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Abstract:
Based on Statement of Financial Accounting Concepts (SFAC) No. 2, this paper argues for fair value measures of property, plant, and equipment and challenges the primary arguments in support of maintaining the current status quo in the United States - strict historical costs for all property, plant, and equipment unless the asset is impaired. We first provide a summary of the valuation of property, plant, and equipment internationally noting that revaluations to fair value are an acceptable practice under international and many national accounting standards. We also provide a brief historical perspective of accounting in the United States where prior to 1940 the upward valuation of property, plant, and equipment was an acceptable accounting alternative. We then evaluate fair value versus historical cost measures for property, plant, and equipment based on the qualitative characteristics of accounting information in SFAC No. 2. We argue that fair value measures for property, plant, and equipment are superior to historical cost based on the characteristics of predictive value, feedback value, timeliness, neutrality, representational faithfulness, comparability, and consistency. Verifiability appears to be the sole qualitative characteristic favoring historical cost over fair value. Finally, we address key measurement concepts for property, plant, and equipment. The United States could learn from the practices already established in other countries and in international financial reporting standards by reconsidering fair value measures for property, plant, and equipment.

fixed assets, fair values, relevance, reliability

Abstract:
This paper discusses challenges and opportunities facing international accounting researchers and demonstrates the relevance of markets-based international accounting research to those new to the area. We review recent research in the areas of required GAAP for foreign-listed firms and adoption of international standards, accounting classifications, earnings management, the impact of foreign operations on firm valuation, capital market anomalies, and accounting reforms. Suggestions for future research are provided in each area. Examples of domestic research issues that can be addressed with international data are also provided. The opportunities for conducting international accounting research are many and growing.

capital markets, international accounting, review

Abstract:
Statement of Financial Accounting Standards No. 157 (FAS 157), Fair Value Measurements, prioritizes the source of information used in fair value measurements into three levels: (1) Level 1 (observable inputs from quoted prices in active markets), (2) Level 2 (indirectly observable inputs from quoted prices of comparable items in active markets, identical items in inactive markets, or other market-related information), and (3) Level 3 (unobservable, firm-generated inputs). Using quarterly reports of banking firms in 2008, we find that the value relevance of Level 1 and Level 2 fair values is greater than the value relevance of Level 3 fair values. In addition, we find evidence that the value relevance of fair values (especially Level 3 fair values) is greater for firms with strong corporate governance. Overall, our results support the relevance of fair value measurements under FAS 157, but weaker corporate governance mechanisms may reduce the relevance of these measures.

FAS 157, Fair Value, Fair Value Hierarchy, Value Relevance, Corporate Governance

Abstract:
Statement of Financial Accounting Standards No. 157 (FAS 157), Fair Value Measurements, prioritizes the source of information used in fair value measurements into three levels: (1) Level 1 (observable inputs from quoted prices in active markets), (2) Level 2 (indirectly observable inputs from quoted prices of comparable items in active markets, identical items in inactive markets, or other market-related information), and (3) Level 3 (unobservable, firm-generated inputs). Using quarterly reports of banking firms in 2008, we find that the value relevance of Level 1 and Level 2 fair values is greater than the value relevance of Level 3 fair values. In addition, we find evidence that the value relevance of fair values (especially Level 3 fair values) is greater for firms with strong corporate governance. Overall, our results support the relevance of fair value measurements under FAS 157, but weaker corporate governance mechanisms may reduce the relevance of these measures.

FAS 157, Value Relevance, Fair Values, Fair Value Hierarchy, Corporate Governance

Abstract:
Foreign operations are becoming increasingly important for U.S. companies. We investigate whether the market's valuation of foreign earnings is a function of the firm's geographic segment disclosures. Specifically, we examine the effects of an increase in the number of geographic segments disclosed and the inclusion of earnings measures in geographic segment disclosures following the adoption of SFAS 131. We find strong evidence that our proxies for increased disclosure are positively associated with the valuation of foreign earnings. Our results are robust to a number of sensitivity analyses. Taken together, our results suggest that the pricing of foreign earnings is associated with important aspects of the firm's information environment.

