sloan (1996). Rooted in behavioral finance, the theory relates accounting numbers to firm value through a prism of how investors perceive and interpret financial information presented to them in annual and other relevant reports. ...
... This finding seems to agree with the theoretical expectation of the Miller and Modigliani (1961) on value in the MM value relevance theory where cash flow patterns and therefore cash flow volatility by extension affect firm value. But just like for the first independent variable, ICFRV is a value arrived at after a deeper evaluation of financial statements beyond the surface and that such information influences market value seems to suggest that the finding is in contradiction with the functional fixation theory of Sloan (1996). ...
There are a multiple number of determinants of investor perceptions about firm value which in turn influence demand for and supply of firm securities and therefore market prices and the corresponding firm market value as indicated by firm market capitalization. Extant literature reveals that it is not clear whether or not the volatility in the investing cash flows of a firm is priced information risk factor for companies listed at the Nairobi Securities Exchange (NSE). This lack of literature consensus arises from the conflicting theoretical and empirical evidence on the influence of such volatility on firm market capitalization. This study sought to establish if the annual fluctuations in cash flows from investing activities affects the market values of companies listed at the NSE. Market value was measured using the firm market capitalization ratio while the investing cash flow volatility was based on the 3-year rolling standard deviations of the investing cash flow ratios. The relevant theories that try to explain the interlinkage between investing cash flow volatility information with firm stock market valuations are the functional fixation theory; the random walk theory; the efficient market hypothesis and the MM value relevance theory. The research was undertaken as a census quantitative descriptive study based on all the 66 listed companies at the NSE. From these, 45 met the secondary data requirements resulting in 450 firm year observations for the 2011 to 2022 study period. Diagnostic tests for normality, heteroscedasticity, autocorrelation and model specification tests were undertaken. Hausman specification test provided a preference for the fixed effects model that was then used in the panel regression analysis. P-value and t-test were used in hypothesis testing at 95% confidence interval. The results of the study revealed that the volatility of the cash flows from investing activities had a negative influence on firm market valuation for the firms quoted at the Nairobi Securities Exchange. The findings support the MM value relevance theory; the Efficient Market Hypothesis and the Random Walk Theory but fail to support the Functional Fixation Theory. Since the study finds that the volatility in the cash flows from investing activities to be a priced information risk factor at the NSE, it recommends that more disclosures on information about cash flows in general and cash flows from investing activities in particular should be reported in the financial statements of listed companies in Kenya to aid investors in their investment decision making.
... R. Sloan (1996) Formuła obliczeniowa +1 = 1 + 1 + Gładkość wyniku finansowego Gładkość wyniku finansowego (SMOOTH) kalkulowana jest za pomocą metodologii Leuza, Nandy i Wysockiego. Zakłada ona, iż o gładkości wyniku stanowi stosunek odchylenia standardowego wyniku netto do odchylenia standardowego operacyjnych przepływów pieniężnych. ...
... Źródło: opracowanie własne na podst.: Dechow, Sloan i Sweeney (1995); Sloan (1996); Leuz, Nanda i Wysocki (2003) Ponadto w analizach empirycznych skorzystano z takich metod badawczych, jak: statystyki rozkładu zmiennych, testy istotności statystycznej, czy testy służące do weryfikacji hipotez nieparametrycznych (w tym test Manna-Whitneya-Wilcoxona, służący do sprawdzenia, czy wartości prób pobranych z dwóch niezależnych populacji są jednakowo duże, jak i test znakowanych rang Wilcoxona, będący odpowiednikiem testu t-studenta dla prób zależnych) (Szymczak, 2010). ...
