Pub Date : 2025-12-01Epub Date: 2025-06-05DOI: 10.1016/j.adiac.2025.100821
James Jianxin Gong , Nian Lim Lee (Vic) , Sophia I. Wang
Using the most recently available data on compensation actually paid (CAP) to CEOs and non-CEO executives, we document a strong and positive relationship between CAP-based pay-performance misalignment and shareholder Say-on-pay (SOP) votes against executive compensation (SOP dissent). The positive relationship between CAP-based misalignment and SOP dissent is stronger when equity constitutes a greater portion of compensation and is weaker when total shareholder return is used to determine CEO non-equity incentive payout. The findings are robust to the use of alternative measures of CAP-based pay-performance misalignment and SOP dissent as well as to the use of an entropy-balanced sample. In contrast, when pay-performance misalignment is based on summary compensation table (SCT) pay, we find an insignificant relationship between pay-performance misalignment and SOP dissent. Overall, we find strong empirical support that shareholders consider CAP-based pay-performance misalignment when casting their SOP votes.
{"title":"Do shareholders vote against executive compensation when pay is misaligned with performance?","authors":"James Jianxin Gong , Nian Lim Lee (Vic) , Sophia I. Wang","doi":"10.1016/j.adiac.2025.100821","DOIUrl":"10.1016/j.adiac.2025.100821","url":null,"abstract":"<div><div>Using the most recently available data on compensation actually paid (CAP) to CEOs and non-CEO executives, we document a strong and positive relationship between CAP-based pay-performance misalignment and shareholder Say-on-pay (SOP) votes against executive compensation (SOP dissent). The positive relationship between CAP-based misalignment and SOP dissent is stronger when equity constitutes a greater portion of compensation and is weaker when total shareholder return is used to determine CEO non-equity incentive payout. The findings are robust to the use of alternative measures of CAP-based pay-performance misalignment and SOP dissent as well as to the use of an entropy-balanced sample. In contrast, when pay-performance misalignment is based on summary compensation table (SCT) pay, we find an insignificant relationship between pay-performance misalignment and SOP dissent. Overall, we find strong empirical support that shareholders consider CAP-based pay-performance misalignment when casting their SOP votes.</div></div>","PeriodicalId":46906,"journal":{"name":"Advances in Accounting","volume":"69 ","pages":"Article 100821"},"PeriodicalIF":1.2,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144212249","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 : 2025-12-01Epub Date: 2025-10-24DOI: 10.1016/j.adiac.2025.100849
Anis Triki, Gilberto Marquez-Illescas
We explore whether the impact of financial disclosures on investors' judgment and decision-making is contingent on their perception of CEOs' narcissism, in a setting in which firms report good news. Specifically, our theoretical model predicts that CEOs' narcissism impacts investors' willingness to invest through their perceptions of management credibility and disclosure credibility. Using data from 153 non-professional investors, we give support to those predictions. First, we find that investors' perception of management credibility is lower when a more narcissistic CEO leads the company. Second, our results indicate that this lack of credibility reduces investors' perception of disclosure credibility, which leads to a lower willingness to invest.
