We examine the informativeness of earnings in the presence of earnings co‐movements. Many theoretical studies infer that the more a firm's earnings move with the market the less weight investors need to place on those earnings, thus rendering them less informative. On the other hand, managers have less opportunity to bias the earnings signal the more earnings co‐move, making them more reliable. We measure earnings co‐movement using an industry–firm pairing correlational technique. Overall our results show both the degree of co‐movement and the ordering of earnings announcements impacts on the informativeness of earnings as indicated by earnings response coefficients. Earnings responses are larger for firms that report earnings before their most highly correlated industry peer, but the responses are reduced as earnings co‐movement increases. We interpret our results to indicate that the more earnings co‐move with an industry peer the less informative earnings become, but only when the peer firm is able to obtain information at a later date.
{"title":"Earnings Co‐Movements and the Informativeness of Earnings","authors":"Andrew B. Jackson, C. Li, R. Morris","doi":"10.1111/abac.12200","DOIUrl":"https://doi.org/10.1111/abac.12200","url":null,"abstract":"We examine the informativeness of earnings in the presence of earnings co‐movements. Many theoretical studies infer that the more a firm's earnings move with the market the less weight investors need to place on those earnings, thus rendering them less informative. On the other hand, managers have less opportunity to bias the earnings signal the more earnings co‐move, making them more reliable. We measure earnings co‐movement using an industry–firm pairing correlational technique. Overall our results show both the degree of co‐movement and the ordering of earnings announcements impacts on the informativeness of earnings as indicated by earnings response coefficients. Earnings responses are larger for firms that report earnings before their most highly correlated industry peer, but the responses are reduced as earnings co‐movement increases. We interpret our results to indicate that the more earnings co‐move with an industry peer the less informative earnings become, but only when the peer firm is able to obtain information at a later date.","PeriodicalId":359030,"journal":{"name":"Wiley-Blackwell: Abacus","volume":"32 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129312882","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using a sample of firms from the financial sector of the Australian Securities Exchange, we examine the effect of the fair value adjustments of financial instruments on firms' dividend distributions in the context of mandatory International Financial Reporting Standards (IFRS) adoption. We find a positive relationship between the fair value adjustments of financial instruments and firms' dividend payouts, suggesting that the frequent use of fair value adjustments of financial instruments by financial firms following mandatory IFRS adoption has the potential to increase the proportion of transitory earnings in reported earnings and cause changes in dividend policies. Our results add to the ongoing debate on the unintended economic consequences of fair value accounting (FVA) and provide empirical support for regulators' concerns that unrealized FVA gains from asset revaluation during booms may encourage the distribution of those unrealized gains.
{"title":"The Effect of Fair Value Adjustments on Dividend Policy Under Mandatory International Financial Reporting Standards Adoption: Australian Evidence","authors":"X. Chen, Andreas Hellmann, Safdar R. Mithani","doi":"10.1111/abac.12180","DOIUrl":"https://doi.org/10.1111/abac.12180","url":null,"abstract":"Using a sample of firms from the financial sector of the Australian Securities Exchange, we examine the effect of the fair value adjustments of financial instruments on firms' dividend distributions in the context of mandatory International Financial Reporting Standards (IFRS) adoption. We find a positive relationship between the fair value adjustments of financial instruments and firms' dividend payouts, suggesting that the frequent use of fair value adjustments of financial instruments by financial firms following mandatory IFRS adoption has the potential to increase the proportion of transitory earnings in reported earnings and cause changes in dividend policies. Our results add to the ongoing debate on the unintended economic consequences of fair value accounting (FVA) and provide empirical support for regulators' concerns that unrealized FVA gains from asset revaluation during booms may encourage the distribution of those unrealized gains.","PeriodicalId":359030,"journal":{"name":"Wiley-Blackwell: Abacus","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129400639","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Yizhe Dong, Martien Lubberink, Diandian Ma, M. Tippett
We demonstrate that when the variables comprising a firm's investment opportunity set depend on their past values then the present value of the cash flows the firm expects to earn will be stated in terms of the levels and the momentum of the affected variables. It is also shown that the market value of a firm's equity is comprised of the present value of the cash flows it expects to earn from operating under its existing investment opportunity set plus the value of the real options the firm possesses to modify or even completely change its existing investment opportunity set. Our empirical analysis, based on both Chinese and US data, shows that earnings momentum and the adaptation and growth options typically available to firms all appear to have a significant impact on equity prices. [ABSTRACT FROM AUTHOR]