Geographic segment disclosures, valuation, foreign earnings, SFAS 131, international

Abstract:
Foreign operations are becoming increasingly important for U.S. companies. We investigate whether the market's valuation of foreign earnings is a function of the firm's geographic segment disclosures. Specifically, we examine the effects of an increase in the number of geographic segments disclosed and the inclusion of earnings measures in geographic segment disclosures following the adoption of SFAS 131. We find strong evidence that our proxies for increased disclosure are positively associated with the valuation of foreign earnings. Our results are robust to a number of sensitivity analyses. Taken together, our results suggest that the pricing of foreign earnings is associated with important aspects of the firm's information environment.

Foreign earnings, geographic disclosures, valuation, SFAS 131

Abstract:
The purpose of this study is to highlight issues of interest to researchers employing the I/B/E/S earnings and forecast data. I/B/E/S has traditionally provided per share data on a split-adjusted basis, rounded to the nearest penny. In doing so, per share amounts are comparable over time. However, because not all prior forecasts and earnings per share amounts divide precisely to a penny, adjusting for stock splits and rounding to the nearest penny can cause a loss of information. Researchers are prohibited in many cases from determining the amounts actually reported in prior years, leading to misclassified observations. We obtain actual (unadjusted) earnings and forecast data from I/B/E/S and compare results to those generated using the adjusted I/B/E/S data. We replicate prior studies and find that conclusions are affected when using the actual I/B/E/S data.

Analysts' Forecast Errors, Earnings, Earnings Changes, Earnings Announcement Returns, Dispersion, Misclassification

Abstract:
The purpose of this study is to highlight issues of interest to researchers employing the I/B/E/S earnings and forecast data. I/B/E/S has traditionally provided per share data on a split-adjusted basis, rounded to the nearest penny. In doing so, per share amounts are comparable over time. However, because not all prior forecasts and earnings per share amounts divide precisely to a penny, adjusting for stock splits and rounding to the nearest penny can cause a loss of information. Researchers are prohibited in many cases from determining the amounts actually reported in prior years, leading to misclassified observations. We obtain actual (unadjusted) earnings and forecast data from I/B/E/S and compare results to those generated using the adjusted I/B/E/S data. We replicate prior studies and find that conclusions are affected when using the actual I/B/E/S data.

Analysts' Forecast Errors, Earnings, Earnings Changes, Earnings Announcement Returns, Dispersion, Misclassification

Abstract:
This study examines the relation between excess auditor remuneration and the implied required rate of return (IRR hereafter) on equity capital in global markets. We conjecture that when auditor remuneration is excessively large, investors may perceive the auditor to be economically bonded to the client, leading to a lack of independence. This perceived lack of independence increases the information risk associated with the credibility of financial statements, thereby increasing IRR. Consistent with this notion, we find that IRR is increasing in excess auditor remuneration, but only in countries with stronger investor protection. Finding evidence of a relation only in stronger investor protection countries is consistent with the more prominent role of audited financial statements for investors' decisions in these countries. In settings where investors are less likely to rely on audited financial statements and instead rely on alternative sources of information (i.e., in countries with weaker investor protection), the impact of client/auditor bonding should have less of an effect on investors' decisions.

Auditing, auditor independence, economic bonding, cost of equity capital, international, investor protection

Abstract:
This study examines the relation between excess auditor remuneration and the implied required rate of return (IRR hereafter) on equity capital in global markets. We conjecture that when auditor remuneration is excessively large, investors may perceive the auditor to be economically bonded to the client, leading to a lack of independence. This perceived lack of independence increases the information risk associated with the credibility of financial statements, thereby increasing IRR. Consistent with this notion, we find that IRR is increasing in excess auditor remuneration, but only in countries with stronger investor protection. Finding evidence of a relation only in stronger investor protection countries is consistent with the more prominent role of audited financial statements for investors' decisions in these countries. In settings where investors are less likely to rely on audited financial statements and instead rely on alternative sources of information (i.e., in countries with weaker investor protection), the impact of client/auditor bonding should have less of an effect on investors' decisions.

Auditing, auditor independence, economic bonding, cost of equity capital, international, investor protection

Abstract:
This paper investigates Japanese managers' use of income from the sale of fixed assets and marketable securities to manage earnings. The earnings management target examined in the paper is Japanese managers' forecasts of current year earnings. We find a negative relation between income from asset sales and management forecast error. When current reported operating income is below (above) management's forecast of operating income, firms increase (decrease) earnings through the sale of fixed assets and marketable securities. The results hold after controlling for expected future performance, debt to equity ratio, size, growth, and last year's income from asset sales.