{"title":"Do investors see the darkness in narcissism?","authors":"Anis Triki, Gilberto Marquez-Illescas","doi":"10.1016/j.adiac.2025.100849","DOIUrl":"10.1016/j.adiac.2025.100849","url":null,"abstract":"<div><div>We explore whether the impact of financial disclosures on investors' judgment and decision-making is contingent on their perception of CEOs' narcissism, in a setting in which firms report good news. Specifically, our theoretical model predicts that CEOs' narcissism impacts investors' willingness to invest through their perceptions of management credibility and disclosure credibility. Using data from 153 non-professional investors, we give support to those predictions. First, we find that investors' perception of management credibility is lower when a more narcissistic CEO leads the company. Second, our results indicate that this lack of credibility reduces investors' perception of disclosure credibility, which leads to a lower willingness to invest.</div></div>","PeriodicalId":46906,"journal":{"name":"Advances in Accounting","volume":"69 ","pages":"Article 100849"},"PeriodicalIF":1.5,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145361003","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 : 2025-12-01Epub Date: 2025-10-17DOI: 10.1016/j.adiac.2025.100850
Yiyun Ge , Yi Zhang
Corporate carbon disclosure plays a crucial role in addressing the environmental challenges driven by climate change. This research investigates the role of green investors in enhancing corporate carbon disclosure. Using a sample of Chinese listed firms from 2008 to 2022, our findings suggest that green investors enhance corporate carbon disclosure. These results remain robust across multiple sensitivity analyses and endogeneity checks, including the difference-in-differences estimation. Further tests show that green investors significantly enhance carbon disclosure primarily in firms led by non-green CEOs and with higher investors' exit threats. Moreover, the positive impact of green institutional investors on carbon disclosure is more pronounced in firms located in regions with lower public environmental concern, in firms facing more competition and, in more recent subsamples. This study provides empirical evidence that green investors play an essential role in promoting carbon disclosure levels.
{"title":"Green investors and corporate carbon disclosure","authors":"Yiyun Ge , Yi Zhang","doi":"10.1016/j.adiac.2025.100850","DOIUrl":"10.1016/j.adiac.2025.100850","url":null,"abstract":"<div><div>Corporate carbon disclosure plays a crucial role in addressing the environmental challenges driven by climate change. This research investigates the role of green investors in enhancing corporate carbon disclosure. Using a sample of Chinese listed firms from 2008 to 2022, our findings suggest that green investors enhance corporate carbon disclosure. These results remain robust across multiple sensitivity analyses and endogeneity checks, including the difference-in-differences estimation. Further tests show that green investors significantly enhance carbon disclosure primarily in firms led by non-green CEOs and with higher investors' exit threats. Moreover, the positive impact of green institutional investors on carbon disclosure is more pronounced in firms located in regions with lower public environmental concern, in firms facing more competition and, in more recent subsamples. This study provides empirical evidence that green investors play an essential role in promoting carbon disclosure levels.</div></div>","PeriodicalId":46906,"journal":{"name":"Advances in Accounting","volume":"69 ","pages":"Article 100850"},"PeriodicalIF":1.5,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145324299","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 : 2025-12-01Epub Date: 2025-09-10DOI: 10.1016/j.adiac.2025.100845
Lele Chen , Rachana Kalelkar , Qiao Xu
In this paper, we investigate whether the odd composition of audit committees influences the demand for audit effort. Extant literature posits that the financial reporting quality is higher when audit committees comprise an odd number of directors. The rationale is that the odd composition of committees fosters a voting environment where directors are more inclined to vote informatively and independently, leading to decisions that better align with shareholders' interests. Our findings support this theory, showing that odd audit committees demand greater audit effort. In addition, we find that the odd audit committees are more likely to make decisions that enhance auditor independence by not using auditor-provided tax services and strengthen financial reporting quality by avoiding the delay in the engagement of new auditors. We further find that the association between odd audit committees and the demand for audit effort is not affected by audit committee size and odd audit committees are negatively associated with material weaknesses in internal controls. Our study makes a valuable contribution to the corporate governance literature by documenting that the odd versus even composition of audit committees enhances the effectiveness of audit committee monitoring related to the quality of financial reporting.