{"title":"Earnings Momentum, Adaptation Value, and Nonlinearities in the Valuation of Chinese Equity Stocks","authors":"Yizhe Dong, Martien Lubberink, Diandian Ma, M. Tippett","doi":"10.1111/abac.12145","DOIUrl":"https://doi.org/10.1111/abac.12145","url":null,"abstract":"We demonstrate that when the variables comprising a firm's investment opportunity set depend on their past values then the present value of the cash flows the firm expects to earn will be stated in terms of the levels and the momentum of the affected variables. It is also shown that the market value of a firm's equity is comprised of the present value of the cash flows it expects to earn from operating under its existing investment opportunity set plus the value of the real options the firm possesses to modify or even completely change its existing investment opportunity set. Our empirical analysis, based on both Chinese and US data, shows that earnings momentum and the adaptation and growth options typically available to firms all appear to have a significant impact on equity prices. [ABSTRACT FROM AUTHOR]","PeriodicalId":359030,"journal":{"name":"Wiley-Blackwell: Abacus","volume":"192 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133512547","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we examine the impact of managerial ability on the relation between corporate tax avoidance and investment efficiency. Using a sample of US firms from 1994–2015, we find that as tax avoidance increases, firms with high (low) managerial ability exhibit increased (reduced) investment efficiency, that is, smaller (greater) deviations from predicted levels of investment spending. Supplemental analysis also shows that as tax avoidance increases, strong (weak) corporate governance increases (decreases) investment efficiency. Overall, our findings shed light on whether corporate tax avoidance generates wealth for the firm's shareholders or simply exacerbates agency problems.
{"title":"Tax Avoidance, Managerial Ability, and Investment Efficiency","authors":"Inder K. Khurana, William J. Moser, K. K. Raman","doi":"10.1111/abac.12142","DOIUrl":"https://doi.org/10.1111/abac.12142","url":null,"abstract":"In this paper, we examine the impact of managerial ability on the relation between corporate tax avoidance and investment efficiency. Using a sample of US firms from 1994–2015, we find that as tax avoidance increases, firms with high (low) managerial ability exhibit increased (reduced) investment efficiency, that is, smaller (greater) deviations from predicted levels of investment spending. Supplemental analysis also shows that as tax avoidance increases, strong (weak) corporate governance increases (decreases) investment efficiency. Overall, our findings shed light on whether corporate tax avoidance generates wealth for the firm's shareholders or simply exacerbates agency problems.","PeriodicalId":359030,"journal":{"name":"Wiley-Blackwell: Abacus","volume":"43 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-11-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130626626","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
type="main"> This paper provides a selective survey of Ohlson and Vuolteenaho-type accounting valuation models. The focus is on the valuation, return, and cost of capital dynamics of these models. Emphasis is placed primarily on variations of these models that incorporate risk aversion, parameter uncertainty, and/or time-varying costs of equity. Empirical papers that address the dynamics of these models are also surveyed.
{"title":"Accounting Valuation and Cost of Equity Capital Dynamics","authors":"Jeffrey L. Callen","doi":"10.1111/abac.12070","DOIUrl":"https://doi.org/10.1111/abac.12070","url":null,"abstract":"type=\"main\"> This paper provides a selective survey of Ohlson and Vuolteenaho-type accounting valuation models. The focus is on the valuation, return, and cost of capital dynamics of these models. Emphasis is placed primarily on variations of these models that incorporate risk aversion, parameter uncertainty, and/or time-varying costs of equity. Empirical papers that address the dynamics of these models are also surveyed.","PeriodicalId":359030,"journal":{"name":"Wiley-Blackwell: Abacus","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122466254","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
type="main"> Christodoulou et al. ( ) develop measures of the cost of equity capital that require only accounting inputs, using as an identification strategy the linear information dynamics of Feltham and Ohlson ( ). I propose to test these measures by evaluating the predictability of innovations to abnormal earnings using various predetermined variables. The over-identifying restrictions of this model require these innovations not to be predictable. Using a generalized model, I observe that the estimated measures are probably too low. I conjecture that this anomaly, which occurs jointly with a positive drift in abnormal earnings, is caused by the omission of economic assets such as intangibles.