Asset sales, Earnings management, Management forecasts, Historical cost

Abstract:
This paper investigates Japanese managers' use of income from the sale of fixed assets and marketable securities to manage earnings. The earnings management target examined in the paper is Japanese managers forecasts of current year and year-ahead earnings. Firms with current performance below (above) previous management forecasts are expected to manage earnings upward (downward) by reporting higher (lower) income from asset sales. In relation to future performance, firms with management forecasts of future periods below (above) current performance are more likely to save (recognize) unrealized holding income on historical cost assets. The results support these expectations. Japanese managers consider both current and future income effects in the recognition of income from asset sales.

Asset sales; Earnings management; Management forecasts; Historical cost

Abstract:
This study tests the agency cost hypothesis in the context of geographic earnings disclosures. The agency cost hypothesis predicts that managers, when not monitored by shareholders, will make self-maximizing decisions which may not necessarily be in the best interest of shareholders. These decisions include aggressively growing the firm, which reduces profitability and destroys firm value. Geographic earnings disclosures provide an interesting context to examine this issue. Beginning with Statement of Financial Accounting Standards No. 131 (SFAS 131), most U.S. multinational firms are no longer required to disclose earnings by geographic area (e.g., net income in Mexico or net income in East Asia). Such non-disclosure potentially reduces the ability of shareholders to monitor managers' decisions related to foreign operations. Using a sample of U.S. multinationals with substantial foreign operations, we find that non-disclosing firms, relative to firms that continue to disclose geographic earnings, experience greater expansion of foreign sales, produce lower foreign profit margins, and have lower firm value in the post-SFAS 131 period. Our conclusions are strengthened by the fact that these differences do not exist in the pre-SFAS 131 period and do not relate to domestic operations. We find differences in the predicted direction only for foreign operations and only after adoption of SFAS 131. Our results are robust to the inclusion of an extensive set of control variables related to alternative corporate governance mechanisms, operating performance, and the firm's information environment. Overall, the results are consistent with the agency cost hypothesis and the important role of financial disclosures in monitoring managers.

Empire building, disclosure, agency cost hypothesis, SFAS 131

Abstract:
This study tests the agency cost hypothesis in the context of geographic earnings disclosures. The agency cost hypothesis predicts that managers, when not monitored by shareholders, will make self-maximizing decisions which may not necessarily be in the best interest of shareholders. These decisions include aggressively growing the firm, which reduces profitability and destroys firm value. Geographic earnings disclosures provide an interesting context to examine this issue. Beginning with Statement of Financial Accounting Standards No. 131 (SFAS 131), most U.S. multinational firms are no longer required to disclose earnings by geographic area (e.g., net income in Mexico or net income in East Asia). Such non-disclosure potentially reduces the ability of shareholders to monitor managers' decisions related to foreign operations. Using a sample of U.S. multinationals with substantial foreign operations, we find that non-disclosing firms, relative to firms that continue to disclose geographic earnings, experience greater expansion of foreign sales, produce lower foreign profit margins, and have lower firm value in the post-SFAS 131 period. Our conclusions are strengthened by the fact that these differences do not exist in the pre-SFAS 131 period and do not relate to domestic operations. We find differences in the predicted direction only for foreign operations and only after adoption of SFAS 131. Our results are robust to the inclusion of an extensive set of control variables related to alternative corporate governance mechanisms, operating performance, and the firm's information environment. Overall, the results are consistent with the agency cost hypothesis and the important role of financial disclosures in monitoring managers.

Empire building, disclosure, agency cost hypothesis, SFAS 131

Abstract:
Japanese firms report both parent-only and consolidated financial statements. Because of the unique business environment in Japan, there is a widely held view that parent-only data provides a better means for assessing the value of the entire firm. We find that both parent-only and subsidiary earnings are important in predicting future consolidated earnings. However, while stock prices accurately reflect the persistence of parent-only earnings, the Japanese stock market appears to underestimate the persistence of subsidiary earnings, causing a significant positive relation between changes in subsidiary earnings in year t and stock returns in year t+1. This relation between subsidiary earnings and future stock returns does not persist beyond year t+1. Taking a long (short) position in firms with large, positive (negative) changes in subsidiary earnings results in an average annual abnormal return of 7.06% with positive returns in 12 of the 13 years in the test period.