{"title":"Audit committee composition and effectiveness: The role of odd-numbered committees","authors":"Lele Chen , Rachana Kalelkar , Qiao Xu","doi":"10.1016/j.adiac.2025.100845","DOIUrl":"10.1016/j.adiac.2025.100845","url":null,"abstract":"<div><div>In this paper, we investigate whether the odd composition of audit committees influences the demand for audit effort. Extant literature posits that the financial reporting quality is higher when audit committees comprise an odd number of directors. The rationale is that the odd composition of committees fosters a voting environment where directors are more inclined to vote informatively and independently, leading to decisions that better align with shareholders' interests. Our findings support this theory, showing that odd audit committees demand greater audit effort. In addition, we find that the odd audit committees are more likely to make decisions that enhance auditor independence by not using auditor-provided tax services and strengthen financial reporting quality by avoiding the delay in the engagement of new auditors. We further find that the association between odd audit committees and the demand for audit effort is not affected by audit committee size and odd audit committees are negatively associated with material weaknesses in internal controls. Our study makes a valuable contribution to the corporate governance literature by documenting that the odd versus even composition of audit committees enhances the effectiveness of audit committee monitoring related to the quality of financial reporting.</div></div>","PeriodicalId":46906,"journal":{"name":"Advances in Accounting","volume":"69 ","pages":"Article 100845"},"PeriodicalIF":1.5,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145026517","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 : 2025-12-01Epub Date: 2025-07-16DOI: 10.1016/j.adiac.2025.100836
Hui-Yu Hsiao , Wu-Po Liu , Tian Tian
This study investigates the effects on audit fees and financial reporting quality resulting from transitioning from a semi-annual review to a semi-annual audit for Taiwan-registered foreign firms (KY firms), following the 2021 regulatory amendment by the Financial Supervisory Commission. The regulation, implemented in response to major accounting scandals, mandates that KY firms have their semi-annual financial statements audited instead of reviewed. By analyzing data from 2019 to 2022, we examine the effects of this change on KY firms compared with those on non-KY firms. Our findings indicate that although audit fees for KY firms significantly increase after the regulation, there is no improvement in either semi-annual or annual financial reporting quality. Additionally, the regulation does not improve audit efficiency, as measured by audit report lag. These results raise questions about the optimal level of auditing and suggest the need for a balanced approach to audit regulations. The increased audit costs do not seem to yield proportional benefits in terms of reporting quality or efficiency. These findings have important implications for regulators and market participants in Taiwan and other emerging markets.
{"title":"The impact of semi-annual audits on audit fees and financial reporting quality: Evidence from Taiwan-registered foreign firms","authors":"Hui-Yu Hsiao , Wu-Po Liu , Tian Tian","doi":"10.1016/j.adiac.2025.100836","DOIUrl":"10.1016/j.adiac.2025.100836","url":null,"abstract":"<div><div>This study investigates the effects on audit fees and financial reporting quality resulting from transitioning from a semi-annual review to a semi-annual audit for Taiwan-registered foreign firms (KY firms), following the 2021 regulatory amendment by the Financial Supervisory Commission. The regulation, implemented in response to major accounting scandals, mandates that KY firms have their semi-annual financial statements audited instead of reviewed. By analyzing data from 2019 to 2022, we examine the effects of this change on KY firms compared with those on non-KY firms. Our findings indicate that although audit fees for KY firms significantly increase after the regulation, there is no improvement in either semi-annual or annual financial reporting quality. Additionally, the regulation does not improve audit efficiency, as measured by audit report lag. These results raise questions about the optimal level of auditing and suggest the need for a balanced approach to audit regulations. The increased audit costs do not seem to yield proportional benefits in terms of reporting quality or efficiency. These findings have important implications for regulators and market participants in Taiwan and other emerging markets.</div></div>","PeriodicalId":46906,"journal":{"name":"Advances in Accounting","volume":"69 ","pages":"Article 100836"},"PeriodicalIF":1.2,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144654233","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 : 2025-12-01Epub Date: 2025-06-26DOI: 10.1016/j.adiac.2025.100835
Zining Li , James M. Plečnik , Wendy Wilson , Suning Zhang
This study examines whether recognizing an expense on the face of the financial statements affects the cost of equity capital. Specifically, we analyze cost of equity effects around the change in accounting treatment imposed by Statement of Financial Accounting Standards 123R (SFAS 123R). This standard requires the recognition of an expense for the fair value of employee stock option grants, while previously this information was disclosed in financial statement footnotes. We find that, while pre-SFAS 123R firms benefited from a relatively lower cost of equity from option grants, once expense recognition was required, the benefit was diminished. While various possible explanations for this result exist, our additional analyses suggest that a decline in accounting information quality drives our results. Further, we find that the impact of SFAS 123R was greater for firms operating in technology-focused industries, likely due to their heavy use of stock options.