{"title":"Diagnostics to Evaluate Cost of Capital Measures. Discussion of Christodoulou Et Al","authors":"J. Bertomeu","doi":"10.1111/abac.12074","DOIUrl":"https://doi.org/10.1111/abac.12074","url":null,"abstract":"type=\"main\"> Christodoulou et al. ( ) develop measures of the cost of equity capital that require only accounting inputs, using as an identification strategy the linear information dynamics of Feltham and Ohlson ( ). I propose to test these measures by evaluating the predictability of innovations to abnormal earnings using various predetermined variables. The over-identifying restrictions of this model require these innovations not to be predictable. Using a generalized model, I observe that the estimated measures are probably too low. I conjecture that this anomaly, which occurs jointly with a positive drift in abnormal earnings, is caused by the omission of economic assets such as intangibles.","PeriodicalId":359030,"journal":{"name":"Wiley-Blackwell: Abacus","volume":"52 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115884225","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper provides a commentary on the studies of Barth (2015), Dyckman and Zeff (2015), Ohlson (2015), Sunder (2015), and Whittington (2015) as they relate to past, present, and future directions in accounting research.
{"title":"Accounting Research: Where Now?","authors":"Stewart Jones, M. Wells","doi":"10.1111/abac.12062","DOIUrl":"https://doi.org/10.1111/abac.12062","url":null,"abstract":"This paper provides a commentary on the studies of Barth (2015), Dyckman and Zeff (2015), Ohlson (2015), Sunder (2015), and Whittington (2015) as they relate to past, present, and future directions in accounting research.","PeriodicalId":359030,"journal":{"name":"Wiley-Blackwell: Abacus","volume":"52 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114583784","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
type="main"> Financial accounting standards are set by organizations granted a significant degree of monopoly power by various governments. While there has been considerable debate on the merits of national (e.g., US Financial Accounting Standards Board (FASB)) versus international (International Accounting Standards Board (IASB)) monopolies, little attention has been paid to the merits of using competing standard-setting organizations (SSOs) for setting accounting standards. We compare the standard-setting processes of the FASB/IASB to the processes of four technology-oriented SSOs to assess the role of competition. We also provide a case study of monopoly and competitive standards in telephony. Both telephony and accounting yield some gains from coordination, and similar arguments are used (under the labels of comparability and consistency of accounting) in debates about granting a monopoly to their respective SSOs. Our results show that a group of volunteers competing with the government-sanctioned monopoly of International Telecommunications Union transformed the telephone industry. Thanks to this standards competition, we enjoy free video internet calling and massive cost savings. Implications for accounting standard setting are discussed.
