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| Author | : University Microfilms International (Ann Arbor, MI) |
| Publisher | : |
| Total Pages | : 97 |
| Release | : 1989 |
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| Release | : 2017 |
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The importance of earnings response coefficient (ERC) research arises mainly from the need to enhance confidence of a firm's stakeholders in accounting information announcements, especially the equity investors, enabling them to make informed stock decisions. Due to the significance of this subject, this paper provides a review of the extant ERC literature and expounds on its evolution and development of the relevant theories, offers perspectives, and highlights the models used since 1968 when the earnings-to-returns relationship first became prominent. The study also evaluates the application of the ERC perspective and highlights the main empirical findings and also elucidates on related research methodologies applied to date and incorporates the relevant explicit and implied critiques. The main research results found while conducting this review supports the relevance of accounting information announcements to stock price formations, and therefore enhancing the confidence of investors and firm's stakeholders in such announcements (Ball & Brown, 1968; Collins & Kothari, 1989; Cheng, 1994; Kothari et al., 2010; Ariff et al., 2011; Hwang & Zhang, 2012; Patatoukas, 2013; Mostafa & Dixon, 2013; Al-Baidhani et al., 2017). Researchers also calculated and evaluated relevant ERCs using different methods such as event study method and regression methods, and applying different approaches such as individual stocks approach and portfolios approach, as detailed in this review. In addition to the enhancement of the stakeholders' confidence in the accounting information, this review paper will be useful to financial accounting standards setters and contributes to a holistic understanding of the literature on earnings-to-returns relationship.
| Author | : Douglas Clifford Cerf |
| Publisher | : |
| Total Pages | : 248 |
| Release | : 1991 |
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| Release | : 2017 |
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This paper reports new findings from applying portfolio method, which shows a much bigger earnings impact on share prices (ERC) compared to the erstwhile reports of ERC using individual events, averaged over the sample. We estimate cumulative abnormal returns, CAR, across a test window for each quarterly earnings announcement event across one accounting year. The CARs are then regressed against earnings changes of individual firms and portfolios. The findings show a significant positive CAR when earnings increases; and a negative CAR if earnings declines. The ERC is very small in the test period of 2001-14, which is consistent with published results for years before 2000. The ERC size magnifies substantially due to the grouping effect used through portfolio formation. What is significant is that the use of portfolio method, by removing the idiosyncratic errors, show a price response very close to the size of earnings (i.e., ERC of 0.93) with a very high R-square of 75 percent. The last evidence supports strongly the value relevance accounting theory that has not seen much support from averaging the price responses of individual event responses.
| Author | : Krishnamoorthy Ramesh |
| Publisher | : |
| Total Pages | : 262 |
| Release | : 1991 |
| Genre | : Corporate profits |
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| Author | : Khondkar E. Karim |
| Publisher | : |
| Total Pages | : |
| Release | : 2000 |
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This study empirically investigates the marginal security price responses to unexpected earnings and examines the effect of accounting based debt covenants on the magnitude of the long-window marginal security price responses. This study has two primary research objectives. The first objective is to improve measurement of the determinants of discount factor or demand rate of return (kit). The second objective is to provide additional evidence that return on equity is a positive function of the default risk of debt. The extension and improvement proposed by this study relies heavily on the Earnings Response Coefficient (ERC) literature that describes the price-informativeness of earnings to include appropriate control variables, firm size, reported accounting earnings, level of accruals. This research used three different matching techniques for control groups of non-violating firms in order to provide more powerful tests. This study examined the actual covenant violation, as a proxy for the default risk of debt. Three research hypotheses are generated based on the theoretical propositions of recent accounting based debt covenants, accounting choice, firm size, ERC, and differential information hypothesis literature. The major results of the study are as follows. The results support the notion that ERC is negatively related with the default risk of firm as measured by the actual violation of debt covenants after controlling for the effects of firm size and level of reported net income. However, test results fail to support the notion that ERC is negatively related with the default risk of firm when the firms are matched on the level of their accruals.