Consolidated earnings; Parent-only earnings; Market efficiency; Mishkin model; Japan

Abstract:
Japanese firms report both parent-only and consolidated financial statements. Because of the unique business environment in Japan, there is a widely held view that parent-only data provides a better means for assessing the value of the entire firm. We find that both parent-only and subsidiary earnings are important in predicting future consolidated earnings. However, while stock prices accurately reflect the persistence of parent-only earnings, the Japanese stock market appears to underestimate the persistence of subsidiary earnings, causing a significant positive relation between changes in subsidiary earnings in year t and stock returns in year t+1. This relation between subsidiary earnings and future stock returns does not persist beyond year t+1. Taking a long (short) position in firms with large, positive (negative) changes in subsidiary earnings results in an average annual abnormal return of 7.06% with positive returns in 12 of the 13 years in the test period.

Consolidated earnings, Parent-only earnings, Market efficiency, Mishkin model, Japan

Abstract:
We test the ability of analyst characteristics to explain relative forecast accuracy across legal origins (common law versus civil law). Common law countries generally have more effective corporate governance mechanisms, including stronger investor protection laws and inputs provided through higher-quality financial reporting systems. In this type of environment, investors are more willing to compete for superior investment decisions because they expect to be equitably rewarded, and investors are more likely to demand information about accounting earnings because earnings have more value relevance. The increased demand by investors for earnings information increases the economic incentives of analysts to provide more accurate earnings forecasts. We predict that analysts with superior ability and resources in common law countries will more consistently outperform their peers because appropriate market-based incentives exist. In civil law countries, where the demand for earnings information is reduced because of weaker corporate governance mechanisms and lower-quality financial reporting, we predict that analysts with superior ability will less consistently provide superior forecasts. Results are consistent with our expectations and suggest an association between legal and financial reporting environments and analysts' forecast behavior.

Analysts characteristics, relative forecast performance, investor demand, common law, civil law, quality of financial reporting systems, international accounting

Abstract:
The role that accounting information plays in facilitating the flow of capital between external providers of financing and the firm is less obvious for private firms compared with public firms. Using a large sample of private firms from 68 countries, we find that private firms that choose to have their financial statements audited by an independent external auditor (our proxy for financial reporting transparency) experience significantly lower problems with gaining access to external finance (and obtain those funds at a lower cost) than do other private firms. We further find that the effect of financial transparency in reducing financing constraints increases with ownership concentration. We thus provide unique evidence on the joint role of financial transparency and ownership in a private firm setting. Our results are robust to controlling for firm-level characteristics, industry effects, and country-level variables, as well as controlling for self-selection biases related to the choice of having the financial statements audited. Given the predominance of private firms around the world and the relatively scarce amount of research in this area, we add to the literature on the role of accounting information for an important and interesting group of firms.

Financing constraints, Financial transparency, auditing, ownership concentration, private firms, international

Abstract:
This is the first large study to examine the relation between analysts’ stock recommendations, earnings forecasts, and future excess stock returns in an international context. We first document that some of the peculiar findings established in the U.S. extend to other strong investor protection countries. Specifically, we find that analysts’ recommendations relate positively to simple heuristics but negatively to more rigorous residual income valuation estimates (scaled by price). Furthermore, residual income valuation estimates relate positively to future returns, indicating their usefulness to investors, while analysts’ recommendations and heuristics relate negatively to future stock returns. In contrast, in weak investor protection countries, these peculiar findings are less observable. In these countries, analysts appear to rely relatively more on residual income valuation estimates in setting their recommendations, and these recommendations relate positively to future returns. The overall results are consistent with analysts’ recommendations being influenced by economic incentives other than identifying mispriced stocks in countries with strong investor protection, substantiating puzzling results in the U.S.

Analysts, international, valuation, earnings forecasts, stock recommendations, investor protection

Abstract:
Existing research provides competing theories about how dispersion of investor beliefs might affect stock prices. We measure changes in dispersion of investor beliefs around earnings announcements using changes in the dispersion of individual analysts' forecasts. We find that the three-day market response to earnings announcements is negatively associated with changes in dispersion, consistent with the cost of capital hypothesis. The results hold after controlling for the current earnings surprise, forecast revisions of future earnings, and reported earnings relative to various earnings thresholds. Our study provides new insight about the information contained in earnings announcements that is incremental to the magnitude and timing of cash flows.

