Download or read book Impact of Earnings Smoothness on Stock Prices Stock Returns and Future Earnings Changes The Polish Experience written by Jacek Welc and published by . This book was released on 2015 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: Capital markets appreciate stability. It means that companies reporting smooth earnings patterns tend to be priced relatively high. However, the empirical issue is whether such valuation premiums for earnings smoothness are justified. We examine the relationships between past five-year earnings smoothness and relative stock prices of companies listed on the Warsaw Stock Exchange. The empirical investigation confirmed that on the Polish market the smooth historical earnings are rewarded with valuation premiums and the erratic earnings are penalized with valuation discounts. However, stocks with smooth past earnings tend to bring sub-par future stock returns while stocks with relatively erratic earnings seem to generate above-average returns. Furthermore, the scope of past earnings smoothness does not show any discernible relationships to realized investment risk measures. Finally, companies with smooth earnings tend to report “negative earnings surprises” and relatively slow earnings growth rates in the following year. All in all, our research suggests that there is not any empirically observable justification for the valuation premiums observed in the case of stocks with smooth past earnings because such smoothness translate neither into relatively low future investment risks nor relatively fast future earnings growth.

Download or read book Changes in the Market s Ability to Anticipate Future Earnings Over Time and Earnings Quality written by Amanda M.. Badger and published by . This book was released on 2018 with total page 93 pages. Available in PDF, EPUB and Kindle. Book excerpt: "Bai et al. (2016) show that since the 1960s the ability of prices to explain variation in future earnings (i.e., price informativeness) has significantly increased for S&P 500 firms, but significantly decreased for the full sample of firms. Over the same time period, the fundamental properties of earnings have substantially deteriorated. All else equal, the deterioration in earnings properties should result in accounting earnings becoming a poorer measure of economic performance and reduce the market's ability to anticipate future earnings. Understanding the impact of the deterioration in earnings properties on price informativeness is important because more informative prices lead to more efficient resource allocation. I find that, for non-S&P 500 firms, changes over time in price informativeness are positively related to changes in revenue expense matching (REM). This indicates that, despite the dramatic increase in the amount and quality of financial information available to investors over time, the deterioration in REM negatively impacted the extent to which current prices reflect future earnings information for non-S&P 500 firms. In contrast, for S&P 500 firms, I find that changes in price informativeness are not related to changes in REM, indicating that the deterioration in REM did not inhibit the market's ability to anticipate future earnings for S&P 500 firms. Thus, I provide an explanation for the differential trend in price informativeness between S&P 500 firms and the full sample of firms documented by Bai et al. (2016), namely, the differential impact of changes in REM on the market's ability to anticipate future earnings for S&P 500 firms vs. non-S&P 500 firms."--Page vi.

Download or read book Does Income Smoothing Make Stock Prices More Informative written by Paul Zarowin and published by . This book was released on 2008 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a new approach to studying the effects of earnings management, by testing whether income smoothing, a particular form of earnings management, is associated with more informative stock prices. Stock price informativeness is defined as the amount of information about future earnings and cash flows reflected in current period stock returns, and ismeasured as the coefficient on future earnings (cash flows) in a regression of current stock return against current and future earnings (cash flows and accruals). I find that firms with greater smoothing have more informative stock prices, implying that managers use income smoothing to reveal their private information about the firm s future profitability.

Download or read book Essay 1 Accrual Effect in Stock Returns written by Konan Chan and published by . This book was released on 2000 with total page 186 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Aggregate Earnings Stock Market Returns and Macroeconomic Activity written by Lakshmanan Shivakumar and published by . This book was released on 2007 with total page 16 pages. Available in PDF, EPUB and Kindle. Book excerpt: Anilowski, Feng and Skinner (Journal of Accounting and Economics, 2006, this issue) examine the relationship between aggregate earnings guidance, aggregate earnings news and market returns. They provide evidence that changes in aggregate proportions of downward or upward earnings guidance are associated with aggregate earnings news and weakly associated with market returns. However, the study is unable to establish causality or the precise nature of the relationship between aggregate earnings guidance and market returns. To better understand the relationship, this paper analyses the relation between aggregate earnings, stock market returns and the macroeconomy. I empirically document that aggregate earnings primarily contain information about future inflation. This inflation information in aggregate earnings causes aggregate earnings to be negatively correlated with stock returns. The paper concludes with suggestions for future research.