Cel artykułu. Zasadniczym celem artykułu jest sześcioczynnikowa analiza jakości wyników finansowych netto raportowanych w sprawozdaniach finansowych spółek publicznych operujących w ramach grup kapitałowych i notowanych na Rynku Głównym GPW w Warszawie. Metodyka. Jakość wyniku finansowego estymowana została na podstawie współczynników dyskrecjonalnych różnic memoriałowych, współczynników bieżących intencjonalnych różnic memoriałowych, wskaźnika szybkości ujmowania strat oraz mierników stabilności, przewidywalności i gładkości zysku (straty) netto. Metodyka badań opiera się m.in. na zastosowaniu modeli: Dechow, Sloan’a i Sweeney (1995), Dechow i Dicheva (2002) czy An (2017), a także statystyk rozkładu zmiennych, testów istotności statystycznej, czy testów nieparametrycznych: Manna-Whitneya-Wilcoxona oraz znakowanych rang Wilcoxona. Wyniki/Rezultaty badania. Otrzymane wyniki badań empirycznych wskazują, że spółki publiczne nieprzynależące do grup kapitałowych w większym stopniu kształtują wyniki finansowe, aniżeli spółki operujące w ramach tychże grup. Ponadto, jakość wyników finansowych prezentowanych w sprawozdaniach skonsolidowanych jest generalnie wyższa od jakości zysków (strat) widniejących w jednostkowych sprawozdaniach podmiotów pełniących funkcję nadrzędną w ramach poszczególnych grup kapitałowych.
... The accrual anomaly, originally documented by Sloan (1996), suggests that investors price stocks as if they are unaware that accruals are less persistent than cash flows. Although analysts specialize in interpreting financial information and should thus be more knowledgeable about the persistence of earnings components than investors, Bradshaw et al. (2001) find that they also incorporate accruals information incorrectly in their forecasts. ...
... The Disappearance of the Accrual Anomaly Sloan (1996) finds that the accruals component of earnings is less persistent than the cash flow component and that investors price securities as if they are unaware of this difference, naively fixating on bottom line earnings. As a result, a strategy that takes a long position in the lowest-accrual firms and a short position in the highest-accrual firms generates economically large and statistically significant excess returns. ...
We investigate changes in analysts’ accrual-related forecast optimism after the disappearance of the accrual anomaly. We find that such optimism persists in the no-anomaly period, particularly when analysts’ incentives are aligned with greater optimism (i.e., for firms with high external financing). By contrast, the accrual-related forecast optimism declines when analysts’ incentives for optimism are low and in circumstances where analysts would have been more aware of accruals information after the anomaly became publicized (i.e., when analysts issued a cash flow forecast). These findings suggest that analysts’ incentives can offset forecast improvements that their heightened accrual awareness would otherwise allow. They also highlight the importance of considering both analysts’ incentives and knowledge when interpreting their forecasts.
Data Availability: Data are available from sources identified in the text.
JEL Classifications: G14; G29; M41.
... In summary, the findings reveal that many asset characteristics have predictive power for future returns. However, many characteristics frequently proposed for predicting future returns, such as accruals (oa) (Sloan 1996), free cash flow (freecf) (Lakonishok et al. 1994), earnings-to-price (e2p) (Basu 1983), and book-to-market (bm) (Rosenberg et al. 1985) do not account for the substantial variation in returns, after controlling for other characteristics. Next, we inspect the conditional factors. ...
In economic applications, the behavior of objects (e.g., individuals, firms, or households) is often modeled as a function of microeconomic and/or macroeconomic conditions. While macroeconomic conditions are common to all objects and change only over time, microeconomic conditions are object-specific and thus vary both among objects and through time. The simultaneous modeling of microeconomic and macroeconomic conditions has proven to be extremely difficult for these applications due to the mismatch of dimensions, potential interactions, and the high number of parameters to estimate. By marrying recurrent neural networks with conditional factor models, we propose a new white-box machine learning method, the recurrent double-conditional factor model (RDCFM), which allows for the modeling of the simultaneous and combined influence of micro- and macroeconomic conditions while being parsimoniously parameterized. Due to the low degree of parameterization, the RDCFM generalizes well and estimation remains feasible even if the time-series and the cross-section are large. We demonstrate the suitability of our method using an application from the financial economics literature.
