Narges Hamidian, Ph.D. ,
Assistant Professor
Department Of AccountingFaculty Of Administrative Sciences And Economics
Address
University of Isfahan
Azadi square
Isfahan, Iran
Postal Code : 8174673441
Research Output
Articles
2023
Publication Date: 2023/11/22
پیشرفت های حسابداری (20089988)(2)pp. 292-319
The purpose of this research is to investigate the effect of different stages of the firm life cycle on the quality of financial reporting. To measure the quality of financial reporting, the quality of matching (simultaneous correlation between income and expenses) and the probability of misstatement financial reporting have been used. The statistical the population of this study are all companies listed in Tehran Stock Market, in which 101 companies in the period 2012 to 2022 have been selected by systematic elimination method. For data analysis and hypothesis testing, multivariate regression model based on compound data and probit regression is used. The results of the hypotheses test showed that the quality of the match in the maturity stage is higher than the introduction and growth stage, but the decline stage does not affect the quality of the match. In addition, the results showed that in the introduction stage, the probability of misstatement financial reporting is higher than in the maturity stage. Finally, the findings showed that in the growth and decline stage, the probability of incorrect financial reporting is not higher than in the maturity stage. Overall, the findings of this study increase researchers' understanding of the role of life cycle stages in creating variation in financial reporting quality.
Publication Date: 2023/08/23
پیشرفت های حسابداری (20089988)(1)pp. 227-257
Introduction
Accounting earnings is an appropriate measure for performance evaluation, stock valuation, forecasting and evaluation of expected returns, as well as predicting the company's future performance. Therefore, the announcement of earnings is one of the criteria used to evaluate the reaction of investors to the announced earnings. Like the announcement of earnings, the timing of the earnings announcement also affects the price and returns. Through the timing of the earnings announcement, companies have the possibility to influence the investors' reaction to the reported information, and the market's reaction to the earnings announcement is affected by the time of issuance of the reports. The results of the previous literature show that market reaction to the earnings announcement is influenced by the time of declaring news and reports. The results of these studies show that the announcement of delayed earnings results in negative market reaction, and investors discount this information. This issue can be caused by the reduction of information content of earnings or the possibility of earnings manipulation by managers. Considering the effect of the timing of earnings announcement on the market reaction and also the existence of various motivations for earnings manipulation, it seems necessary to investigate the effect of the timing of the earnings announcement on stock returns and the effect of earnings manipulation on this relationship. Therefore, the purpose of this study is to investigate the effect of the delay in announcing quarterly earnings on abnormal stock returns by considering the moderating role of earnings manipulation.
Hypothesis
According to the literature, the research hypotheses include:
1. The delay of quarterly earnings announcement has a negative effect on abnormal returns at the time of earnings announcement.
Earnings manipulation exacerbates the negative impact of late quarterly earnings announcements on abnormal returns at the time of earnings announcements.
Methods
In this study, to calculate the variables and test the hypotheses, required data has been collected from the annual and quarterly financial statements and its footnotes of listed companies in the Tehran Stock Exchange and the existing databases including “Rahavard Novin” and “Codal”. The sample of this study consists of 126 listed companies in Tehran Stock Exchange during 2012 to 2022. To test hypotheses OLS regression and panel data methods have been used.
Results
The result of the first hypothesis test showed that the delay of quarterly earnings announcement has a negative and significant effect on the abnormal return. Also, according to the second hypothesis, earnings manipulation based on the adjusted model of Beneish (1999) aggravates this negative effect. That is, the delayed earnings announcement in the investors' view can involve earnings manipulation and as a result, the negative reaction to the delay in quarterly earnings announcements will intensify. However, earnings manipulation based on the model of Kothari et al. (2005) did not have a significant effect on the negative market reaction to the delayed earnings announcement.