Dispersion of beliefs, cost of capital, equity call option, market friction, announcement returns

Abstract:
Existing research provides competing theories as to how dispersion of investor beliefs might affect stock prices. We measure changes in dispersion of investor beliefs around earnings announcements using changes in the dispersion of individual analysts' forecasts. We find that the three-day market response to earnings announcements is negatively associated with changes in dispersion, consistent with the cost of capital hypothesis. The results hold after controlling for the current earnings surprise, forecast revisions of future earnings, and reported earnings relative to various earnings thresholds. Our study provides new insight about the information contained within earnings announcements that is incremental to the magnitude and timing of cash flows.

Dispersion of beliefs, cost of capital, equity call option, market friction, announcement returns

Abstract:
Beginning with Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related Information, most U.S. multinational firms no longer disclose geographic earnings in their annual reports. Given the recent growth in foreign operations of U.S. firms and the varying operating environments around the world, information (or lack thereof) related to geographical performance can affect investors information set. Using empirical tests that closely follow the Kim and Verrecchia (1997) model, we find results consistent with their predictions. Specifically, using a sample of firms with substantial foreign operations, we find evidence of a decrease in event-period private information following adoption of SFAS 131 for firms that no longer disclose geographic earnings. These results suggest that decreased public information (i.e., non-disclosure of geographic earnings) reduces the ability of investors to utilize or generate private information in conjunction with the public announcement of quarterly earnings, which dampens trading. We also find evidence of a decrease in pre-announcement private information following adoption of SFAS 131. This is consistent with an overall improvement in public disclosures that has the effect of reducing differences in the precision of private information across investors in the period prior to the earnings announcement. However, such an effect is observed for both firms which no longer disclose geographic earnings and for firms that continue to disclose geographic earnings.

Trading volume, private information, economic theory, segment disclosure, geographic earnings

Abstract:
Using an extensive panel of cross-border M&A transactions between 1990 and 2007, we find that firms from developing countries (versus those from developed countries) bid higher on average to acquire assets in developed countries. We are interested in why these higher bids occur. We find that bids of firms from developing countries are higher in cases where the transaction displays “national pride” characteristics, where national pride is identified through a manual examination of media articles. These results, which are robust to numerous specifications and control variables, highlight a source of pride beyond personal hubris which potentially influences corporate decision makers.

Mergers & Acquisitions, bid premium, national pride, emerging markets

Abstract:
We examine whether the relation between returns and unexpected earnings at the time earnings are announced is affected by two earnings thresholds: to report a profit and to report an increase in earnings. We focus on unexpectedly meeting or missing these thresholds. Unexpectedly meeting (missing) the profit threshold occurs when analysts forecast a loss (profit) and the firm reports a profit (loss). Unexpectedly meeting (missing) the earnings increase threshold occurs when analysts forecast a decrease (increase) in earnings and the firm reports an increase (decrease). Investors should only price unexpected information during earnings announcements. Therefore, the effects of meeting and missing earnings thresholds is better identified using unexpected measures. We find that the returns/earnings relation is not affected when firms unexpectedly meet or miss the profit or increase in earnings thresholds. In other words, zero earnings and a zero change in earnings do not appear to be "special" points that elicit a differential response by investors to unexpected earnings. Overall, the results suggest that the market's reaction to analysts' forecast errors is explained better by the firm's level and change in profitability than by a threshold effect. As firms become more profitable, earnings news (e.g., analysts' forecast errors) becomes more relevant in predicting future cash flows and in setting firm value.

Abstract:
From 1994 to 1998, Bradshaw (2004) finds that analysts' stock recommendations relate negatively to residual income valuation estimates but positively to valuation heuristics based on the price-to-earnings-to-growth ratio and long-term growth. These results are surprising, especially considering that future returns relate positively to residual income valuation estimates and negatively to heuristics. Using a large sample of analysts for the 1993-2005 period, we consider whether recent regulatory reforms affect this apparent inconsistent analyst behavior. Consistent with the intent of these reforms, we find that the negative relation between analysts' stock recommendations and residual income valuations is diminishing following regulations. We also show that residual income valuations, developed using analysts' earnings forecasts, relate more positively with future returns. However, we document that stock recommendations continue to relate negatively with future returns. We conclude that recent regulations have affected analysts' outputs - forecasted earnings and stock recommendations - but investors should be aware that factors other than identifying mispriced stocks continue to influence how analysts recommend stocks.