... If investors are not fully rational with regard to earnings management, the incentives to manage earnings upward are strengthened. Sloan (1996) finds that investors overvalue accruals and that firms with high accruals have poor subsequent returns, an overvaluation commonly known as the accruals anomaly. Xie (2001) finds that the accruals anomaly is primarily due to discretionary accruals. ...
When equity markets open to foreign investors, firms in these markets have significant opportunities for attracting foreign capital. Using a set of economies that opened their equity markets, I find a significant degree of income-increasing earnings management in the year of opening. This positive effect is more pronounced in industries that are more dependent on external financing and for financially constrained firms, suggesting that firms’ need for equity finance contributes the earnings management. The effect is weaker when a firm is constrained from earnings management by a Big N auditor and by being in an economy with stronger legal enforcement. Overall, my results suggest that equity market liberalization fosters firms’ upward earnings management behaviors around the world.
... Secara akurat mencerminkan kinerja operasi perusahaan. Perusahaan dengan relatif tinggi, maka kualitas laba mencerminkan kinerja perusahaan yang tinggi (Li, 2014;Demerjian et al, 2013;Dechow dan Schrand, 2004;Sloan, 1996). Ini memberikan informasi lebih banyak tentang kinerja perusahaan dengan kondisi yang relevan dengan keputusan spesifik yang dibuat secara spesifik oleh pengambil keputusan (Dechow et al., 2010). ...
The research purposed to analyze operating cash flow, leverage and return on asset to the company’s performance. The method used in this research is multiple regression analysis using Eviews 9. The samples used in this research are 242 which is the data of 121 manufacturing companies listed in Indonesia Stock Exchange from 2014-2015. The results show that operating cash flow and return on asset variables have a significant positive effect on the company’s performance, while leverage has a significant negative effect on the company’s performance. Total asset and age of the firm have a significant positive effect on the company’s performance.Keywords: operating cash flow; leverage; return on asset; company’s performance.
... Secara akurat mencerminkan kinerja operasi perusahaan. Perusahaan dengan relatif tinggi, maka kualitas laba mencerminkan kinerja perusahaan yang tinggi (Li, 2014;Demerjian et al, 2013;Dechow dan Schrand, 2004;Sloan, 1996). Ini memberikan informasi lebih banyak tentang kinerja perusahaan dengan kondisi yang relevan dengan keputusan spesifik yang dibuat secara spesifik oleh pengambil keputusan (Dechow et al., 2010). ...
The research purposed to analyze operating cash flow, leverage and return on asset to the company’s performance. The method used in this research is multiple regression analysis using Eviews 9. The samples used in this research are 242 which is the data of 121 manufacturing companies listed in Indonesia Stock Exchange from 2014-2015. The results show that operating cash flow and return on asset variables have a significant positive effect on the company’s performance, while leverage has a significant negative effect on the company’s performance. Total asset and age of the firm have a significant positive effect on the company’s performance.Keywords: operating cash flow; leverage; return on asset; company’s performance.
... (10)-(13). In doing so, we acknowledge that the intuitive but simple within-quintile approach used in Panel A of Table 4 could be problematic because there is evidence that the level of accruals itself is related to earnings quality and earnings persistence (e.g., Sloan 1996). Accordingly, in this (and subsequent) analysis, we control for the level of total accruals using two-pass sorts following Dechow and Dichev (2002), which results in the formation of quintile portfolios rather than simple sample quintiles. ...
We define accrual duration as the length of time between an accrual and its associated cash flow. Accrual duration is inextricably linked to accrual discretion and accrual quality by the fundamentals of the accrual process—the recording of longer-duration accruals involves using longer-term estimates, which makes them relatively more discretionary and less reliable, ceteris paribus. We provide the theoretical development of this broad idea and demonstrate several empirical applications linking accrual duration to earnings persistence, Accounting and Auditing Enforcement Releases, asset write-offs, and the observed kink in the earnings distribution. A major advantage of the accrual duration approach is that it is quite general, which allows us to derive a powerful new model of total accruals discretion and quality as well as a novel measure of total accruals duration. Finally, we discuss how the accrual duration approach can illuminate numerous ongoing issues in accounting research.
