Showing papers on "Post-earnings-announcement drift published in 1996"

Do Stock Prices Fully Reflect Information in Accruals and Cash flows about Future Earnings

Abstract: This paper investigates whether stock prices reflect information about future earnings contained in the accrual and cash flow components of current earnings. The extent to which current earnings performance persists into the future is shown to depend on the relative magnitudes of the cash and accrual components of current earnings. However, stock prices are found to act as if investors "fixate" on earnings, failing to reflect fully information contained in the accrual and cash flow components of current earnings until that information impacts future earnings.

Going-Concern Status, Earnings Persistence, and Informativeness of Earnings*

Abstract: . Valuation theory recognizes that the relation between earnings innovations and changes in security valuation is increasing in the persistence of the earnings innovations. Analyses in this article reveal that the present value of revisions in expected future benefits is a function of the length of revision horizon, suggesting that earnings persistence is determined, in part, by an entity's going-concern status. These analyses predict an inverse relation between earnings informativeness and an entity's probability of termination. Drawing on a sample of quarterly earnings and returns data from more than 1,500 distinct firms for the period 1981–1990, a statistically significant inverse relation is documented between an entity's probability of termination and the informativeness of earnings—the latter measured as the coefficient from a regression of returns on earnings. Further empirical analyses reveal that this result is a pervasive economic phenomenon not attributable to extreme conditions or other prevailing explanations of earnings informativeness. This inference is robust to variations in research design, including measurement of earnings informativeness and of termination probability and alternative specifications of the relation between returns and earnings. Consequently, the evidence in this article is consistent with a fundamental role for an entity's going-concern status in determining the usefulness of earnings. Resume. La theorie de l'evaluation reconnait le fait que la relation entre les nouvelles informations relatives au benefice net et les changements dans l'evaluation des titres s'intensifie lorsque persistent lesdites informations. Les analyses realisees par les auteurs revelent que la valeur actualisee des rajustements dans les gains futurs esperes depend de l'horizon du rajustement, ce qui donne a penser que la persistance du benefice net est en partie fonction de la continuite de l'exploitation de l'entreprise. Selon ces analyses, le potentiel informatif du benefice net devrait etre en relation inverse avec la probabilite de fermeture de l'entite. En s'appuyant sur un echantillon de donnees trimestrielles relatives au benefice net et au rendement recueillies aupres de plus de 1500 entreprises distinctes pour la periode 1981–1990, les auteurs observent une relation inverse statistiquement significative entre la probabilite de fermeture d'une entite et le potentiel informatif du benefice—ce dernier etant mesure sous forme de coefficient, au moyen d'une regression des rendements sur les benefices. D'autres analyses empiriques revelent que cette conclusion est un phenomene economique repandu qui n'est pas attribuable a des conditions extremes ou a d'autres explications predominantes du potentiel informatif du benefice net. Cette inference resiste aux variations dans le plan de recherche, y compris la mesure du potentiel informatif du benefice net et de la probabilite de fermeture, et les autres caracteristiques possibles de la relation entre le rendement et le benefice. Les resultats obtenus confirment donc que la continuite de l'exploitation joue un role fondamental dans la determination de l'utilite du benefice net.

The Relation Between Security Returns, Firm Earnings, and Industry Earnings*

Abstract: . In this paper we examine the relation between a firm's stock return and the earnings of other firms in the same industry, controlling for the firm's own earnings. We present a model in which the sign of this relation depends on the relative uncertainty there is about the size of the total industry value versus the division of that value between firms. We document considerable cross-industry variation in the relation between a firm's return and other firms' earnings, and demonstrate empirically that the sign of the relation depends on information provided prior to the industry earnings announcement period. Resume. Les auteurs examinent la relation entre le rendement de l'action d'une societe et les benefices des entreprises appartenant au meme secteur d'activite, en veillant a controler les benefices de la societe en question. Dans le modele qu'ils proposent, le sens (positif ou negatif) de cette relation depend de l'incertitude relative qui caracterise l'importance de la valeur globale du secteur d'activite par rapport au partage de cette valeur entre les entreprises qui le constituent. Les auteurs ont recueilli quantite d'information confirmant l'existence d'une forte variation dans la relation entre le rendement des actions d'une entreprise et les benefices des autres entreprises d'un meme secteur; ils demontrent aussi empiriquement que le sens de la relation depend de l'information produite avant la periode ou les benefices du secteur sont communiques.