Analysts, stock recommendations, earnings forecasts, residual income models, valuation, regulation, Reg FD

Abstract:
Research shows that analysts following companies with a higher portion of foreign operations provide more optimistic forecasts, presumably in order to maintain favorable relations with management and thereby obtain improved access to information. We examine the effect of the introduction of Regulation Fair Disclosure (Reg FD) on analyst forecast bias for internationally diversified firms. We hypothesize that analysts' incentives to issue optimistic forecasts for such firms should be reduced in the post-Reg FD era, because Reg FD prohibits firms from selectively disclosing management information to analysts. First, we demonstrate that average forecast bias decreases for our full sample of multinational firms. Second, we show that the positive relation between forecast optimism and international diversification significantly declines (and even disappears) in the post-Reg FD period. Reg FD appears to have been successful in reducing analysts' optimistic bias and in reducing the effect of forecasting complexity on forecast bias for our sample of multinational firms.

Analysts, forecast bias, Reg FD, international diversification

Abstract:
General evidence exists to indicate that managers manage earnings at three common earnings thresholds: analyst forecasts, prior period earnings, and zero earnings. We examine one market-based motivation suggested for this behavior. If managers perceive the market penalty for barely missing an earnings threshold to be disproportionately high (i.e., a torpedo effect), they may use discretion to manage earnings upward to meet the earnings threshold. This market-based incentive would explain the evidence in favor of earnings management at earnings thresholds. To test the existence of a torpedo effect, we employ a comprehensive model that measures the market’s reaction to reported earnings that barely miss earnings thresholds. This model controls for the level of unexpected earnings and several other firm characteristics known to affect the relation between returns and earnings. Overall, we conclude that there is little evidence of a torpedo effect. This conclusion holds for both low growth and high growth firms and is unaffected by the firm’s history of meeting the threshold. Our paper is important for dispelling some commonly held beliefs about the market’s response to earnings thresholds.

Earnings thresholds, market reaction, torpedo effect

Abstract:
McVay (2006) concludes that managers opportunistically shift core expenses to special items to inflate current core earnings, resulting in a positive relation between unexpected core earnings and income-decreasing special items. However, she further notes that this relation disappears when contemporaneous accruals are dropped from the core earnings expectations model. McVay (2006, 2008) calls for research to improve the core earnings expectations model and to provide additional cross-sectional tests of classification shifting. Using a core earnings expectations model that is not dependent on accrual special items, we show that classification shifting is more likely in the fourth quarter than in interim quarters. We also find more evidence of classification shifting when the ability of managers to manipulate accruals appears to be constrained and in meeting a range of earnings benchmarks. Overall, our evidence provides broad support for McVay’s (2006, 2008) conclusion that managers engage in classification shifting. Our study also sheds new understanding of the conditions under which managers are more likely to employ classification shifting.

Classification shifting, special items, earnings thresholds, accruals manipulation constraints

Abstract:
Prior research finds a positive relation between current changes in foreign earnings of US multinational firms and future stock returns. The cause of this relation is either (1) investors' mispricing of securities by underestimating the persistence of foreign earnings or (2) research design misspecifications (e.g., the researcher failing to control for cross-sectional differences in risk). The purpose of this study is to determine which of these two competing explanations is more likely. If the anomalous results are due to market mispricing, then the anomalous results should be more pronounced for firms that are followed by fewer well-informed, sophisticated investors and for firms that have foreign earnings that are more persistent than domestic earnings. If the anomaly is related to research design misspecification, then the existence of the anomaly is not expected to vary across these firm characteristics. The results are more consistent with the market mispricing hypothesis. Predicting the existence of the foreign earnings anomaly based on these firm-specific characteristics increases our understanding of the true nature of the anomaly. In addition, relating the foreign earnings anomaly to firm-specific characteristics provides relevant information to investors for firm valuation and helps to promote future academic research in the market's valuation of multinational firms' operations.

