The World Price of Earnings Opacity
Indiana University Bloomington - Department of Finance
Cornell University - School of Applied Economics and Management
Queen's University - Queen's School of Business
EFA 2002 Berlin Meetings Presented Paper
We analyze the financial statements of 58,653 firm-years from 34 countries for the period 1985-1998 to construct a panel data set measuring three dimensions of earnings opacity for each country - earnings aggressiveness, loss avoidance, and earnings smoothing. We combine these three dimensions to obtain an overall earnings opacity time-series measure per country. We then explore whether earnings opacity affects two dimensions of an equity market in a country - the return the shareholders demand and how much they trade. While not all results are consistent for our three individual earnings opacity dimensions, our panel data tests document that, after controlling for other influences, an increase in overall earnings opacity in a country is linked to an increase in the cost of equity and a decrease in trading in the stock market of that country.
Note: An earlier version of this paper was titled "The World Price of Earnings Management"
Number of Pages in PDF File: 52
Keywords: Earnings Opacity; Cost of Equity; Turnover
JEL Classification: G15, G30, M41, M43working papers series
Date posted: September 5, 2001
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