{"title":"Stock option expense recognition and the cost of equity","authors":"Zining Li , James M. Plečnik , Wendy Wilson , Suning Zhang","doi":"10.1016/j.adiac.2025.100835","DOIUrl":"10.1016/j.adiac.2025.100835","url":null,"abstract":"<div><div>This study examines whether recognizing an expense on the face of the financial statements affects the cost of equity capital. Specifically, we analyze cost of equity effects around the change in accounting treatment imposed by Statement of Financial Accounting Standards 123R (SFAS 123R). This standard requires the recognition of an expense for the fair value of employee stock option grants, while previously this information was disclosed in financial statement footnotes. We find that, while pre-SFAS 123R firms benefited from a relatively lower cost of equity from option grants, once expense recognition was required, the benefit was diminished. While various possible explanations for this result exist, our additional analyses suggest that a decline in accounting information quality drives our results. Further, we find that the impact of SFAS 123R was greater for firms operating in technology-focused industries, likely due to their heavy use of stock options.</div></div>","PeriodicalId":46906,"journal":{"name":"Advances in Accounting","volume":"69 ","pages":"Article 100835"},"PeriodicalIF":1.2,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144489657","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 : 2025-12-01Epub Date: 2025-10-17DOI: 10.1016/j.adiac.2025.100846
Kyungeun Karry Kwon , Myung Seok Park
In June 2014, the Public Company Accounting Oversight Board amended Auditing Standard No. 12, requiring auditors to obtain an understanding of a firm's financial relationships and transactions with its executive officers, including executive compensation. This study examines whether, following the amendment, auditors view the use of non-financial performance measures (NFPMs) in CEO compensation contracts as relevant to their risk assessments and whether this perspective influences audit pricing. Using hand-collected data on NFPMs from proxy statements, we find that auditors charge significantly lower fees to clients that include NFPMs in CEO compensation contracts in the post-amendment period. Additionally, we document a notable decline in audit fees when clients adopt NFPM-based compensation after the amendment. These findings suggest auditors responded to the revised standard by treating NFPMs in CEO compensation as a risk-mitigating factor and adjusting audit pricing accordingly.
{"title":"The use of non-financial performance measures in CEO compensation contracts and pricing of audit engagements: Evidence from the amendment to PCAOB AS 2110","authors":"Kyungeun Karry Kwon , Myung Seok Park","doi":"10.1016/j.adiac.2025.100846","DOIUrl":"10.1016/j.adiac.2025.100846","url":null,"abstract":"<div><div>In June 2014, the Public Company Accounting Oversight Board amended Auditing Standard No. 12, requiring auditors to obtain an understanding of a firm's financial relationships and transactions with its executive officers, including executive compensation. This study examines whether, following the amendment, auditors view the use of non-financial performance measures (NFPMs) in CEO compensation contracts as relevant to their risk assessments and whether this perspective influences audit pricing. Using hand-collected data on NFPMs from proxy statements, we find that auditors charge significantly lower fees to clients that include NFPMs in CEO compensation contracts in the post-amendment period. Additionally, we document a notable decline in audit fees when clients adopt NFPM-based compensation after the amendment. These findings suggest auditors responded to the revised standard by treating NFPMs in CEO compensation as a risk-mitigating factor and adjusting audit pricing accordingly.</div></div>","PeriodicalId":46906,"journal":{"name":"Advances in Accounting","volume":"69 ","pages":"Article 100846"},"PeriodicalIF":1.5,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145324298","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 : 2025-12-01Epub Date: 2025-08-26DOI: 10.1016/j.adiac.2025.100843
Yu-Lin Hsu , Ya-Chih Yang , Manish Rajkumar Arora
This study examines the determinants of the switch from IFRS to the new UK GAAP, which like IFRS for SMEs aims to be closely aligned with IFRS but requires much less disclosure, in UK private firms. We find that private UK companies are more likely to switch to the new UK GAAP in 2015, the first year when new UK GAAP replaced old UK GAAP, if they have higher sales growth rates or if directors are shareholders. The result further shows that the switch to new UK GAAP helps to reduce the disclosure levels (e.g., fewer pages of annual reports). The consistency with IFRS and reduced disclosure in new UK GAAP may explain why private firms with greater incentives to reduce disclosure level and having fewer problems of information asymmetry may adopt this new framework. Our findings imply that the extensive disclosures required by IFRS may still be a burden for many firms, including those which adopted it before. A reduced framework consistent with IFRS (e.g., the new UK GAAP or IFRS for SMEs) may help to tackle this issue. Furthermore, our results show that the key factors influencing the decision of switching to new UK GAAP during 2016–2022 (i.e., the presence of Big 4 auditors, major shareholders and foreign shareholders/parents) are different from those in 2015, generally in line with previous literature that companies with different adoption incentives would adopt new financial reporting standards at a different time.
