Download or read book Extreme Accruals Earnings Quality and Investor Mispricing written by Anwer S. Ahmed and published by . This book was released on 2004 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: Extreme accruals are commonly viewed as tainted by earnings management, contributing to lower quality earnings. We refer to this presumption as the earnings management/quality hypothesis. We directly examine three aspects of the presumed relation between the level of accruals and earnings management/quality: (i) the implications of earnings management for earnings persistence, (ii) the implications of earnings management for accrual mispricing, and (iii) the likelihood of greater opportunistic management to achieve earnings targets.We find (i) no evidence that extreme income-increasing accruals have lower persistence for year-ahead earnings, (ii) no evidence that investors systematically overweight extreme accruals, and (iii) no evidence that extreme accrual firms fall into the interval of firms just avoiding losses or earnings decreases more than other firms. We do find evidence that extreme income-decreasing accruals have lower persistence, but the evidence suggests this results from poor economic performance rather than accrual manipulation. We also document that investors consistently underestimate the persistence of cash flows for all firms, and that predictable year-ahead abnormal returns to extreme total or abnormal accrual portfolios documented in prior work appear to be driven by cash flow mispricing rather than accrual mispricing. Overall, our findings cast doubt on using extreme accruals to proxy for earnings management and/or low earnings quality.

Download or read book Earnings Quality and Accrual Mispricing a Country and Firm level Investigation in the Period Surrounding SOX written by Maria Elizabeth Strydom and published by . This book was released on 2011 with total page 378 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis investigates accrual mispricing through two related studies. The first examines the impact of earnings quality on accrual mispricing in the US and determines whether mispricing persists at the country level in the high earnings quality environment following the Sarbanes-Oxley Act (SOX) of 2002. The second study determines whether accruals are mispriced at the firm level and if such firm level mispricing persists so that profits can be generated by exploiting this trading strategy.The motivation to investigate the impact of earnings quality on the mispricing of accruals stems from the substantive literature that documents the persistent accrual anomaly (Sloan, 1996; Xie, 2001; Mashruwala et al., 2006) but fails to find its cause. This thesis examines whether this persistent country-level mispricing stems from investors being misled by low earnings quality. When earnings quality is low, investors will not be able to accurately price accruals. Earnings quality could therefore explain the existence of the accrual anomaly. Since SOX improved earnings quality, accrual mispricing should be less in the post-SOX environment. This thesis therefore also examines the mispricing of accruals post-SOX to determine whether it persists.This thesis' second study is motivated by the cross-country (Pincus et al., 2007), country-level (Sloan, 1996; Xie, 2001), and industry-level (Zhang, 2007; Trejo-Pech et al., 2009) evidence that shows differences in mispricing. While cross-country, country-level, and industry-level mispricing have been investigated, there is no evidence on whether a firm-level anomaly exists, and this study therefore attempts to fill that void. This study is also motivated by the findings of Fama and French (2008) and Avramov et al. (2010). Fama and French (2008) investigate the pervasiveness of asset pricing anomalies and conclude that the accrual anomaly is one of few that persist in all size groups, cross sections, and sorts. Avramov et al. (2010) similarly investigate commonalities across asset pricing anomalies and conclude that whilst the majority of asset pricing anomalies are associated with downgrades in firm credit ratings, the accrual anomaly is an exception and remains unaccounted for and robust. Given the pervasiveness of this anomaly over time, this study investigates whether the firm-level accrual anomaly is similarly persistent.Two accrual mispricing models (Mishkin, 1983; Kraft et al., 2007) are employed in the first study to investigate the impact of earnings quality on the accrual anomaly. These models are augmented by including earnings quality proxies to determine their impact on mispricing. Given that both yield identical results, the second study employs only the Mishkin (1983) model to estimate firm-level mispricing. The mispricing model is employed for each firm in each year to estimate firm-level accrual mispricing. Significantly over- and underpriced accrual firms are identified, and a trading strategy of buying underpriced accrual firms and selling overpriced ones is examined for abnormal returns.The results from the first study indicate that earnings quality mitigates accrual mispricing. When investigated in the post-SOX environment, however, there is no evidence of mispricing. This is true even without considering earnings quality. These findings show that SOX have achieved its stated aim of improving disclosure quality so that investors are better able to estimate accrual persistence, mitigating the anomaly. The second study shows, however, that firm-level mispricing still exists. Specifically, it shows that both significantly over- and underpriced accrual firms exist in the same post-SOX sample, whereas at the country level no anomaly was documented. As with the differences in accrual mispricing documented at the aggregate market (Hirshleifer et al., 2009) and industry levels (Trejo-Pech et al., 2009), firm-level mispricing also differs from the country-level anomaly. Further analyses of firm-level mispricing show abnormal returns are available from a strategy of selling overpriced accrual firms and buying underpriced accrual firms.The first study contributes to the literature documenting the impact of earnings quality on accrual mispricing and thus provides evidence of the importance of good disclosure quality in ensuring efficient pricing. It also contributes by showing that SOX has achieved its stated aims of improving disclosure quality and has thus mitigated mispricing at the country level. A further contribution is the direct comparison of the accrual mispricing models of Mishkin (1983) and Kraft et al. (2007) and the evidence that they yield similar results. The second study makes two main contributions: First, it documents that firm-level accrual mispricing exists, even in the absence of a country-level anomaly. Second, the study shows that at the firm level both significantly over- and underpriced accrual firms exist, and it establishes the persistence of this firm-level mispricing. It also documents that investors can profit from a firm-level accrual mispricing strategy.