Discussion and Conclusion
According to the accounting literature, the delayed earnings announcement is accompanied by negative market reaction and investors discount this information. Chen et al. (2021) believe that this negative reaction can be caused by a reduction in the information content of delayed earnings or the possibility of earnings manipulation by managers. Therefore, in this study, the effect of the delay of quarterly earnings announcement on abnormal stock returns by considering the moderating role of earnings manipulation was investigated.The results of the first hypothesis test showed that the coefficient of delayed earnings announcement at the 95% confidence level has a negative and significant effect on the accumulated abnormal return, which shows, the longer the quarterly earnings announcement is delayed, the lower the cumulative abnormal return in the earnings announcement window; then the first hypothesis is not rejected. In other words, the capital market reacts negatively to the delayed earnings announcement. In the second hypothesis, the effect of earnings manipulation on the negative relationship between the delayed earnings announcement and cumulative abnormal return was investigated. The results of the test of this hypothesis showed that earnings manipulation based on the model of Kothari et al. (2005) has no significant effect on the negative relationship between the delayed earnings announcement and abnormal returns, and the second hypothesis is rejected based on this criterion. This result is consistent with Chen et al. (2021). However, according to the earnings manipulation criterion based on the adjusted Beneish model (1999), the coefficient of the interactive variable RLaq × EMB is negative and significant at the 95% confidence level. Considering the negativity of the coefficient of the interactive variable and also the negative effect of the delayed earnings announcement on the accumulated abnormal return (first hypothesis), it can be said that the earnings manipulation based on the adjusted model of Beneish (1999), aggravates the negative effect of the delayed earnings announcement on the abnormal return, so the second hypothesis is not rejected. This shows that the delayed earnings announcement can contain information about the possibility of earnings manipulation, and investors react negatively to this announcement of earnings.
Accounting earnings is an appropriate measure for performance evaluation, stock valuation, forecasting and evaluation of expected returns, as well as predicting the company's future performance. Therefore, the announcement of earnings is one of the criteria used to evaluate the reaction of investors to the announced earnings. Like the announcement of earnings, the timing of the earnings announcement also affects the price and returns. Through the timing of the earnings announcement, companies have the possibility to influence the investors' reaction to the reported information, and the market's reaction to the earnings announcement is affected by the time of issuance of the reports. The results of the previous literature show that market reaction to the earnings announcement is influenced by the time of declaring news and reports. The results of these studies show that the announcement of delayed earnings results in negative market reaction, and investors discount this information. This issue can be caused by the reduction of information content of earnings or the possibility of earnings manipulation by managers. Considering the effect of the timing of earnings announcement on the market reaction and also the existence of various motivations for earnings manipulation, it seems necessary to investigate the effect of the timing of the earnings announcement on stock returns and the effect of earnings manipulation on this relationship. Therefore, the purpose of this study is to investigate the effect of the delay in announcing quarterly earnings on abnormal stock returns by considering the moderating role of earnings manipulation.
Hypothesis
According to the literature, the research hypotheses include:
1. The delay of quarterly earnings announcement has a negative effect on abnormal returns at the time of earnings announcement.
Earnings manipulation exacerbates the negative impact of late quarterly earnings announcements on abnormal returns at the time of earnings announcements.
Methods
In this study, to calculate the variables and test the hypotheses, required data has been collected from the annual and quarterly financial statements and its footnotes of listed companies in the Tehran Stock Exchange and the existing databases including “Rahavard Novin” and “Codal”. The sample of this study consists of 126 listed companies in Tehran Stock Exchange during 2012 to 2022. To test hypotheses OLS regression and panel data methods have been used.
Results
The result of the first hypothesis test showed that the delay of quarterly earnings announcement has a negative and significant effect on the abnormal return. Also, according to the second hypothesis, earnings manipulation based on the adjusted model of Beneish (1999) aggravates this negative effect. That is, the delayed earnings announcement in the investors' view can involve earnings manipulation and as a result, the negative reaction to the delay in quarterly earnings announcements will intensify. However, earnings manipulation based on the model of Kothari et al. (2005) did not have a significant effect on the negative market reaction to the delayed earnings announcement.
Discussion and Conclusion
According to the accounting literature, the delayed earnings announcement is accompanied by negative market reaction and investors discount this information. Chen et al. (2021) believe that this negative reaction can be caused by a reduction in the information content of delayed earnings or the possibility of earnings manipulation by managers. Therefore, in this study, the effect of the delay of quarterly earnings announcement on abnormal stock returns by considering the moderating role of earnings manipulation was investigated.The results of the first hypothesis test showed that the coefficient of delayed earnings announcement at the 95% confidence level has a negative and significant effect on the accumulated abnormal return, which shows, the longer the quarterly earnings announcement is delayed, the lower the cumulative abnormal return in the earnings announcement window; then the first hypothesis is not rejected. In other words, the capital market reacts negatively to the delayed earnings announcement. In the second hypothesis, the effect of earnings manipulation on the negative relationship between the delayed earnings announcement and cumulative abnormal return was investigated. The results of the test of this hypothesis showed that earnings manipulation based on the model of Kothari et al. (2005) has no significant effect on the negative relationship between the delayed earnings announcement and abnormal returns, and the second hypothesis is rejected based on this criterion. This result is consistent with Chen et al. (2021). However, according to the earnings manipulation criterion based on the adjusted Beneish model (1999), the coefficient of the interactive variable RLaq × EMB is negative and significant at the 95% confidence level. Considering the negativity of the coefficient of the interactive variable and also the negative effect of the delayed earnings announcement on the accumulated abnormal return (first hypothesis), it can be said that the earnings manipulation based on the adjusted model of Beneish (1999), aggravates the negative effect of the delayed earnings announcement on the abnormal return, so the second hypothesis is not rejected. This shows that the delayed earnings announcement can contain information about the possibility of earnings manipulation, and investors react negatively to this announcement of earnings.