... The data analysis technique used is Partial Least Squares (Hair et al., 2021). The measurement used for Earnings Quality is Operating Accrual, which was used in Sloan's (1996) study, with the formula as follows: ...
The study analyzes the factors influencing integrated reporting and its implications for firm value with earnings quality as a moderating variable. The study was conducted on energy sector companies on stock exchanges of several Southeast Asian countries. The selection is due to Southeast Asia’s vulnerability to global market sentiment changes related to financial and sustainability aspects. The study employed the SEM-PLS analysis method. 208 data from 26 companies over 8 years were used. The investigation affirms that leverage, age, and board size have positively impacted integrated reporting. Firm size, growth, and board independence have a negative impact on integrated reporting. Profitability, board activity, and stakeholder pressure have not significantly influenced integrated reporting, but integrated reporting positively impacts firm value. Additionally, earnings quality does not moderate the influence of integrated reporting on firm value. The study provides insights for companies to improve the presentation of high-quality information to stakeholders. Increasing the firm value of energy companies in Southeast Asian countries needs to be done as a progressive concern for environmental impacts and sustainably creating integrated reporting.
... So, a cash flow statement serves as a more direct measure in contrast to profit, making it applicable for making decisions. In addition, Sloan (1996), Kousenidis (2006), Amuzu (2010) and Bhandari and Iyer (2013) asserted that the investment community has traditionally placed great emphasis on profits. However, it is important to concentrate on real activities and omit non-cash charges. ...
This study seeks to explore the information value of free cash flow (FCF) on corporate sustainability and investigate the moderating effects of board gender diversity and firm size on the association between FCF and corporate sustainability of Thai listed companies. The dataset consists of companies listed on the Stock Exchange of Thailand (SET) in 2022. Multivariate regression analysis is executed in this study. Subsequently, PROCESS macro served to evaluate the proposed hypotheses. This study found that FCF has a significant positive relationship with corporate sustainability. As well, board gender diversity and firm size both moderate the relationship between FCF and corporate sustainability, such that the positive effect of FCF on corporate sustainability is stronger when the proportion of female boards diminishes, while firm size is smaller. However, when firms have a larger proportion of females on the boards of directors for all levels of firm size, free cash flow indicates that there is no statistically significant effect on corporate sustainability. This study contributes to FCF and sustainability literature by understanding the extent of corporate sustainability.
... Time series attribute of earnings is a construct that attempts to examine earnings quality in financial accounting literature (Sloan, 1996). According to Lipe (1990) persistence is autocorrelation in earnings. ...
Earnings quality is a demanding attribute of firm and is valued by investors in resource allocation decisions. High earnings quality firms create value for stakeholders and poor earnings quality causes value deterioration. This study takes into account earnings quality attributes of Pakistani corporate sector and investigates impact of ownership structure and financial health on firms’ earnings quality. Earnings quality has been measured by four attributes of accrual quality, earnings persistence, earnings predictability, earnings smoothness. A sample of 325 non-financial PSX listed Firms have been selected and classified into four unique categories on the basis of financial health (healthy and distressed) and ownership (family and non-family). The classification aims to determine level of earnings quality for each category. Results find significant effect of book financial position and ownership structure on earnings quality of firms. Findings reveal Earnings quality for non distressed family (NDF) firms was highest followed by non distressed non family firms (NDNF), while earnings quality for distressed family (DF) firms was poor and poorer for distressed non family (DNF) firms when firms were classified into these four categories. These results provide important implications for investors, analysts, regulators and standard setters.