Download or read book Implications of the Cash Component of Earnings for Earnings Persistence and Stock Returns written by Panayotis Artikis and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The main objective of this paper is to examine the persistence, pricing and economic significance of the cash component of earnings in U.K. listed firms from 1981 to 2013. In so doing, we break down the cash component of earnings into changes in the cash balance and into issuances/distributions to debtholders and equity holders. We find that the cash component of earnings is more persistent than the accrual component and that this higher persistence can be attributed primarily to cash distributed to equity holders. Cash retained by the firm as changes in the cash balance also appears to be more persistent than accruals, whereas cash attributed to debtholders has approximately the same persistence level as accruals. The results from our pricing models support the naïve investor hypothesis and show both that future stock returns have the strongest positive correlation with the most persistent cash subcomponent of earnings and that investors can devise a profitable investment strategy by investing in companies that have high cash distributions to equity holders. Our results are consistent across subperiods - when controlling for changes in financial reporting standards and the economic environment - and across different size groupings.

Download or read book Essays on the Relation Between Accounting Earnings and Stock Returns written by Peng-Chia Chiu and published by . This book was released on 2013 with total page 137 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation includes three chapters, which are about empirical investigation of the return earnings relation. Chapter 1 explores the differential timing in stock price incorporation of industry and firm-specific earnings. I find that on average stock returns anticipate industry revenue and expense components earlier than the respective firm-specific components. Further analysis shows that the timing difference between industry versus firm-specific information about revenue or expense is inversely related to product market competition and accounting reporting quality. Additionally, the timing difference between industry versus firm-specific information about expense line-items varies across line-items. Overall, these results aid in our understanding of the price discovery process with respect to accounting earnings information. Chapter 2 examines a new dimension, the effect of seasonality, on the relation between expected earnings (EE) and subsequent price drift. The key finding is that the relation between EE proxied by analyst forecasts and future returns is positive in non-January months but negative in January. This reverse January relation is observed among different types of stocks, domestic and international markets, and cannot be explained away by other variables associated with January returns. Further analysis suggests that the reverse January relation is a result of a temporary price drift away from fundamental value. The results illustrate the importance of controlling for the calendar-time dimension when studying market efficiency with respect to expected earnings. Chapter 3 investigates whether seasonally-differenced quarterly gross margin, a component of earnings, predicts future stock returns incremental to previously documented pricing anomalies based on financial accounting variables. A long/short trading strategy based on the gross profit surprises yields monthly returns over 115 basis points and generates positive returns in 113 out of 136 calendar quarters spanning 1977-2010. Further analysis shows that the return spread is larger for firms in industries characterized by low levels of capital expenditures and R & D intensity. Since 2000, gross profit surprise hedge portfolios yield returns of 91 basis points per month compared to 42 basis points per month for earnings surprise-based hedge strategies. The results suggest that gross margin contains information about future core profitability that is incremental to reported earnings and that information is reflected in stock prices with a delay.

Download or read book The Effect of Retained Earnings Changes in Dividends and Changes in Earnings on Stock Market Prices written by Robert Avakian and published by . This book was released on 1954 with total page 100 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Investor Uncertainty and the Earnings return Relation written by Kenneth Reichelt and published by . This book was released on 2005 with total page 134 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Income Smoothing Information Uncertainty Stock Returns and Cost of Equity written by Linda H. Chen and published by . This book was released on 2018 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the effect of income smoothing on information uncertainty, stock returns, and cost of equity. I show that income smoothing through both total accruals and discretionary accruals tends to reduce firms' information uncertainty, as measured by stock return volatility, analyst earnings forecast dispersion, and analyst earnings forecast error. Further, I provide evidence that stocks of income smoothing firms are priced with a premium. Controlling for earnings shocks and other firm characteristics, income smoothing firms have significantly higher abnormal returns around earnings announcement. In addition, I show that income smoothing reduces firms' implied cost of equity or expected returns. The result is more robust over short horizons up to two years.