Publication Date: 2023/02/20
پیشرفت های حسابداری (20089988)(2)pp. 65-97
1- Introduction
Due to the separation of ownership from management and conflict of interests, asymmetry of information between managers and owners, debt contracts and managers' rewards, there is a probability of distortion and manipulation of earnings by management. In this regard, the information environment of the firms plays a central role in the investors' reaction to the financial reports. There are various sources of information to obtain information, include reports published by the firm or information published by peer firms in the same industry. The ability of managers to manipulate earnings or not, depends on the amount of information that can be obtained from other sources of information such as financial statements of other firms. The intra-industry information transfer and the earnings co-movement can affect the involvement of managers with earnings manipulation activities.
When there is earnings co-movement, capital market’s members can obtain information from the earnings of peer firms about the real and correct earnings of the firm, and as a result, they can better identify bias in financial information and reports. The knowledge of the capital market participants about the true earnings of the firm, the expected benefits of earnings manipulation are reduced. Based on this, the aim of this study is to investigate the effect of earnings co-movement on the probability of earnings manipulation and also to investigate this relationship under the conditions of product market competition.
2- Hypothesis
According to the literature, the research hypotheses include:
In firms with higher earnings co-movement, the probability of earnings manipulation will be less.
In firms with low product market competition, compared to high competition, the relationship between earnings co-movement and the probability of earnings manipulation will be stronger.
3- Methods
In this study, in order to calculate the variables and test the hypotheses, required data has been collected from the annual and quarterly financial statements and its footnotes of listed companies in the Tehran Stock Exchange and the existing databases including “Rahavard Novin” and “Codal”. The sample of this study consists of 134 listed companies in Tehran Stock Exchange during 2009 to 2020. To test hypotheses, logit regression and panel data methods have been used.
4- Results
The results of the first hypothesis test showed that earnings co-movement has a negative and significant effect on the probability of earnings manipulation. That is, in firm with higher earnings co-movement, the probability of earnings manipulation is less.
The results of testing the second hypothesis also showed that in firms with low product market competition, there is a negative relationship between earnings co-movement and the probability of earnings manipulation, but there is no significant relationship in firms with high product market competition. Therefore, in firms with low competition, compared to high competition, the relationship between earnings co-movement and the probability of earnings manipulation is stronger.
Based on the sensitivity analysis test, the relationship between earnings co-movement and probability of earnings manipulation is stronger in companies with old age, compared to young ones.
5- Discussion and Conclusion
According to the accounting literature, the intra-industry information transfer and the earnings co-movement can affect the level of involvement of managers with earnings manipulation activities. Based on this, in the current study, the impact of earnings co-movement on the probability of earnings manipulation was investigated, as well as the investigation of this relationship under the conditions of product market competition.
According to the first hypothesis, it was expected that the probability of earnings manipulation would be lower in firms with higher earnings co-movement. The results of the test of this hypothesis showed that the coefficient of earnings co-movement variable is significant and negative at the confidence level of 95%, and the first hypothesis of the research is not rejected. This means that when the firm’s earnings moves with the earnings of other companies in the industry and this co-movement is more, investors can estimate the expected profit of the firms based on the earning’s’ information of other firms in the industry. In this situation, managers will be less able to manipulate earnings, as a result, the probability of earnings manipulation will decrease.
In the second hypothesis, the relationship between earnings co-movement and the probability of earnings manipulation in high and low competitive environment was investigated. When product market competition is higher, competition acts as a disciplinary mechanism and limits the biased behavior of managers. Therefore, it was expected that in firms with low product market competition, the relationship between earnings co-movement and the probability of earnings manipulation will be stronger than in high competition. The results showed that in firms with high product market competition, earnings co-movement has no significant effect on the probability of earnings manipulation, but in firms with low product market competition, earnings co-movement has a negative and significant effect on the probability of earnings manipulation. That is, the high competition in the product market is a deterrent and a limiting factor for managers' biased behavior.
Based on accounting literature, managers' motivations and their bonus contracts are different based on the firm’ age. Hence, the relationship between earnings co-movement and the probability of earnings manipulation was also investigated by considering the age of firms.