... The market-to-book ratio (MB) is defined as total assets minus book value of common equity plus market value of common equity scaled by total assets. The accruals (Accrual) are calculated as changes in non-cash working capital minus depreciation expense, scaled by average total assets for the previous (4) two quarters (Sloan 1996). 9 Institutional ownership (IO) is obtained from Thomson Reuters 13F holdings and measured as the percentage of shares owned by institutions relative to total shares outstanding at the end of each quarter. ...
This study examines how a stock security’s cash flow duration impacts stock price reactions at earnings announcements. We find that stock price reactions are positively associated with cash flow duration, especially when earnings surprises are negative. Our results imply that long duration creates a leverage effect that magnifies the price reaction around earnings announcements. We further show that the greater stock price reaction for firms with longer cash flow duration could be caused by less accurate analyst forecasts and short-sales constraints. Finally, we find that the effect of cash flow duration generally increases over time, being more notable during financial crisis and less notable when investor sentiment is high.
... This is because those companies would have a more difficult time recapitalizing given the perception that they have limited opportunities for development. On the other hand, this explanation does not clarify why low Q businesses have a positive connection between leverage and company value (Sloan, 1996). Our research makes a contribution to three independent bodies of research that have been conducted previously: one on the relationship between leverage policy and growth prospects; another on the relationship between leverage as well as investment; and a third on strategies for investment within multinational enterprises. ...
Using a sample covering practically all dividend-paying oil and gas companies companies in Pakistan during 2011-2020, we document that earnings management in these companies is driven by two concurrent forces: the willingness to pay (tax-exempt) dividends and avoiding unnecessary company income tax. Moreover, we show that the need for income increasing earnings management enabling current dividend distribution is mitigated by the amount of retained earnings from prior years. This article adds to the existing literature by providing empirical evidence for dividend and tax-driven earnings management in private oil and gas companies facing neither political pressures nor capital market incentives for earnings disclosures.
... Similarly, different income statement and balance sheet variables are considered independent variables. Therefore, based on the studies Barth et al., (2001); Collins et al., (1997); Sloan (1996); Basu (1997); Easton & Harris (1991), different return, price-to-earnings ratio and BHAR models are developed in a study. To analyze the VRAI on stock returns during market under and overreaction, the following models are developed: ...
Value relevance of accounting information (VRAI) is a fundamental characteristic of influencing stock returns. This study analyzes the impact of VRAI on stock returns during market under and overreaction in Pakistan. The data of 322 non-financial firms listed in PSX from 2005 to 2022 is used. To explain stock returns, we employ the annual stock returns and buying and holding returns model. The data on financial variables has been collected from annual reports published on the company's websites and PSX Data Stream. The outcomes show that the accounting information variables earnings per share and change in earnings per share are positively related to the stock returns during market over and under reaction. Earnings per share, net income and book value are significantly related to the BHAR diuuring market under and overreaction while earnings per share and book value are significantly related to the BHAR during market overreaction of non-financial firms. It is also concluded that balance sheet variables attract more investors to invest in the stock market during the underreaction of non-financial firms. Therefore, it is suggested that the non-financial firms must present adequate accounting information on their financial statements within the specified time frame.
... Se utiliza la metodología de estudio de eventos, y se concluye con la aceptación de la hipótesis de mercado eficiente en forma semifuerte, según Jareño (2009). Además, en el Reino Unido, de junio de 1990 a diciembre de 2005, se realizó un estudio para evaluar si con las anomalías de incremento se puede implementar una estrategia de porfolio que sea rentable, descontados los costos de transacción, usando la metodología de Sloan (1996), el cual concluyó que el mercado bursátil es eficiente en forma semifuerte, según los autores Soares y Stark (2009). ...