Download or read book Earnings Quality and Future Returns written by Messod D. Beneish and published by . This book was released on 2014 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper examines the relation between the probability of manipulation, accruals, and future returns. We show that firms that have a high likelihood of earnings manipulation (as measured by the Beneish (1999)'s M-Score) experience lower future earnings, but that investors expect these firms to have higher future earnings. Indeed, we find that investors overestimate next-period return on assets by 490 to 690 basis points (this is significant as the median ROA in the sample 4.6%). We also show that the probability of manipulation is a correlated omitted variable for the earnings forecasting models used in prior research on accrual mispricing and that including the probability of manipulation greatly attenuates the mispricing of accrual persistence. Finally, we show that the probability of earnings manipulation predicts economically significant abnormal returns of approximately 15% per year after controlling for accruals and various controls for risk factors, including a factor compensating for earnings quality differences (Easley and O'Hara (2004), Francis et al. (2005)). We interpret our results that the predictive ability of accruals for returns is greatly diminished in the presence of the M-Score as indicating that accrual mispricing arises because investors are misled by managers' opportunistic management of earnings.

Download or read book Earnings Quality written by Elisa Menicucci and published by Springer Nature. This book was released on 2019-12-21 with total page 154 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides an overview of earnings quality (EQ) in the context of financial reporting and offers suggestions for defining and measuring it. Although EQ has received increasing attention from investors, creditors, regulators, and researchers in different areas, there are various definitions of it and different approaches for its measurement. The book describes the relationship between EQ and earnings management (EM) since they can be considered related challenges, especially in the context of international financial reporting standards (IAS/IFRSs). EM occurs when managers make discretionary accounting choices that are regarded as either an efficient communication of private information to improve the informativeness of a firm’s current and future performance, or a distorting disclosure to mislead the firm’s true performance. The intentional manipulation of earnings by managers, within the limits allowed by the accounting standards, may alter the usefulness of financial reporting and lead to lower quality of earnings. The use of fair value in financial reporting has created a current debate about the impact it might have on EQ. At times, the high subjectivity in estimating fair value can allow opportunities for the exercise of management judgments and intentional bias, which can reduce the quality of financial reporting. Management discretion can result in high EM and hence in a reduction of EQ. Particularly during difficult financial periods, managers engage in EM to mask the negative effects of the turmoil, and in such circumstances accruals and earnings smoothing are attempts to reduce abnormal variations of earnings in such circumstances. This book is a valuable resource for those interested in wider perspectives on EQ and it adds to the research studies on this topic in the context of financial reporting.