The results showed that in older firms, earnings co-movement has a negative and significant effect on the probability of earnings manipulation, but no significant effect was observed in younger firms. This may indicate that old firms are the focus of attention of capital market activists and shareholders. Therefore, in old companies, the earnings co-movement reduces the probability of biased activities of managers and earnings manipulation.
Keywords: Earnings Co-movement, Earnings Manipulation, Intra-industry Information Transfer, Product Market Competition.
Due to the separation of ownership from management and conflict of interests, asymmetry of information between managers and owners, debt contracts and managers' rewards, there is a probability of distortion and manipulation of earnings by management. In this regard, the information environment of the firms plays a central role in the investors' reaction to the financial reports. There are various sources of information to obtain information, include reports published by the firm or information published by peer firms in the same industry. The ability of managers to manipulate earnings or not, depends on the amount of information that can be obtained from other sources of information such as financial statements of other firms. The intra-industry information transfer and the earnings co-movement can affect the involvement of managers with earnings manipulation activities.
When there is earnings co-movement, capital market’s members can obtain information from the earnings of peer firms about the real and correct earnings of the firm, and as a result, they can better identify bias in financial information and reports. The knowledge of the capital market participants about the true earnings of the firm, the expected benefits of earnings manipulation are reduced. Based on this, the aim of this study is to investigate the effect of earnings co-movement on the probability of earnings manipulation and also to investigate this relationship under the conditions of product market competition.
2- Hypothesis
According to the literature, the research hypotheses include:
In firms with higher earnings co-movement, the probability of earnings manipulation will be less.
In firms with low product market competition, compared to high competition, the relationship between earnings co-movement and the probability of earnings manipulation will be stronger.
3- Methods
In this study, in order to calculate the variables and test the hypotheses, required data has been collected from the annual and quarterly financial statements and its footnotes of listed companies in the Tehran Stock Exchange and the existing databases including “Rahavard Novin” and “Codal”. The sample of this study consists of 134 listed companies in Tehran Stock Exchange during 2009 to 2020. To test hypotheses, logit regression and panel data methods have been used.
4- Results
The results of the first hypothesis test showed that earnings co-movement has a negative and significant effect on the probability of earnings manipulation. That is, in firm with higher earnings co-movement, the probability of earnings manipulation is less.
The results of testing the second hypothesis also showed that in firms with low product market competition, there is a negative relationship between earnings co-movement and the probability of earnings manipulation, but there is no significant relationship in firms with high product market competition. Therefore, in firms with low competition, compared to high competition, the relationship between earnings co-movement and the probability of earnings manipulation is stronger.
Based on the sensitivity analysis test, the relationship between earnings co-movement and probability of earnings manipulation is stronger in companies with old age, compared to young ones.
5- Discussion and Conclusion
According to the accounting literature, the intra-industry information transfer and the earnings co-movement can affect the level of involvement of managers with earnings manipulation activities. Based on this, in the current study, the impact of earnings co-movement on the probability of earnings manipulation was investigated, as well as the investigation of this relationship under the conditions of product market competition.
According to the first hypothesis, it was expected that the probability of earnings manipulation would be lower in firms with higher earnings co-movement. The results of the test of this hypothesis showed that the coefficient of earnings co-movement variable is significant and negative at the confidence level of 95%, and the first hypothesis of the research is not rejected. This means that when the firm’s earnings moves with the earnings of other companies in the industry and this co-movement is more, investors can estimate the expected profit of the firms based on the earning’s’ information of other firms in the industry. In this situation, managers will be less able to manipulate earnings, as a result, the probability of earnings manipulation will decrease.
In the second hypothesis, the relationship between earnings co-movement and the probability of earnings manipulation in high and low competitive environment was investigated. When product market competition is higher, competition acts as a disciplinary mechanism and limits the biased behavior of managers. Therefore, it was expected that in firms with low product market competition, the relationship between earnings co-movement and the probability of earnings manipulation will be stronger than in high competition. The results showed that in firms with high product market competition, earnings co-movement has no significant effect on the probability of earnings manipulation, but in firms with low product market competition, earnings co-movement has a negative and significant effect on the probability of earnings manipulation. That is, the high competition in the product market is a deterrent and a limiting factor for managers' biased behavior.
Based on accounting literature, managers' motivations and their bonus contracts are different based on the firm’ age. Hence, the relationship between earnings co-movement and the probability of earnings manipulation was also investigated by considering the age of firms.