{"title":"The switch from IFRS to local GAAP: Evidence from UK private firms","authors":"Yu-Lin Hsu , Ya-Chih Yang , Manish Rajkumar Arora","doi":"10.1016/j.adiac.2025.100843","DOIUrl":"10.1016/j.adiac.2025.100843","url":null,"abstract":"<div><div>This study examines the determinants of the switch from IFRS to the new UK GAAP, which like IFRS for SMEs aims to be closely aligned with IFRS but requires much less disclosure, in UK private firms. We find that private UK companies are more likely to switch to the new UK GAAP in 2015, the first year when new UK GAAP replaced old UK GAAP, if they have higher sales growth rates or if directors are shareholders. The result further shows that the switch to new UK GAAP helps to reduce the disclosure levels (e.g., fewer pages of annual reports). The consistency with IFRS and reduced disclosure in new UK GAAP may explain why private firms with greater incentives to reduce disclosure level and having fewer problems of information asymmetry may adopt this new framework. Our findings imply that the extensive disclosures required by IFRS may still be a burden for many firms, including those which adopted it before. A reduced framework consistent with IFRS (e.g., the new UK GAAP or IFRS for SMEs) may help to tackle this issue. Furthermore, our results show that the key factors influencing the decision of switching to new UK GAAP during 2016–2022 (i.e., the presence of Big 4 auditors, major shareholders and foreign shareholders/parents) are different from those in 2015, generally in line with previous literature that companies with different adoption incentives would adopt new financial reporting standards at a different time.</div></div>","PeriodicalId":46906,"journal":{"name":"Advances in Accounting","volume":"69 ","pages":"Article 100843"},"PeriodicalIF":1.5,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144902318","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 : 2025-12-01Epub Date: 2025-09-30DOI: 10.1016/j.adiac.2025.100847
Yan Sun , Suyi Liu , Justin Yiqiang Jin
Based on the law of comparative advantage, we empirically investigate whether and how component auditors impact audit quality in multinational group audits (MGAs) in China. Despite mixed findings from studies based on U.S. and Australian data, there is a dearth of research on the impact of component auditors in emerging markets, where MGAs are growing substantially, and the institutional environment differs significantly from that of developed countries. Using manually collected data from China, we find that involving component auditors significantly enhances audit quality, with the effect becoming more pronounced as their involvement increases. Our mechanism analysis shows that component auditors enhance MGA audit quality by leveraging their comparative advantages, which are shaped by strong institutional environments and mature capital markets. Furthermore, our heterogeneity analysis reveals that the contribution of component auditors is more pronounced when group auditors have lower proficiency, less experience, or when their accounting firms are less globalized. This study highlights the comparative advantages of component auditors and emphasizes the concerted efforts of both group and component auditors in improving MGA audit quality in an emerging market. Our findings are relevant to multinational groups, international practitioners, investors, and regulators.