Download or read book Investor Attention Earnings Management and Stock Mispricing written by Yiqiang Justin Jin and published by . This book was released on 2009 with total page 194 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis first examines the determinants of earnings management in an international setting using the Limited Investor Attention Model of Hirshleifer and Teoh (2003). The model predicts that investor attention reduces earnings management. I have four key findings. First, I document that financial analysts curb adjusted absolute abnormal accruals and absolute performance-matched abnormal accruals in global firms. Second, I document that institutional block-holdings curb adjusted absolute abnormal accruals across the world. Third, I document that analyst following is related to more reduction in earnings management in common law countries than in code-law countries. Fourth, I find that institutional block-holders are more effective monitors in common law countries than in code law countries. This thesis also examines the relation between investor attention and stock mispricing of abnormal accruals in an international setting using the Limited Investor Attention Model of Hirshleifer and Teoh (2003). Consistent with the model's hypothesis that investor attention reduces stock mispricing, I document three key findings. First, I find a significant and negative correlation between stock mispricing and analyst following in global firms. Second, stock mispricing is negatively correlated with institutional ownership in U.S. firms. Stock mispricing is not significantly correlated with institutional block-holdings in global firms. Third, stock mispricing per dollar of abnormal accrual is decreasing in analyst following for sufficiently large abnormal accruals in U.S. and global firms.

Download or read book Earnings Quality Measures and Excess Returns written by Pietro Perotti and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines how commonly used earnings quality measures fulfill a key objective of financial reporting, i.e., improving decision usefulness for investors. We propose a stock-price-based measure for assessing the quality of earnings quality measures. We predict that firms with higher earnings quality will be less mispriced than other firms. Mispricing is measured by the difference of the mean absolute excess returns of portfolios formed on high and low values of a measure. We examine persistence, predictability, two measures of smoothness, abnormal accruals, accruals quality, earnings response coefficient, and value relevance. For a large sample of U.S. non-financial firms over the period 1988-2007, we show that all measures except for smoothness are negatively associated with absolute excess returns, suggesting that smoothness is generally a favorable attribute of earnings. Accruals measures generate the largest spread in absolute excess returns, followed by smoothness and market-based measures. These results lend support to the widespread use of accruals measures as overall measures of earnings quality in the literature.

Download or read book Capital Market Implications of Earnings Quality written by Bianca Ahrens and published by BoD – Books on Demand. This book was released on 2010 with total page 282 pages. Available in PDF, EPUB and Kindle. Book excerpt: In his speech from 1998 the former chairman of the United States Securities and Exchange Commission (SEC) Arthur Levitt pointed out that trust "is the bedrock of our capital markets" and that this must not be shaken by the erosion of earnings quality. He made clear that it is the challenge of the whole financial community to counteract such a development. This thesis deals with the question whether the importance of earnings for the capital market varies with its quality. The question arises, because in recent years a large number of firm scandals has shaken the trust in the reliability of reported earnings. In order to properly address the research questions, the literature on earnings quality definitions, quality measures as well as implications of earnings quality on capital markets is reviewed and critically discussed. The author investigates whether well known results concerning capital market implications of earnings quality remain stable for all measures considered. She answers the question of how earnings quality affects firm value, cost of equity capital, and the accuracy of analysts' forecasts taking into account the effects of determinants of earnings quality.