The results showed that in older firms, earnings co-movement has a negative and significant effect on the probability of earnings manipulation, but no significant effect was observed in younger firms. This may indicate that old firms are the focus of attention of capital market activists and shareholders. Therefore, in old companies, the earnings co-movement reduces the probability of biased activities of managers and earnings manipulation.
Keywords: Earnings Co-movement, Earnings Manipulation, Intra-industry Information Transfer, Product Market Competition.
2020
Publication Date: 2020/12/21
پیشرفت های حسابداری (20089988)(2)pp. 159-190
Journal of Accounting Advances, (2020) 12(1): 1-27
DOI: 10.22099/JAA.2021.40327.2124
Journal of Accounting Advances (JAA)
Journal homepage: www.jaa.shirazu.ac.ir/?lang=en
The effect of Earnings Co-movement on Quarterly Earnings Response Coefficient
Narges Hamidian1
1. Assistant Professor, Department of Accounting, Faculty of Administrative Sciences and Economics, University of Isfahan
ARTICLE INF
ABSTRACT
Received: 2021-04-12
Accepted: 2021-06-22
Prior literature shows that a firm’s earnings tend to move with other firms in the same industry. This concept is called co-movement. So investors will be able to form an expectation of a firm’s earnings from the industry. Given that the reported earnings do reflect the flow of information to the market, the purpose of this study is investigating the effect of earnings co-movement on quarterly earnings response coefficient. The sample of this study consists of 134 listed companies in Tehran Stock Exchange during the period 2008 to 2019. The results of the first hypothesis showed that the response coefficients to quarterly earnings announcement have a positive and significant relationship with the buy and hold returns in the three-day earnings announcement window, and earnings co-movement weakens this relationship. Also, the results of testing the second and third hypotheses showed that when there is good news, earnings co-movement weakens earnings response coefficient, but under bad news, earnings co-movement has no effect on earnings response coefficient.
* Corresponding author:
Narges Hamidian
Assistant Professor, Department of Accounting, Faculty of Administrative Sciences and Economics, University of Isfahan
Email: n.hamidian@ase.ui.ac.ir
1- Introduction
Prior literature shows that firms’ earnings tend to co-move together, so investors will be able to form an expectation of a firm’s earnings from the market (Brown and Ball, 1967). This concept is called co-movement. Given that there is a significant relationship between a firm’s earnings and the earnings of other firms in the market, and the reported earnings do reflect the flow of information to the market, the question is whether this relationship has an effect on earnings informativeness?
There are two different views about how earnings co-movement impacts earnings response coefficient (earnings informativeness). First, some studies imply the higher the degree of earnings co-movement of a firm with other firms in same industry, the less informative that firm’s earnings release will be. In other words, investors will be able to predict a firm’s earnings by using similar firms in the same industry and so there will be less uncertainty about that firm’s earnings (see, e.g. Fischer and Verrecchia, 2000; Jackson et al, 2020). Second, some other papers (such as Heinle and Verrecchia, 2016 and Jackson et al., 2017) show that the more the earnings of a firm co-move with the industry and market, the less likely it is that the firm will issue a biased earnings report. So, the earnings will be more informative to investors.
Therefore, this study attempts to investigate the effect of earnings co-movement on quarterly earnings response coefficient. Also, because of the behavioral biases of investors in reaction to good and bad news, the effect of earnings co-movement on quarterly earnings response coefficient with considering good and bad news has also been investigated.
2- Hypothesis
According to the literature, the research hypotheses include:
Earnings co-movement weakens response coefficient to quarterly earnings announcement.
Under good news, earnings co-movement weakens response coefficient to quarterly earnings announcement.
Under bad news, earnings co-movement strengthens the response coefficient to quarterly earnings announcement.
3- Methods
In this study, in order to calculate the variables and test the hypotheses, required data has been collected from the annual and quarterly financial statements and its footnotes of listed companies in the Tehran Stock Exchange and the existing databases including “Rahavard Novin” and “Codal”. The sample of this study consists of 134 listed companies in Tehran Stock Exchange during 2008 to 2019. To test this hypotheses, the period of 8 years (2012 to 2019) and panel data methods have been used.
4- Results
The results of investigating the first hypothesis showed that the response coefficients to quarterly earnings announcement have a positive and significant relationship with the buy and hold returns in the three-day earnings announcement window, and earnings co-movement weakens this relationship. Also, the results of testing the second and third hypotheses showed that when there is good news, earnings co-movement weakens earnings response coefficient, but under bad news, earnings co-movement has no effect on earnings response coefficient.