Download or read book The E P Effect and the Earnings Forecast Error Effect written by Jeehong Kim and published by . This book was released on 1987 with total page 386 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book STOCK PRICE REACTIONS TO EARNINGS ANNOUNCEMENTS A written by VICTOR L. BERNARD and published by . This book was released on 1992 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Stock Price Reaction to Quarterly Earnings Announcements with Respect of Outlook Changes and Deviation to Consensus Forecast written by Benjamin Schmitt and published by . This book was released on 2015-06-12 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: Bachelor Thesis from the year 2008 in the subject Business economics - Investment and Finance, grade: 1.1, EBS European Business School gGmbH (Finance), language: English, abstract: Many authors have already studied about stock price reactions after earnings announcements yet, which is because of the importance of earnings announcements, in particular quarterly earnings announcements, for many investors. However, all major studies concerning this topic deal with long-term scenarios, the stock's price performance is measured for a time period of at least three quarters. Due to the fact that there are many investors, especially institutional investors such as hedge funds that trade stocks much more frequently, the existing studies are not relevant for them. This paper studies stock price reactions around quarterly earnings announcements for companies listed in Deutscher Aktienindex (DAX) or Midcap DAX (MDAX) with respect to changes of the company's full-year outlook and of earnings surprise regarding analyst consensus forecast within ten days before and after the announcement date. Hence, this paper aims to analyse short-term reaction to quarterly earnings announcements, which are of relevance for all investors, whose investment strategy is, at least partially, focussing on the short-term performance. The main target group of this analysis are therefore hedge funds and investors that run short-term strategies. Due to the fact that the widespread Event Study Methodology is focused on the long-term, it is irrelevant for this analysis.

Download or read book Earnings Acceleration and Stock Returns written by Shuoyuan He and published by . This book was released on 2019 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: We document that earnings acceleration, defined as the quarter-over-quarter change in earnings growth, has significant explanatory power for future excess returns. These excess returns are robust to a wide range of previously documented anomalies as well as a battery of risk controls. The magnitude of the excess returns (1.8% in a month-long window) is comparable to those from book-to-market, post-earnings announcement drift and gross profitability anomalies. The future return predictability appears to be consistent with investors assuming a seasonal random walk model for quarterly earnings and missing predictable implications of earnings acceleration for earnings growth two and three quarters hence. Finally, the excess returns from the basic earnings acceleration trading strategy can be enhanced further by nearly 45% by focusing on specific patterns of earnings acceleration.

Download or read book The Impact of Earnings on Stock Prices written by Kenneth W. Stringer and published by . This book was released on 1980 with total page 70 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Cross sectional Variation of Measurement Error and Predictability of Earnings and Stock Returns written by Jung Hoon Kim and published by . This book was released on 2011 with total page 69 pages. Available in PDF, EPUB and Kindle. Book excerpt: In capital markets research, market expectation of future earnings plays a vital role. However, almost all proxies inevitably measure the market expectation of future earnings with error, which results in unsatisfactory empirical outcomes in prior research (e.g., small empirical values of earnings response coefficient and poor quality estimates of expected rates of return). Using analysts' consensus forecasts, this study investigates how noisy measurement of the market expectation of future earnings affects the predictability of future earnings and stock returns. Based on the errors-in-variables approach, this study first provides a framework to capture cross-sectional variation of the measurement error in analysts' consensus forecasts. With this framework in place, this study documents that analysts' consensus forecasts with more measurement error have less ability to predict future earnings and stock returns, and that incorporating information about cross-sectional variation of the measurement error can improve the predictability of future earnings and stock returns. These findings will be useful to accounting research that relies on the market expectation of future earnings and to practitioners seeking to forecast profitability and stock returns.

Download or read book Aggregate Earnings and Market Returns written by Wen He and published by . This book was released on 2016 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: Kothari, Lewellen and Warner (2006) document that in the U.S. market aggregate earnings changes are negatively related to contemporaneous market returns. This is puzzling given the well-documented evidence that firm-level earnings changes are positively related to stock returns. In this study we use a sample of 28 countries to provide international evidence on this important issue. In pooled cross-country and time-series regressions, we find that aggregate earnings changes are positively associated with contemporaneous market returns. When we run time-series regressions of market returns on aggregate earnings changes for each country, we find only four countries have negative coefficients for aggregate earnings changes and none of these negative coefficients are statistically significant. This evidence contrasts the U.S. evidence. Furthermore aggregate earnings exhibits substantial persistence, suggesting current earnings convey information about future earnings. Finally we find that the earnings-returns relation at aggregate becomes less positive in countries with more transparent accounting disclosure. This result supports the argument proposed by Sadka and Sadka (2009) that predictability of aggregate earnings leads to the negative relation between aggregate earnings and market returns in the U.S.