Download or read book Accrued Earnings and Growth written by Patricia M. Fairfield and published by . This book was released on 2016 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: An important goal of accounting research is to provide evidence that improves the analysis of financial statements for predicting future profitability. Research (Sloan 1996; Xie 2001) has found that (1) the persistence of earnings performance depends on the proportions of the cash and accrual components and that (2) a market inefficiency results from the failure of investors to fully appreciate the implications of cash flows and accruals for future earnings performance. In this study we investigate whether these results with respect to accruals can be generalized to another form of growth in net operating assets. We find that growth in long-term net operating assets, like accruals, has a negative association with one-year-ahead return on assets. We also find that the negative associations of both forms of growth (accruals and growth in long-term net operating assets) to one-year-ahead return on assets are attributable to the effect of growth on the denominator of return on assets. Furthermore, we find that the apparent market mispricing of accruals applies to growth in long-term net operating assets and that the severity of the mispricing does not significantly differ between the components of growth. Thus, the results suggest that the accrual anomaly documented in Sloan (1996) is a subset of a larger anomaly with respect to a general market mispricing of growth in net operating assets. Statement Analysis, Market Mispricing.

Download or read book Investors Expectation of Loss Reversal and Test of Accruals Mispricing written by Jung Hoon Kim and published by . This book was released on 2013 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study reconciles the findings in recent studies regarding the disappearing accruals anomaly and the sustained cash flows anomaly. We attribute the contrasting results to the firms having both highly negative accruals and cash flows. They exhibit highly negative future stock returns although their accruals level is low. For these firms, aside from the previously documented performance-related delisting effects, it appears that investors expect large losses to reverse but are, in fact, negatively surprised by the persistence of negative cash flows. Our results indicate that investors' different priors of the future earnings behavior of loss versus profit firms partially explain the contrasting results in prior studies. To conclude, we reconcile the findings of this study to those of prior studies (Desai et al. 2004; Dopuch et al. 2010; Hafzalla et al. 2011).

Download or read book Earnings Quality written by Patricia M. Dechow and published by Research Foundation of the Institute of Chartered Financial Analysts. This book was released on 2004-01-01 with total page 152 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Investor Attention Earnings Management and Stock Mispricing written by and published by . This book was released on 2003 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: PhD.

Download or read book Earnings Quality written by Jennifer Francis and published by Now Publishers Inc. This book was released on 2008 with total page 97 pages. Available in PDF, EPUB and Kindle. Book excerpt: This review lays out a research perspective on earnings quality. We provide an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earnings quality research. Throughout, we focus on a capital markets setting, as opposed, for example, to a contracting or stewardship setting. Our reason for this choice stems from the view that the capital market uses of accounting information are fundamental, in the sense of providing a basis for other uses, such as stewardship. Because resource allocations are ex ante decisions while contracting/stewardship assessments are ex post evaluations of outcomes, evidence on whether, how and to what degree earnings quality influences capital market resource allocation decisions is fundamental to understanding why and how accounting matters to investors and others, including those charged with stewardship responsibilities. Demonstrating a link between earnings quality and, for example, the costs of equity and debt capital implies a basic economic role in capital allocation decisions for accounting information; this role has only recently been documented in the accounting literature. We focus on how the precision of financial information in capturing one or more underlying valuation-relevant constructs affects the assessment and use of that information by capital market participants. We emphasize that the choice of constructs to be measured is typically contextual. Our main focus is on the precision of earnings, which we view as a summary indicator of the overall quality of financial reporting. Our intent in discussing research that evaluates the capital market effects of earnings quality is both to stimulate further research in this area and to encourage research on related topics, including, for example, the role of earnings quality in contracting and stewardship.

Download or read book Earnings Management written by Joshua Ronen and published by Springer Science & Business Media. This book was released on 2008 with total page 587 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is a study of earnings management, aimed at scholars and professionals in accounting, finance, economics, and law. The authors address research questions including: Why are earnings so important that firms feel compelled to manipulate them? What set of circumstances will induce earnings management? How will the interaction among management, boards of directors, investors, employees, suppliers, customers and regulators affect earnings management? How to design empirical research addressing earnings management? What are the limitations and strengths of current empirical models?