5- Discussion and Conclusion
In this paper we investigated the informativeness of a firm’s earnings in the presence of information about other firms’ earnings (i.e., earnings co-movement). Some literatures show the greater the degree of co-movement, the less relevant earnings become as investors do not need to rely on the information signal from the firm because they can predict earnings from alternative sources in the same industry. On the other hand, some studies imply the greater the degree of co-movements, the less opportunity managers have to bias the earnings signal which will lead to the earnings becoming more reliable and more informative.
The results of investigating the first hypothesis showed that the response coefficients to quarterly earnings announcement have a positive and significant relationship with the buy and hold returns and when earnings co-movement is considered, the quarterly earnings response coefficient decreases. This means that when earnings’ firms move with other firms in the same industry, investors can get information from other firms in the industry and better predict the earnings’ firm. So, earnings announcement will contain less unexpected information. As a result, earnings response coefficient decreases. This result is consistent with Jackson et al., (2020).
The results of testing the second hypothesis indicates that when there is good news, earnings co-movement weakens earnings response coefficient. This implies that investors pay more attention to the good news of the industry and react less to the earnings when good news is published by the firm. But the results of testing the third hypothesis showed under bad news, earnings co-movement has no effect on earnings response coefficient. This lack of relationship may be due to the fact that investors do not pay much attention to the bad news of the industry.
For future studies, we suggest to analyze the relationship between co-movement and other variables such as comparability of financial statements, earnings quality, earnings management, fraud, etc. The results of this research can also be done separately by industry to determine in which industries there is more co-movement.
DOI: 10.22099/JAA.2021.40327.2124
Journal of Accounting Advances (JAA)
Journal homepage: www.jaa.shirazu.ac.ir/?lang=en
The effect of Earnings Co-movement on Quarterly Earnings Response Coefficient
Narges Hamidian1
1. Assistant Professor, Department of Accounting, Faculty of Administrative Sciences and Economics, University of Isfahan
ARTICLE INF
ABSTRACT
Received: 2021-04-12
Accepted: 2021-06-22
Prior literature shows that a firm’s earnings tend to move with other firms in the same industry. This concept is called co-movement. So investors will be able to form an expectation of a firm’s earnings from the industry. Given that the reported earnings do reflect the flow of information to the market, the purpose of this study is investigating the effect of earnings co-movement on quarterly earnings response coefficient. The sample of this study consists of 134 listed companies in Tehran Stock Exchange during the period 2008 to 2019. The results of the first hypothesis showed that the response coefficients to quarterly earnings announcement have a positive and significant relationship with the buy and hold returns in the three-day earnings announcement window, and earnings co-movement weakens this relationship. Also, the results of testing the second and third hypotheses showed that when there is good news, earnings co-movement weakens earnings response coefficient, but under bad news, earnings co-movement has no effect on earnings response coefficient.
* Corresponding author:
Narges Hamidian
Assistant Professor, Department of Accounting, Faculty of Administrative Sciences and Economics, University of Isfahan
Email: n.hamidian@ase.ui.ac.ir
1- Introduction
Prior literature shows that firms’ earnings tend to co-move together, so investors will be able to form an expectation of a firm’s earnings from the market (Brown and Ball, 1967). This concept is called co-movement. Given that there is a significant relationship between a firm’s earnings and the earnings of other firms in the market, and the reported earnings do reflect the flow of information to the market, the question is whether this relationship has an effect on earnings informativeness?
There are two different views about how earnings co-movement impacts earnings response coefficient (earnings informativeness). First, some studies imply the higher the degree of earnings co-movement of a firm with other firms in same industry, the less informative that firm’s earnings release will be. In other words, investors will be able to predict a firm’s earnings by using similar firms in the same industry and so there will be less uncertainty about that firm’s earnings (see, e.g. Fischer and Verrecchia, 2000; Jackson et al, 2020). Second, some other papers (such as Heinle and Verrecchia, 2016 and Jackson et al., 2017) show that the more the earnings of a firm co-move with the industry and market, the less likely it is that the firm will issue a biased earnings report. So, the earnings will be more informative to investors.
Therefore, this study attempts to investigate the effect of earnings co-movement on quarterly earnings response coefficient. Also, because of the behavioral biases of investors in reaction to good and bad news, the effect of earnings co-movement on quarterly earnings response coefficient with considering good and bad news has also been investigated.
2- Hypothesis
According to the literature, the research hypotheses include:
Earnings co-movement weakens response coefficient to quarterly earnings announcement.
Under good news, earnings co-movement weakens response coefficient to quarterly earnings announcement.
Under bad news, earnings co-movement strengthens the response coefficient to quarterly earnings announcement.