Capital market reactions to earnings announcements: empirical evidence on the difference in the information content of IAS-based earnings and EC-Directives-based earnings

Abstract: Listing on a foreign stock exchange and the aim to attract international investors usually forces European quoted companies to adapt information supplied in financial statements to different information needs of international investors. Because of the dominance of the American stock market, this adaptation raises especially the question whether Anglo-American-oriented accounting standards (for instance IAS — International Accounting Standards) convey a higher information content for investors than continental-Europe-oriented accounting standards (for instance EC-Directives). The study examines the information content of earnings announcements, i.e. abnormal returns resulting from un-expected earnings, for a sample of Swiss quoted companies which have changed the accounting standard used for presenting Swiss GAAP consolidated financial statements to either EC-Directives or IAS and can therefore contribute to this discussion. The results of the study suggest that IAS-based earnings announce-ments convey a s...

Post-earnings-announcement drift: Some preliminary evidence for the UK

Abstract: This paper tests for the presence of post-earnings-announcement drift on the London Stock Exchange using data for seven half-years for a constant sample of 206 quoted companies. Separate results are presented for interim and final earnings announcements and the results are disaggregated by firm size. Overall, we find evidence of significant drift for the earnings announcements of small firms but not for the announcements of large firms.

Semi-annual earnings announcements and market reaction: some recent findings for a small capital market

Abstract: This paper tries, first, to document the returns response of stocks to unexpected semi-annual earnings after the announcement of these earnings in a small capital market, i.e. the Brussels Stock Exchange (hereafter BSE), and second, to assess the explanations and empirical problems found in the literature concerning the post-earnings announcement drift. The motivation for this research is the introduction of new Belgian legislation initiating the reporting of the semi-annual results of the firms listed on the BSE (Royal Decree of 18 September 1990). We also attempt to avoid potential empirical problems of earlier Belgian studies and use some techniques more comparable with those of recent American studies. The results show that systematic post-earnings announcement drift is found neither for the market mode, nor for the size-adjusted returns model. The results also suggest that the market model is not a descriptively valid pricing model for the BSE or that its parameters are misspecified. When we distingu...

Post-Earnings Announcement Drift?

Abstract: The predictability of abnormal returns based on information contained in past earnings announcements is an anomaly that is statistically and economically significant. Neither is it illusory, nor is it an artifact of the experimental design. It may be a result of market inefficiency. Our results cannot rule out this explanation. However, we find that earnings change numbers are associated with the probability that firms leave the sample through acquisition, bankruptcy or for other reasons, or are not included in the sample in the first place. Moreover, we find that the magnitude of the post-earnings announcement effect is correlated with factors that proxy for the ex ante probability of the firm surviving to be part of the earnings surprise sample. It also appears to be related to determinants of the bid-ask spread.

Stock returns and earnings announcements in Finland

Abstract: The stock market's reaction to the earnings announcements of Finnish firms is investigated. A risk estimation approach based on accounting information is applied along with a market model. Accounting information is utilized for risk estimation purposes by using the information incorporated in the accounting variables measuring the real determinants of systematic risk. The empirical results indicate that the delay in the market's reaction to negative unexpected earnings differs from that of the positive unexpected earnings. The results of comparing different risk adjusting methods indicate that the drift in stock returns around the earnings announcements is weaker in the case of long return windows when the risk estimation method based on the pure accounting information is applied. This indicates that the previous results concerning the drift in returns may be due to incorrectly measured abnormal returns.