Download or read book An Introduction to Analysis of Financial Data with R written by Ruey S. Tsay and published by John Wiley & Sons. This book was released on 2014-08-21 with total page 388 pages. Available in PDF, EPUB and Kindle. Book excerpt: A complete set of statistical tools for beginning financial analysts from a leading authority Written by one of the leading experts on the topic, An Introduction to Analysis of Financial Data with R explores basic concepts of visualization of financial data. Through a fundamental balance between theory and applications, the book supplies readers with an accessible approach to financial econometric models and their applications to real-world empirical research. The author supplies a hands-on introduction to the analysis of financial data using the freely available R software package and case studies to illustrate actual implementations of the discussed methods. The book begins with the basics of financial data, discussing their summary statistics and related visualization methods. Subsequent chapters explore basic time series analysis and simple econometric models for business, finance, and economics as well as related topics including: Linear time series analysis, with coverage of exponential smoothing for forecasting and methods for model comparison Different approaches to calculating asset volatility and various volatility models High-frequency financial data and simple models for price changes, trading intensity, and realized volatility Quantitative methods for risk management, including value at risk and conditional value at risk Econometric and statistical methods for risk assessment based on extreme value theory and quantile regression Throughout the book, the visual nature of the topic is showcased through graphical representations in R, and two detailed case studies demonstrate the relevance of statistics in finance. A related website features additional data sets and R scripts so readers can create their own simulations and test their comprehension of the presented techniques. An Introduction to Analysis of Financial Data with R is an excellent book for introductory courses on time series and business statistics at the upper-undergraduate and graduate level. The book is also an excellent resource for researchers and practitioners in the fields of business, finance, and economics who would like to enhance their understanding of financial data and today's financial markets.

Download or read book Earnings Management Corporate Investments and Stock Returns written by Feixue Xie and published by . This book was released on 2005 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we investigate the relation between accounting accruals and abnormal corporate investments and if the accrual-based anomaly documented by Sloan (1996) is distinct from the investment-based anomaly documented by Titman, Wei, and Xie (2004). Our results indicate that abnormal capital investments are positively associated with accounting accruals and that the mispricing of abnormal capital investments is distinct from the mispricing of discretionary current accruals. In addition, investors can earn substantially higher size-adjusted returns by exploiting both strategies at the same time than by exploiting each individual strategy alone. Finally, our result suggests that the stock market appears to overvalue both discretionary current accruals and abnormal capital expenditures.

Download or read book International Financial Reporting Standards and New Directions in Earnings Management written by Oliveira, Jonas da Silva and published by IGI Global. This book was released on 2019-03-22 with total page 342 pages. Available in PDF, EPUB and Kindle. Book excerpt: The fiscal market is an unpredictable torrent of information that modern organizations strive to understand. Business professionals dedicate themselves to understanding uncertain results around economic performance to improve management, reporting standards, and predict trends in financial statements. International Financial Reporting Standards and New Directions in Earnings Management is an essential reference source that discusses identifying the behavioral patterns of managers and the accounting policies they use in different opportunistic circumstances. Featuring research on topics such as earnings quality, risk reports, and investor protection, this book is ideal for regulatory authorities, accountants, impression managers, auditors, academics, students, and researchers seeking coverage on the theoretical, empirical, and experimental studies that relate to the different themes within earnings management.

Download or read book Earnings Management written by Joshua Ronen and published by Springer Science & Business Media. This book was released on 2008-08-06 with total page 587 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is a study of earnings management, aimed at scholars and professionals in accounting, finance, economics, and law. The authors address research questions including: Why are earnings so important that firms feel compelled to manipulate them? What set of circumstances will induce earnings management? How will the interaction among management, boards of directors, investors, employees, suppliers, customers and regulators affect earnings management? How to design empirical research addressing earnings management? What are the limitations and strengths of current empirical models?