| Author | : Ralf Ewert |
| Publisher | : |
| Total Pages | : 142 |
| Release | : 2012 |
| Genre | : Business & Economics |
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Earnings Management, Conservatism, and Earnings Quality reviews and illustrates earnings management, conservatism, and their effects on earnings quality in an economic modeling framework. Both earnings management and conservative accounting introduce biases to financial reports. The fundamental issue addressed is what economic effects these biases have on earnings quality or financial reporting quality. Earnings Management, Conservatism, and Earnings Quality reviews analytical models of earnings management and conservatism and shows that both can have beneficial or detrimental economic effects, so a differentiated view is appropriate. Earnings management can provide additional information via the financial reporting communication channel, but it can also be used to misrepresent the firm's position. What the authors find is that similar to earnings management, conservatism can reduce the information content of financial reports if it suppresses relevant information, but it can be a desirable feature that improves economic efficiency. The approach to study earnings management, conservatism, and earnings quality is based on the information economics literature. A variety of analytical models are reviewed that capture the effects and subtle interactions of managers' incentives and rational expectations of users. The benefit of analytical models is to make precise these, often highly complex, strategic effects. They offer a rigorous explanation for the phenomena and show that sometimes conventional wisdom does not apply. The monograph is organized around a few basic model settings, which are presented in simple versions first and then in extensions to elicit the main insights most clearly. Chapter 2 presents the basic rational expectations equilibrium model with earnings management and rational inferences by the capital market. Chapter 3 is devoted to earnings quality and earnings quality metrics used in many studies. Chapter 4 studies conservatism in accounting. Finally, the authors examine the interaction between conservatism and earnings management. Each chapter ends with a section containing a summary of the main findings and conclusions.
| Author | : William Robert Scott |
| Publisher | : Prentice Hall |
| Total Pages | : 532 |
| Release | : 2000 |
| Genre | : Business & Economics |
| ISBN | : 9780130116123 |
Appropriate for Financial Accounting Theory courses at both the senior undergraduate and professional master's levels. This newly revised text provides a theoretical approach to financial accounting in Canada, without overlooking institutional structure and standard setting. Important research papers are selected for description and commentary, while extensive references to other research papers underlie the text discussion.
| Author | : 黃惠琦 |
| Publisher | : |
| Total Pages | : 182 |
| Release | : 2010 |
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| Author | : Jennifer L. Kao |
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| Release | : 2013 |
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This paper extends the growing literature on factors affecting cross-sectional and intertemporal variation in earnings response coefficients. It tests the empirical implications of recent theoretical work by Choi and Salamon (1989) and Holthausen and Verrecchia (1988), who model the degree of price adjustment associated with earnings announcements as a function of the amount of noise or garbling in the accounting earnings signal relative to valuation-relevant cash flows or dividends. The particular earnings measurements considered relate to U.S. multinational companies and to the differences in income determination under Statement of Financial Accounting Standards (SFAS) No. 8 and SFAS No. 52. The study finds a modestly smaller relative price adjustment for a given amount of unexpected earnings for multinational firms than for nonmultinationals during the SFAS No. 8 period. This finding is consistent with multinationals producing "noisier" earnings signals during this time period. However, several indirect measures suggest that there was greater prior probability uncertainty associated with the future cash flows or dividends of the nonmultinational sample. Accordingly, this cannot be ruled out as a competing explanation for the observed differences in the market's response to earnings signals during the SFAS No. 8 period. Following the implementation of SFAS No. 52, the earnings response coefficient increased substantively for firms whose accounting for translation gains or losses was most affected by this standard. These results suggest that the earnings measurements produced under SFAS No. 52 were perceived by market participants to be of higher quality (less noisy) than those produced under SFAS No. 8. The framework and analysis in this paper hold promise for investigating the relative informativeness of earnings signals produced under alternative income determination rules.