El objetivo del presente trabajo es medir el grado de eficiencia del mercado bursátil chileno en el período 2001-2018. Se utiliza la metodología de estudio de eventos (event studies) para comprobar la eficiencia en forma semifuerte del mercado de acciones en Chile, por medio de anuncios de adquisiciones y de fusiones realizados por las empresas componentes del Índice de Precios Selectivo de Acciones (IPSA), de la Bolsa de Comercio de Santiago de Chile. Dicha metodología es la apropiada para medir este tipo de eficiencia. Específicamente, se usan datos diarios y se aplica el modelo de mercado como modelo generador de retornos. Los resultados muestran que el mercado de acciones no se comporta de manera eficiente en forma semifuerte en ese período.
... These studies of financial information as predictors have been mostly developed in the Anglo-Saxon zone; among which are mentioned: Ou and Penman (1989), Bernard and Noel (1991), Holthausen and Larcker (1992), Stober (1992), Lev and Thiagarajan (1993), Sougiannis (1994), Lee (1996), Sloan (1996), Abbarbanell and Bushee (1997), Joos and Joos (1998), which conclude that the accounting information is a useful tool for evaluating the future results of the companies. ...
The purpose of this Article is to determine whether the method of accounting for profit tax in Section 29 of IFRS for SMEs is appropriate. This objective was raised in the context of the international debate on this subject, since it is considered that it is costly for such companies to implement them. The theories analyzed deal with the usefulness of financial information and deferred tax. The method used was quantitative. Some statistical tools were used that helped to determine the distribution of the data and to obtain the equality of means. These tools were that of Shapiro Wilk and the W of Wilcoxon. The results found denote that in the small companies of Ecuador the change of regulations of the NEC Equatorian Accounting Standards to IFRS International Financial Reporting Standards are beneficial, therefore, it would be entering within the logic of the tax effect method as a profit tax registration model.
... french for the fourth month after the fiscal year-end BKLG Order Backlog (Compustat OB) divided by average total assets Dec An indicator variable being one for a sales decline in fiscal year t when Compustat REVT t < REVT t−1 and zero otherwise Variable Description and construction CCC Cash conversion cycle defined by the operating cycle, the sum of the days inventories outstanding and accounts receivables outstanding (Dechow et al. 1998), less days accounts payables outstanding (Wang 2019 An indicator variable for a loss being one when Compustat IBCOM < 0 and zero otherwise ACC + Magnitude of positive accruals (So 2013). We define accruals following (Sloan 1996) prior to 1988 and following Hribar and Collins (2002) starting from 1988 as in (Hou et al. 2015). Dividends for common and ordinary shares divided by average total assets BTM Book value of equity following (Davis et al. 2000) divided by market value available from Compustat PRCC_F × CSHO) Ln(MV) log of market value available from Compustat Leverage Average of long-term debt and current portion of long-term debt (Compustat DLTT + DLC) divided by average total assets *Industry-year and firm fixed effects are incorporated into each regression. ...
Order backlog is an important non-GAAP metric that is a leading indicator of future earnings. We explore how various fundamental analysis metrics interacted with order backlog impacts future earnings. This study examines whether future earnings predicted by order backlog is contingent on other fundamental analysis metrics, such as a sales decrease, the cash conversion cycle, asset growth, and the ratio of order backlog to sales. We find that order backlog is an even more informative leading indicator of future earnings when sales decrease, the cash conversion cycle is longer, and asset growth is higher. In contrast, we find that order backlog in the presence of a higher order backlog to sales ratio predicts lower future earnings. We also find that market participants incorporate the moderating effect of order backlog on sales decreases and the cash conversion cycle, while we do not find the same evidence with asset growth and the backlog to sales ratio. These empirical findings are important for managers who want to effectively communicate the prospects of a firm’s future profitability, and for investors who want to understand the financial fundamentals of firms with an order backlog. Overall, our findings show that the informativeness of order backlog can be conditional on fundamental analysis metrics in certain instances.
... Therefore, some trading strategies can be determined considering the fundamental analysis. For instance, it is recommended to have long positions in firms which have relatively less accruals and short positions in firms which have relatively more accruals in their accounting earnings (Sloan, 1996). ...