Information Content of Interim Earnings Components — Evidence from Finland

Abstract: This study examines the information content of the interim earnings of listed Finnish firms. The degree of association between returns and interim earnings is studied. The assumption is that, compared to transitory changes, permanent changes in earnings have a greater association with returns. Unexpected returns are regressed over unexpected permanent earnings and unexpected transitory earnings. Three return measurement periods are used to examine any potential asynchrony between prices and earnings. To reduce the errors-in-variables problem expected in single-security-level studies, observations are grouped into portfolios. When the data are divided into portfolios, the results give evidence of the association as hypothesized.

Skewness of Earnings and the Believability Hypothesis: How Does The Financial Market Discount Accounting Earnings Disclosures?

Abstract: When firms attempt to manage their earnings disclosures by presenting evidence selectively, sophisticated inference on the part of financial market participants entails a positive association between the market to book ratio of a firm and the skewness of the distribution of its announced earnings. In this paper, we put this hypothesis to the test, and confirm its main predictions. Our regressions reveal a prominent and robust role for skewness in the empirical relationships surrounding earnings disclosures, and suggest that in setting security prices the financial market's skepticism about how much private information managers have dominates the effect of perceived bankruptcy risk.

Earnings Management Around Seasoned Equity Offerings

Abstract: This paper examines earnings management around seasoned equity offerings. Consistent with managers managing earnings, I find offering firms to have temporarily high earnings around the offering. The temporary increase in earnings around the offering appears to be primarily driven by abnormally high accruals in the period. By relating my estimates of abnormal accruals to the incentives and abilities of managers to manage earnings, I show that these abnormal accruals result from earnings management. Further, this analysis shows that the ability to manage earnings is constraining mainly for managers with high incentives to manage earnings. Also, I argue that the announcement of an equity offering signals earnings management in prior quarters to the market, which would result in a negative price reaction to the announcement. Consistent with this argument, I show that the earnings management before an offering announcement partly explains the negative market reaction to the announcement.

Does Dirty Surplus Accounting Conceal the Facts

Abstract: Advocates of dirty surplus accounting practices argue that such practices produce more useful reported earnings numbers because value irrelevant flows are eliminated from reported earnings. Opponents of such practices suggest that dirty surplus accounting can result in the exclusion of value relevant flows from reported earnings. By observing the relationship between stock return and the components of U.K. clean surplus earnings over intervals ranging from one year to twenty years, this paper seeks evidence as to whether dirty surplus accounting practices can cause the systematic exclusion from reported earnings of items which, in the long run, prove to be value relevant. It is argued that, if dirty surplus accounting has the effect of excluding value relevant events from reported earnings and of delaying the recognition by the market of the value relevance of these events, then the power of clean surplus earnings to explain stock returns would be low relative to that of reported earnings in short-interval tests but would dominate that of reported earnings as the interval is extended. Over short intervals, dirty surplus flows (i.e. components of clean surplus earnings other than reported earnings) would contribute little to the explanation of stock returns after controlling for reported earnings but the contribution of dirty surplus flows to the explanation of return would increase as the interval increased. The results of this study suggest that the power of U.K. reported earnings to explain returns dominates that of clean surplus earnings over all return intervals and that dirty surplus flows have little explanatory power, after controlling for reported earnings, even over long intervals. The results do not suggest that any increase in the usefulness of U.K. yearly reported earnings numbers that might have been obtained through the use of dirty surplus accounting practices was acquired at the cost of the exclusion of items which, in the long run, proved to be value relevant.

International Differences in the Value-Relevance of Accounting Numbers: Timeliness, Permanence and Conservatism Under U.S. and U.K. GAAP

Abstract: The empirical relationships between stock prices/returns, earnings and book value are informative about characteristics of accounting quality: conservatism in measurement of earnings and book value; earnings persistence; and earnings timeliness. In this paper we analyse the comparative accounting quality characteristics of the U.S. and U.K. GAAP regimes. We examine large panel data sets over a nineteen year period, controlling for inter- and intra-GAAP regime differences in firm size and industry membership. Our main findings are (i) U.S. earnings were less permanent; (ii) earnings were more timely in the U.K.; (iii) there is weak evidence that earnings recognition is more conservative in the U.S.