3- Methods
In this study, in order to calculate the variables and test the hypotheses, required data has been collected from the annual and quarterly financial statements and its footnotes of listed companies in the Tehran Stock Exchange and the existing databases including “Rahavard Novin” and “Codal”. The sample of this study consists of 134 listed companies in Tehran Stock Exchange during 2008 to 2019. To test this hypotheses, the period of 8 years (2012 to 2019) and panel data methods have been used.
4- Results
The results of investigating the first hypothesis showed that the response coefficients to quarterly earnings announcement have a positive and significant relationship with the buy and hold returns in the three-day earnings announcement window, and earnings co-movement weakens this relationship. Also, the results of testing the second and third hypotheses showed that when there is good news, earnings co-movement weakens earnings response coefficient, but under bad news, earnings co-movement has no effect on earnings response coefficient.
5- Discussion and Conclusion
In this paper we investigated the informativeness of a firm’s earnings in the presence of information about other firms’ earnings (i.e., earnings co-movement). Some literatures show the greater the degree of co-movement, the less relevant earnings become as investors do not need to rely on the information signal from the firm because they can predict earnings from alternative sources in the same industry. On the other hand, some studies imply the greater the degree of co-movements, the less opportunity managers have to bias the earnings signal which will lead to the earnings becoming more reliable and more informative.
The results of investigating the first hypothesis showed that the response coefficients to quarterly earnings announcement have a positive and significant relationship with the buy and hold returns and when earnings co-movement is considered, the quarterly earnings response coefficient decreases. This means that when earnings’ firms move with other firms in the same industry, investors can get information from other firms in the industry and better predict the earnings’ firm. So, earnings announcement will contain less unexpected information. As a result, earnings response coefficient decreases. This result is consistent with Jackson et al., (2020).
The results of testing the second hypothesis indicates that when there is good news, earnings co-movement weakens earnings response coefficient. This implies that investors pay more attention to the good news of the industry and react less to the earnings when good news is published by the firm. But the results of testing the third hypothesis showed under bad news, earnings co-movement has no effect on earnings response coefficient. This lack of relationship may be due to the fact that investors do not pay much attention to the bad news of the industry.
For future studies, we suggest to analyze the relationship between co-movement and other variables such as comparability of financial statements, earnings quality, earnings management, fraud, etc. The results of this research can also be done separately by industry to determine in which industries there is more co-movement.
2018
Publication Date: 2018/08/23
پیشرفت های حسابداری (20089988)(1)pp. 64-97
Introduction
There is an ambiguity about future state of the firms and capital market in conditions of uncertainty. In such a situation, the arrival of any information signal such as earnings announcement may reduce uncertainty leading to a revision of the previous beliefs of investors. Uncertainty could be divided into two groups: market uncertainty and information uncertainty. Investors’ reaction to earnings announcement may be different in these two situations. Under high market uncertainty, firms’ earnings announcement as an information signal may have a greater impact on investors' beliefs and, as a result, leads to more investors’ reaction to firms’ earnings announcement. However, more accurate information signals have a stronger impact on investors' beliefs. In other words, there is under reaction to earnings announcement, when announced earnings contain high uncertainty. Therefore, this study attempts to investigate investors’ reaction to earnings announcement with regards to market and information uncertainty. In addition, this study examines simultaneous effect of these two types of uncertainty on the investors 'reaction to earnings announcement.
Hypotheses
According to the literature, the research hypotheses include:
H1: Under high market uncertainty, investors’ reaction to earnings announcement is higher than low market uncertainty.
H2: Under high information uncertainty, investors’ reaction to earnings announcement is less than low information uncertainty.
H3: Investors’ reaction to earnings announcement under market uncertainty decreases with an increase in the level of information uncertainty.
Methods
In this study, in order to calculate the variables and test the hypotheses, required data was collected from the audited financial statements and its footnotes of listed companies in the Tehran Stock Exchange and the existing databases including “Rahavard Novin” and “Codal”. The sample of this study consists of 162 listed companies in Tehran Stock Exchange from 2005 to 2015. Market uncertainty was measured by the standard deviation of daily market returns during the one month prior to the firms’ earnings announcement. Information uncertainty was calculated by two criteria including quality information and cash flows volatility based on matched-firm design. Panel data method and Wald test were used to estimate models and test of hypotheses, respectively.
Results
Results showed the higher market uncertainty (compared to lower uncertainty), the more investors' response to firms’ earnings announcements. Results also showed, the higher information uncertainty (compared to lower uncertainty), the less investors' response to firms’ earnings announcements. Moreover simultaneous analysis of the "market and information" uncertainty on the investors' reactions to earnings announcements showed although investors' responses to earnings announcements decrease on the high information uncertainty situation, yet unexpectedly, the coefficient of unexpected earnings in the high market uncertainty is less than its coefficient in the low market uncertainty.