According to IFRS legislation, listed companies in the European Union have to prepare their financial statements in compliance with IFRS from the beginning of 2005. Accordingly, as a candidate country for EU membership, Turkey has made IFRS obligatory for listed companies since the beginning of 2005. It is argued that IFRS has capacity to provide more accurate, comprehensive and timely financial statement information than national standards. However, empirical studies have mixed results on quality change after the adoption of IFRS in different countries. At this point, it is important to note that as to whether IFRS improves accounting quality which reflects the association between accounting figures and market prices. As many countries and firms have allocated widespread resources to IFRS adoption, testing the contribution of IFRS to accounting quality is one of the significant research fields attracting many scholars. Furthermore, it is important for managers, accounting report preparers, regulators and investors to draw upon national experiences to gain insight regarding whether IFRS adoption improves accounting information to investors for valuation purposes.
In this context, this research investigates the effect of mandatory implementation of IFRS on the value relevance of accounting information just for the listed companies in Turkey using data from Datastream including a period before and after the adoption of IFRS. In order to test changes in value relevance for focused sample, observation period has been divided into two periods as 2002-2004 and 2005-2007. As one of the purposes of this study is to provide empirical evidence whether there is a difference between financial and non-financial companies in terms of improvement of value relevance after IFRS adoption, it was conducted a research taking into account all listed financial and non-financial institutions for which data are available. Applying modified price regression. model based on Ohlson (1995) valuation model and the empirical methodology followed by Collins et al. (1997), empirical evidence has been provided regarding the improvement in value relevance of accounting figures for all listed companies on Borsa Istanbul Stock Exchange Market as well as comparing the enhancement of value relevance between financial and non-financial companies. Based on the findings of this study, it can be stated that the value relevance of earnings and book value has increased for both financial and non-financial sector in Turkey, however, the increase in value relevance is very limited for the non-financial sector compared to the financial sector and book value is still dominating variable affecting the changes in stock prices even after IFRS adoption. In addition to that, it was found that for both sectors, incremental value relevance of book value increased, whilst incremental value relevance of earnings decreased.
... Log of total shares, SHROUT, in month t minus log of total shares 36 months ago (adjusted for splits using CFASHR) for firm j. Accruals j t Change in noncash working capital minus depreciation (DP) scaled by lagged total assets (AT) for firm j as of month t using the same definition as in Lewellen (2015), which is based on Sloan (1996). ...
I use a novel decomposition to estimate information and bias components from the returns implied by analyst price targets and provide evidence that prices simultaneously under-react to information and over-react to bias. Price reactions to information are permanent, and prices drift in the direction of their initial reaction for up to 12 months. Price reactions to bias are transitory, and prices reverse their initial reaction after about three months. Price reactions are relatively efficient. Approximately 85 percent of the total price reaction to information occurs during price target announcement months. Market participants are able to mostly (but not fully) debias analyst-expected returns before incorporating them into prices, with the announcement-month reaction to bias being relatively weak at about 15 percent of its reaction to information. A trading strategy analysis implies that mispricing induced by bias is only about one-third of that implied by prior research.
JEL Classifications: G12; G14; G40.
This study empirically estimates the date of the structural change in the aggregate earnings–returns relation and reports it as the fourth quarter of 1991. We identify three sources of the structural change: (i) an increase in the relative importance of cash flow news contained in stock returns; (ii) a decrease in the importance of discount rate news contained in aggregate earnings; and (iii) a decrease in the persistence or the predictability of aggregate earnings and returns. Next, we examine the components of aggregate earnings and find that the change in the aggregate earnings–returns relation is largely driven by intertemporal changes in aggregate inventory accruals, suggesting the structural change is attributable to improved inventory management systems.