{"title":"Monopoly Versus Competition in Setting Accounting Standards","authors":"K. Jamal, S. Sunder","doi":"10.1111/abac.12034","DOIUrl":"https://doi.org/10.1111/abac.12034","url":null,"abstract":"type=\"main\"> Financial accounting standards are set by organizations granted a significant degree of monopoly power by various governments. While there has been considerable debate on the merits of national (e.g., US Financial Accounting Standards Board (FASB)) versus international (International Accounting Standards Board (IASB)) monopolies, little attention has been paid to the merits of using competing standard-setting organizations (SSOs) for setting accounting standards. We compare the standard-setting processes of the FASB/IASB to the processes of four technology-oriented SSOs to assess the role of competition. We also provide a case study of monopoly and competitive standards in telephony. Both telephony and accounting yield some gains from coordination, and similar arguments are used (under the labels of comparability and consistency of accounting) in debates about granting a monopoly to their respective SSOs. Our results show that a group of volunteers competing with the government-sanctioned monopoly of International Telecommunications Union transformed the telephone industry. Thanks to this standards competition, we enjoy free video internet calling and massive cost savings. Implications for accounting standard setting are discussed.","PeriodicalId":359030,"journal":{"name":"Wiley-Blackwell: Abacus","volume":"46 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-09-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134350160","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2014-03-01DOI: 10.1111/j.1467-6281.2012.00372.x
A. Sangster, G. Stoner, Giovanna Scataglini-Belghitar, Paul A. De Lange, Brendan T. O'Connell
This paper discusses the nature of the 10 example paragraph entries at the end of Pacioli's bookkeeping treatise. It concludes that these are entries from fledgling banking operations involving one account holder and one borrower who, along with two others, has financial transactions with the account holder. The widely held assumption that they are examples of entries in the Ledger is set aside and it is concluded that, on the basis of the available evidence, they are examples of entries in a Ricordanze, a record book Pacioli described as being used to record items of this type.
{"title":"Pacioli's Example Entries - A Conundrum Resolved?","authors":"A. Sangster, G. Stoner, Giovanna Scataglini-Belghitar, Paul A. De Lange, Brendan T. O'Connell","doi":"10.1111/j.1467-6281.2012.00372.x","DOIUrl":"https://doi.org/10.1111/j.1467-6281.2012.00372.x","url":null,"abstract":"This paper discusses the nature of the 10 example paragraph entries at the end of Pacioli's bookkeeping treatise. It concludes that these are entries from fledgling banking operations involving one account holder and one borrower who, along with two others, has financial transactions with the account holder. The widely held assumption that they are examples of entries in the Ledger is set aside and it is concluded that, on the basis of the available evidence, they are examples of entries in a Ricordanze, a record book Pacioli described as being used to record items of this type.","PeriodicalId":359030,"journal":{"name":"Wiley-Blackwell: Abacus","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126204436","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study extends the theoretical framework of Callen and Segal (2004) and Vuolteenaho (2002) to investigate the association between accrual variability and firm‐level stock return volatility. The empirical evidence supports our prediction that increased uncertainty in current‐period accounting accruals is associated with significantly higher volatility of future stock returns, and the results are valid for measures of both systematic and idiosyncratic volatility. When accrual variability is decomposed into fundamental and discretionary portions, we find that the positive relationship between accrual variability and future stock return volatility is dominated by the fundamental component of accrual variability. Overall, our results suggest that uncertainty reflected in accrual information is subsequently reflected in the fluctuation of future stock returns, and that the predictive content in accruals primarily reflects firms' fundamental uncertainty, rather than any effects of managerial choices and interventions in the accounting process.
{"title":"Fundamentals or Managerial Discretion? The Relationship between Accrual Variability and Future Stock Return Volatility","authors":"Yaowen Shan, Stephen L Taylor, T. Walter","doi":"10.1111/abac.12015","DOIUrl":"https://doi.org/10.1111/abac.12015","url":null,"abstract":"This study extends the theoretical framework of Callen and Segal (2004) and Vuolteenaho (2002) to investigate the association between accrual variability and firm‐level stock return volatility. The empirical evidence supports our prediction that increased uncertainty in current‐period accounting accruals is associated with significantly higher volatility of future stock returns, and the results are valid for measures of both systematic and idiosyncratic volatility. When accrual variability is decomposed into fundamental and discretionary portions, we find that the positive relationship between accrual variability and future stock return volatility is dominated by the fundamental component of accrual variability. Overall, our results suggest that uncertainty reflected in accrual information is subsequently reflected in the fluctuation of future stock returns, and that the predictive content in accruals primarily reflects firms' fundamental uncertainty, rather than any effects of managerial choices and interventions in the accounting process.","PeriodicalId":359030,"journal":{"name":"Wiley-Blackwell: Abacus","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121327327","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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