Discussion and Conclusion
Previous studies often focus on the market uncertainty or the information uncertainty. There are few studies that examine the simultaneous effect of these two types of uncertainty. Therefore, the aim of this study was investigating investors’ reaction to earnings announcement considering both market and information uncertainty. In the first hypothesis, we investigated investors’ reaction to earnings announcement, when market uncertainty is high. Results showed, investors show more reaction to earnings announcement under high market uncertainty. Therefore, the first hypothesis is not rejected. Results of the second hypothesis indicated when firms’ information such as accounting earnings is ambiguous and uncertain, there are less investors’ reaction to earnings announcement and the second hypothesis is also not rejected. Moreover, simultaneous analysis of both uncertainty on the investors' reaction showed although investors' responses to earnings announcements decrease by an increase in the information uncertainty, but unexpectedly, investors show less reaction, when there is a high market uncertainty. It may be due to behavioral bias or lack of investor knowledge for analyzing information. Therefore, the third hypothesis is rejected.
There is an ambiguity about future state of the firms and capital market in conditions of uncertainty. In such a situation, the arrival of any information signal such as earnings announcement may reduce uncertainty leading to a revision of the previous beliefs of investors. Uncertainty could be divided into two groups: market uncertainty and information uncertainty. Investors’ reaction to earnings announcement may be different in these two situations. Under high market uncertainty, firms’ earnings announcement as an information signal may have a greater impact on investors' beliefs and, as a result, leads to more investors’ reaction to firms’ earnings announcement. However, more accurate information signals have a stronger impact on investors' beliefs. In other words, there is under reaction to earnings announcement, when announced earnings contain high uncertainty. Therefore, this study attempts to investigate investors’ reaction to earnings announcement with regards to market and information uncertainty. In addition, this study examines simultaneous effect of these two types of uncertainty on the investors 'reaction to earnings announcement.
Hypotheses
According to the literature, the research hypotheses include:
H1: Under high market uncertainty, investors’ reaction to earnings announcement is higher than low market uncertainty.
H2: Under high information uncertainty, investors’ reaction to earnings announcement is less than low information uncertainty.
H3: Investors’ reaction to earnings announcement under market uncertainty decreases with an increase in the level of information uncertainty.
Methods
In this study, in order to calculate the variables and test the hypotheses, required data was collected from the audited financial statements and its footnotes of listed companies in the Tehran Stock Exchange and the existing databases including “Rahavard Novin” and “Codal”. The sample of this study consists of 162 listed companies in Tehran Stock Exchange from 2005 to 2015. Market uncertainty was measured by the standard deviation of daily market returns during the one month prior to the firms’ earnings announcement. Information uncertainty was calculated by two criteria including quality information and cash flows volatility based on matched-firm design. Panel data method and Wald test were used to estimate models and test of hypotheses, respectively.
Results
Results showed the higher market uncertainty (compared to lower uncertainty), the more investors' response to firms’ earnings announcements. Results also showed, the higher information uncertainty (compared to lower uncertainty), the less investors' response to firms’ earnings announcements. Moreover simultaneous analysis of the "market and information" uncertainty on the investors' reactions to earnings announcements showed although investors' responses to earnings announcements decrease on the high information uncertainty situation, yet unexpectedly, the coefficient of unexpected earnings in the high market uncertainty is less than its coefficient in the low market uncertainty.
Discussion and Conclusion
Previous studies often focus on the market uncertainty or the information uncertainty. There are few studies that examine the simultaneous effect of these two types of uncertainty. Therefore, the aim of this study was investigating investors’ reaction to earnings announcement considering both market and information uncertainty. In the first hypothesis, we investigated investors’ reaction to earnings announcement, when market uncertainty is high. Results showed, investors show more reaction to earnings announcement under high market uncertainty. Therefore, the first hypothesis is not rejected. Results of the second hypothesis indicated when firms’ information such as accounting earnings is ambiguous and uncertain, there are less investors’ reaction to earnings announcement and the second hypothesis is also not rejected. Moreover, simultaneous analysis of both uncertainty on the investors' reaction showed although investors' responses to earnings announcements decrease by an increase in the information uncertainty, but unexpectedly, investors show less reaction, when there is a high market uncertainty. It may be due to behavioral bias or lack of investor knowledge for analyzing information. Therefore, the third hypothesis is rejected.