Abstract:
From 1994 to 1998, Bradshaw (2004) finds that analysts' stock recommendations relate negatively to residual income valuation estimates but positively to valuation heuristics based on the price-to-earnings-to-growth ratio and long-term growth. These results are surprising, especially considering that future returns relate positively to residual income valuation estimates and negatively to heuristics. Using a large sample of analysts for the 1993-2005 period, we consider whether recent regulatory reforms affect this apparent inconsistent analyst behavior. Consistent with the intent of these reforms, we find that the negative relation between analysts' stock recommendations and residual income valuations is diminishing following regulations. We also show that residual income valuations, developed using analysts' earnings forecasts, relate more positively with future returns. However, we document that stock recommendations continue to relate negatively with future returns. We conclude that recent regulations have affected analysts' outputs - forecasted earnings and stock recommendations - but investors should be aware that factors other than identifying mispriced stocks continue to influence how analysts recommend stocks.

Stock recommendations, residual income valuations, valuation heuristics, future returns, regulations

Abstract:
Beginning with Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related Information, most U.S. multinational firms no longer disclose geographic earnings in their annual reports. Given the recent growth in foreign operations of U.S. firms and the varying operating environments around the world, information (or lack thereof) related to geographical performance can affect investors' information set. Using empirical tests that closely follow the Kim and Verrecchia (1997) model, we find results consistent with their predictions. Specifically, using a sample of firms with substantial foreign operations, we find evidence of a decrease in event-period private information following adoption of SFAS 131 for firms that no longer disclose geographic earnings. These results suggest that decreased public information (i.e., non-disclosure of geographic earnings) reduces the ability of investors to utilize or generate private information in conjunction with the public announcement of quarterly earnings, which dampens trading. We also find evidence of a decrease in pre-announcement private information following adoption of SFAS 131. This is consistent with an overall improvement in public disclosures that has the effect of reducing differences in the precision of private information across investors in the period prior to the earnings announcement. However, such an effect is observed for both firms which no longer disclose geographic earnings and for firms that continue to disclose geographic earnings.

Trading volume, private information, economic theory, segment disclosure, geographic earnings, SFAS 131

Abstract:
The purpose of this study is to investigate whether firms' auditor choice relates to national culture. We construct a novel measure of secretiveness based on Hofstede's (1980) cultural factors. Using a very large sample of firms from 37 countries and controlling for a number of firm- and country-level factors, we find that firms in more secretive countries are less likely to hire a Big 4 auditor. We also document that the relation between secrecy dimension of national culture and auditor choice is mitigated by the firms' degree of internationalization. These results establish a link between national culture and financial reporting quality through the firm's choice of auditor.

Culture, Secrecy, Auditor Quality, International

Abstract:
We investigate the effects of the introduction of Statement of Financial Accounting Standards No. 131 (SFAS 131) on the market's valuation of foreign earnings. Thomas (1999) documents that investors discount the value of foreign earnings for US multinational companies. He conjectures but does not test the possibility that this finding is due to poor disclosure related to foreign operations. We find strong evidence that the introduction of the standard is positively associated with the pricing of foreign earnings. In addition, we use both the Mishkin (1983) test and a zero-investment hedge portfolio test and find that investors' mispricing of foreign earnings lessens (and in fact disappears) after SFAS 131. This study is one of the first attempts to show that improved disclosure reduces mispricing.

Abstract:
We investigate the effects of the introduction of Statement of Financial Accounting Standards No. 131 (SFAS 131) on the market's valuation of foreign earnings. Thomas (1999) documents that investors discount the value of foreign earnings for U.S. multinational companies. He conjectures but does not test the possibility that this finding is due to poor disclosure related to foreign operations. We find strong evidence that the introduction of the standard is positively associated with the pricing of foreign earnings. In addition, we use both the Mishkin (1983) test and a zero-investment hedge portfolio test and find that investors' mispricing of foreign earnings lessens (and in fact disappears) after SFAS 131. This study is one of the first attempts to show that improved disclosure reduces mispricing.

