The World Price of Earnings Opacity

Posted: 18 Feb 2003

See all articles by Utpal Bhattacharya

Utpal Bhattacharya

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management

Hazem Daouk

Cornell University - School of Applied Economics and Management

Michael Welker

Queen's University - Queen's School of Business

Multiple version iconThere are 2 versions of this paper

Abstract

We analyze financial statements from 34 countries for the period 1985-1998 to construct a panel data set measuring three dimensions of reported accounting earnings for each country - earnings aggressiveness, loss avoidance, and earnings smoothing. We hypothesize that these three dimensions are associated with uninformative or opaque earnings, and so we combine these three measures to obtain an overall earnings opacity time-series measure per country. We then explore whether our three measures of earnings opacity affect two characteristics 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 measures, our panel data tests document that, after controlling for other influences, an increase in overall earnings opacity in a country is linked to an economically significant increase in the cost of equity and an economically significant decrease in trading in the stock market of that country.

Keywords: earnings opacity, earnings aggressiveness, loss avoidance, earnings smoothing, cost of equity, trading volume

JEL Classification: G15, G30, M41, M43, M47

Suggested Citation

Bhattacharya, Utpal and Daouk, Hazem and Welker, Michael, The World Price of Earnings Opacity. The Accounting Review, July 2003. Available at SSRN: https://ssrn.com/abstract=368920

Utpal Bhattacharya

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management ( email )

Clear Water Bay
Kowloon
Hong Kong

Hazem Daouk

Cornell University - School of Applied Economics and Management ( email )

446 Warren Hall
Ithaca, NY 14853
United States
331-45-78-63-88 (Fax)

HOME PAGE: http://courses.cit.cornell.edu/hd35/

Michael Welker (Contact Author)

Queen's University - Queen's School of Business ( email )

Kingston
Ontario, Ontario K7L 3N6
Canada

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