While research has analyzed how the structure of incentive pay relates to the dispersion of the performance measure distribution, as measured by its variance or volatility, we examine how it relates to the asymmetry of the distribution, as measured by its skewness. In contrast to the variance, skewness affects the relative informativeness of high and low performance about the agent's effort, which determines the relative efficiency of providing rewards and punishments for incentive purposes. Therefore, skewness is an important determinant of compensation convexity, which is determined by the relative holdings of stock and options. Consistent with our analytical and numerical results, we find that the skewness of expected earnings is negatively associated with the convexity of CEO compensation. Our results are economically significant, robust to alternative specifications, and do not appear to be driven by reverse causality. In addition, we find that earnings skewness is negatively associated with total CEO compensation and that this association is driven by lower options‐based compensation. These findings are consistent with CEOs preferring positively skewed performance metrics. Overall, we provide theoretical, numerical, and empirical evidence suggesting that skewness is a more important determinant of the convexity and structure of CEO compensation than volatility.
This study examines the association between a firm’s fundamental factors and stock returns as well as how investor sentiment influences the association between these variables. The fundamental factors analyzed include accounting variables (earnings yields, change in profitability, and capital investment) and earnings quality measures. Investor sentiment is measured using the South African consumer confidence index. A sample of 1 386 firm-year observations from the companies listed on the Johannesburg Stock Exchange (JSE) between 1990 and 2022 was used. The results show that fundamental factors are related to stock returns, except for measures of earnings quality. Although earnings yields and capital investments cause variation in stock returns, their effects on stock returns are influenced by other variables associated with stock returns. In addition, investor sentiment affects the relationship between fundamental factors and stock returns, suggesting that sentiment influences the outcome of the capital market and the way investors process fundamental information. Profitability seems to be more related to stock returns than other fundamental variables. This study sheds light on how sentiment interacts with a set of fundamental factors and their sensitivity to stock returns and highlights the important role of investor sentiment and accounting information in the capital market.
Value Investing stands as one of the most time-honored strategies for long-term equity investment in financial markets, specifically in the domain of stocks. The essence of this approach lies in the estimation of a company's "intrinsic value," which serves as an investor's most refined gage of the company's true worth. Once the investor arrives at an estimation of the intrinsic value for a given company, she proceeds to contemplate purchasing the company's stocks solely if the prevailing market price of the stocks significantly deviates below the estimated intrinsic value, thus presenting an enticing buying opportunity. This deviation, referred to as the "margin of safety," represents the disparity between the intrinsic value and the current market capitalization of the company. Within the scope of this endeavor, our objective is to automate the stock selection process for value investing across a vast spectrum of US companies. To accomplish this, we harness a combination of value-investing principles and quality features derived from historical financial reports and market capitalization data, thereby enabling the identification of favorable value-driven opportunities. Our methodology entails the utilization of an ensemble of classifiers, where the class is determined as a function of the margin of safety. Consequently, the model is trained to discern stocks that exhibit value characteristics warranting investment. Remarkably, our model attains a success rate surpassing 80%, effectively identifying stocks capable of yielding an annualized return of 15% within a three-year timeframe from the recommended stock purchase date provided by the model.
This paper applies three robust approaches, namely, the MM estimation, the Theil–Sen estimation, and the quantile regression, to generate earnings forecasts in Chinese financial market and evaluates the forecast accuracy of these three methods based on three forecasting criteria. We examine six forecasting models where the predicted variables include earnings per share, net income, and three profitability measures. We show that the three robust methods significantly outperform the OLS method. Moreover, the MM estimation and the quantile regression have better forecast accuracy than the Theil–Sen approach.
This paper analyzes an important class of models in which expectations play an important role. Topics included in the analysis are tests of: (1) rationality of forecasts in either market or survey data, (2) capital market efficiency, (3) the short-run neutrality of monetary policy and, (4) Granger causality in macroeconometric models. The common elements of these tests are highlighted. In particular, cross-equation tests for rationality or the short-run neutrality of money are shown to be equivalent to more common regression tests in the literature. These results demonstrate that the exact specification of the relevant information set used in rational forecasts is not necessary for the cross-equation tests to have desirable asymptotic properties. Also discussed are the conditions for identification of coefficients and testability of hypotheses.