Segment disclosure, SFAS 131 foreign earnings, valuation, mispricing

Abstract:
Our broad research objective is to investigate whether convergence towards international standards improves the decision usefulness of information. Recent changes in Japanese consolidated reporting practices to better align with international standards provide an excellent setting to investigate this research objective. Specifically, we examine the effect of changes in Japanese consolidation policy on financial analysts' perceptions of the persistence of subsidiary earnings. Previous research provides evidence that, prior to the change in consolidation policy, consolidated financial information was not used efficiently in the Japanese capital market. Prior research finds a positive relation between subsidiary earnings and future stock returns in Japan, indicating that investors underestimate the persistence of subsidiary earnings. Consistent with prior research using stock returns, we find that financial analysts also underestimate the persistence of subsidiary earnings in Japan. We document a significant positive relation between subsidiary earnings and future forecast errors of consolidated earnings. However, following the changes in consolidation policy in Japan, we find that financial analysts no longer underestimate the persistence of subsidiary earnings. Changes in Japanese consolidation policy in conformance with international standards increase decision usefulness by improving the ability of financial analysts to predict overall firm performance. One limitation of our research design relates to the adoption of mandated accounting policy changes by all sample firms in the same calendar time. This makes it difficult to control for the impact of correlated omitted variables. While this concern can never be completely eliminated, we provide additional tests that examine sample partitions by firm size and industry. These additional tests support the primary findings that Japan's efforts to converge consolidation rules with international standards have improved analysts' consolidated earnings forecasts.

Consolidation policy, forecast error, convergence, parent, subsidiary

Abstract:
Recent research provides evidence that the operating cash flows-to-price ratio subsumes accruals in explaining future annual returns. This suggests that the accrual anomaly is part of the overall value-glamour anomaly and does not represent the mispricing of earnings. We extend the literature by using multiple measures of abnormal accruals and separate analyses of future annual returns and future earnings announcement returns. The results reveal that the operating cash flows-to-price ratio does not subsume abnormal accruals in explaining future annual returns or future announcement returns. We also find that the operating cash flows-to-price ratio does not subsume total accruals in explaining future announcement returns. These results are not consistent with accruals being a manifestation of the value-glamour anomaly. Our study contributes to the current debate on the existence and the extent of the (abnormal) accrual anomaly. Moreover, the methodology employed can help researchers in exploring mispricing phenomena.

Abnormal Accruals, Market Mispricing, Operating Cash Flows-to-Price Ratio, Value-Glamour Anomaly

Abstract:
We find that analyst forecasts of earnings per share occur in nickel intervals at a much greater frequency than do actual earnings per share. Analysts who round their earnings per share forecasts to nickel intervals exhibit characteristics of analysts that are less informed, exert less effort, and have fewer resources. Rounded forecasts are less accurate and the negative relation between rounding and forecast accuracy increases as the rounding interval goes from nickel to dime, quarter, half-dollar, and dollar intervals. An examination of announcement period returns provides evidence that market expectations more closely align with consensus forecasts including rounded forecasts and then correct toward the more accurate consensus forecasts excluding rounded forecasts. Finally, exclusion of rounded forecasts decreases forecast dispersion.

Heaping, rounding, analyst forecast accuracy, dispersion

Abstract:
This study investigates whether abnormal returns can be earned using public information about firms' domestic and foreign earnings. The results indicate that the market understates foreign earnings' persistence. As a result, it is possible to construct a zero-investment hedge portfolio that consistently earns positive returns across years. A disproportionate fraction of the positive abnormal returns to the long position is concentrated in the few days surrounding the subsequent year's quarterly earnings announcement dates. Furthermore, the abnormal returns do not appear to persist beyond the subsequent year. The results are consistent with market mispricing, and not mis-estimated risk.

Key words: Capital markets; Market efficiency; Valuation; Multinational firms; Foreign earnings; Mishkin model

Abstract:
Not all components of earnings are expected to provide similar information regarding future earnings. For example, basic financial statement analysis indicates that the persistence of ordinary income should be greater than the persistence of special, extraordinary, or discontinued operations. Because the market assigns higher multiples to earnings components that are more persistent, differentiating earnings components on the basis of relative persistence would appear to be useful. A focus on relative predictive value is consistent with research findings and user recommendations on separating earnings components that are persistent or permanent from those that are transitory or temporary. This paper examines the persistence and forecast accuracy of earnings components for retail and manufacturing companies listed in the world's two largest equity markets; the USA and Japan. We find the forecast accuracy of earnings in both the USA and Japan increases with greater disaggregation of earnings components. The results further indicate that the improvements in forecast accuracy due to earnings disaggregation are greater in the USA than in Japan. The greater emphasis and more detailed guidelines for reporting earnings components in the USA produce a better differentiation in the persistence of earnings components resulting in greater forecast improvements from earnings disaggregation.