{"title":"Concerted efforts: The role of component auditors in multinational group audit in China","authors":"Yan Sun , Suyi Liu , Justin Yiqiang Jin","doi":"10.1016/j.adiac.2025.100847","DOIUrl":"10.1016/j.adiac.2025.100847","url":null,"abstract":"<div><div>Based on the law of comparative advantage, we empirically investigate whether and how component auditors impact audit quality in multinational group audits (MGAs) in China. Despite mixed findings from studies based on U.S. and Australian data, there is a dearth of research on the impact of component auditors in emerging markets, where MGAs are growing substantially, and the institutional environment differs significantly from that of developed countries. Using manually collected data from China, we find that involving component auditors significantly enhances audit quality, with the effect becoming more pronounced as their involvement increases. Our mechanism analysis shows that component auditors enhance MGA audit quality by leveraging their comparative advantages, which are shaped by strong institutional environments and mature capital markets. Furthermore, our heterogeneity analysis reveals that the contribution of component auditors is more pronounced when group auditors have lower proficiency, less experience, or when their accounting firms are less globalized. This study highlights the comparative advantages of component auditors and emphasizes the concerted efforts of both group and component auditors in improving MGA audit quality in an emerging market. Our findings are relevant to multinational groups, international practitioners, investors, and regulators.</div></div>","PeriodicalId":46906,"journal":{"name":"Advances in Accounting","volume":"69 ","pages":"Article 100847"},"PeriodicalIF":1.5,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145218941","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 : 2025-12-01Epub Date: 2025-07-22DOI: 10.1016/j.adiac.2025.100837
Jeong-Bon Kim , Junwoo Kim , Jay Junghun Lee
This study investigates the role of earnings and cash flows in equity valuation under severe uncertainty about firm fundamentals. Using the COVID-19 pandemic as an exogenous shock that exacerbates fundamental uncertainty, we find that severe uncertainty leads investors to increase the valuation weight on cash flows and reduce the valuation weight on earnings. Consequently, while net earnings dominate operating cash flows in explaining the cross-section of stock returns during the pre-pandemic period, operating cash flows outperform net earnings during the pandemic period. We also find that the decrease in the value relevance of earnings is attributable to the decline in the valuation weight on the accrual component of earnings. Further analyses reveal that the dominance of cash flows over earnings is less pronounced for operating earnings than for net earnings and that the valuation weight on cash flows increases with ex-ante exposure to the pandemic shock and with the level of financial inflexibility. Moreover, we find that while analysts' earnings forecasts become less accurate and more dispersed during the pandemic period, their cash flow forecasts do not exhibit significant changes in forecast accuracy or dispersion over the same period. Our evidence highlights the relative importance of cash flows versus earnings under severe uncertainty about firms' prospects.
{"title":"Earnings versus cash flows in equity valuation: Evidence from the COVID-19 crisis","authors":"Jeong-Bon Kim , Junwoo Kim , Jay Junghun Lee","doi":"10.1016/j.adiac.2025.100837","DOIUrl":"10.1016/j.adiac.2025.100837","url":null,"abstract":"<div><div>This study investigates the role of earnings and cash flows in equity valuation under severe uncertainty about firm fundamentals. Using the COVID-19 pandemic as an exogenous shock that exacerbates fundamental uncertainty, we find that severe uncertainty leads investors to increase the valuation weight on cash flows and reduce the valuation weight on earnings. Consequently, while net earnings dominate operating cash flows in explaining the cross-section of stock returns during the pre-pandemic period, operating cash flows outperform net earnings during the pandemic period. We also find that the decrease in the value relevance of earnings is attributable to the decline in the valuation weight on the accrual component of earnings. Further analyses reveal that the dominance of cash flows over earnings is less pronounced for operating earnings than for net earnings and that the valuation weight on cash flows increases with ex-ante exposure to the pandemic shock and with the level of financial inflexibility. Moreover, we find that while analysts' earnings forecasts become less accurate and more dispersed during the pandemic period, their cash flow forecasts do not exhibit significant changes in forecast accuracy or dispersion over the same period. Our evidence highlights the relative importance of cash flows versus earnings under severe uncertainty about firms' prospects.</div></div>","PeriodicalId":46906,"journal":{"name":"Advances in Accounting","volume":"69 ","pages":"Article 100837"},"PeriodicalIF":1.2,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144679596","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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