[In a thorough review of market-based research on the information content of accounting earnings, Lev (1989) concludes that the explanatory value of earnings for stock returns, and therefore the usefulness of earnings disclosures, tends to be embarrassingly low. A number of nonmutually exclusive explanations have been advanced for these disappointing results, including: (1) poor specification of the estimating equation, such as a failure to allow for cross-sectional variation in the regression parameters; (2) inappropriate choice of the assumed proxy for expected earnings; (3) the availability of more timely sources of the value-relevant information in earnings statements (Beaver et al. 1980); and (4) poor informational properties (quality) of reported earnings because of biases induced by accounting measurement practices or creative "abuses" of the earnings measurement process. Lev (1989) speculated that the last of these explanations was the most likely cause of the poor statistical performance consistently found in returns-earnings research. In contrast, the present study shows that a considerable improvement in statistical performance can be achieved by working with a more general specification of the returns-earnings relation. Lev's article has resulted in serious questioning of the contribution of market-based research, but we believe that the present study provides grounds for a more positive assessment. We use a panel regression approach to examine the association between annual stock price returns and reported earnings figures of industrial companies in the United Kingdom. We combine several recent advances in market-based accounting research design to produce a specification of the relation between earnings and price changes that subsumes the following key features: 1. Contemporaneous earnings yield is included in addition to the deflated first difference in earnings that is normally included in models of the returns-earnings relation. 2. Regression parameters are allowed to vary both cross-sectionally and over time. 3. Parameter values are allowed to vary across components of earnings to accommodate differences in the degree of persistence; in particular, we model the explanatory power resulting from attempts by accountants to distinguish extraordinary and exceptional items from the other components of earnings. We introduce these features in a general model in a way that allows us to assess the incremental explanatory power of each individually as well as the joint effects of two or more combined. Each methodological improvement contributes significantly to our ability to explain security price changes, and we show that the best fit is achieved by incorporating all three features in a single general model. In moving from the standard model, which regresses a measure of abnormal returns on earnings changes, to the most general model, the adjusted R-squared increases from 0.10 to 0.38.]

In a thorough review of market-based research on the information content of accounting earnings, Lev (1989) concludes that the explanatory value of earnings for stock returns, and therefore the usefulness of earnings disclosures, tends to be embarrassingly low. A number of nonmutually exclusive explanations have been advanced for these disappointing results, including: (1) poor specification of the estimating equation, such as a failure to allow for cross-sectional variation in the regression parameters; (2) inappropriate choice of the assumed proxy for expected earnings; (3) the availability of more timely sources of the value-relevant information in earnings statements (Beaver et al. 1980); and (4) poor informational properties (quality) of reported earnings because of biases induced by accounting measurement practices or creative "abuses" of the earnings measurement process. Lev (1989) speculated that the last of these explanations was the most likely cause of the poor statistical performance consistently found in returns-earnings research. In contrast, the present study shows that a considerable improvement in statistical performance can be achieved by working with a more general specification of the returns-earnings relation. Lev's article has resulted in serious questioning of the contribution of market-based research, but we believe that the present study provides grounds for a more positive assessment. We use a panel regression approach to examine the association between annual stock price returns and reported earnings figures of industrial companies in the United Kingdom. We combine several recent advances in market-based accounting research design to produce a specification of the relation between earnings and price changes that subsumes the following key features: 1. Contemporaneous earnings yield is included in addition to the deflated first difference in earnings that is normally included in models of the returns-earnings relation. 2. Regression parameters are allowed to vary both cross-sectionally and over time. 3. Parameter values are allowed to vary across components of earnings to accommodate differences in the degree of persistence; in particular, we model the explanatory power resulting from attempts by accountants to distinguish extraordinary and exceptional items from the other components of earnings. We introduce these features in a general model in a way that allows us to assess the incremental explanatory power of each individually as well as the joint effects of two or more combined. Each methodological improvement contributes significantly to our ability to explain security price changes, and we show that the best fit is achieved by incorporating all three features in a single general model. In moving from the standard model, which regresses a measure of abnormal returns on earnings changes, to the most general model, the adjusted A-squared increases from 0.10 to 0.38.

Peter F. Pope, Martin Walker, International Differences in the Timeliness, Conservatism, and Classification of Earnings, Journal of Accounting Research, Vol. 37, Studies on Credible Financial Reporting (1999), pp. 53-87

Consistent with the prevailing socio-political ideology of China, the Chinese government offers financial assistance to firms, including many listed companies. Government subsidies are provided for several reasons including support for investment, support to enable firms to pursue social objectives, and support to prop up ailing firms in order to protect jobs. We examine the value relevance of government subsidies for Chinese listed companies and structure our study around three questions. First, whether the subsidies received by Chinese listed companies are value relevant consistent with their time-series properties. Second, whether the value relevance of subsidies depends on the purpose for which they are used. Third, whether the value relevance of subsidies depends on the channel through which they are granted. We motivate these research questions through interviews of accountants, managers, academics, government officials and financial analysts. Through large sample analyses, we confirm that subsidies are positively related to firm value, but less so for distressed firms and subsidies granted through non-tax channels. Our study contributes to improved understanding of Chinese-style capitalism.

We extend standard models of conditional earnings conservatism and adaptation value to the context of the corporate refocusing activities of UK listed companies. This analysis is interesting because refocusing activities are: (1) commonly anticipated by significant negative returns in the financial year(s) before the refocusing event; (2) typically associated with large material charges; and (3) likely to be part of a strategic plan with the internal decision preceding the formal public announcement. We complement Burgstahler and Dichev [1997] by showing how their nonlinear relation between share prices and earnings changes around refocusing events as adaptation options are exercised. Because refocusing events also involve large realized losses and major changes to firms’ strategic plans, we expect to see systematic changes in the timing relations between stock returns and reported earnings. To capture this, we show how the coefficients of Basu's [1997] model of conditional conservatism change around refocusing events.

ABSTRACT We examine whether earnings reconciliation from U.K. generally accepted accounting principles (GAAP) to International Financial Reporting Standards (IFRS) convey information. As a result of debt contracting, mandatory accounting changes are expected to affect the likelihood of violating existing covenants based on rolling GAAP, leading to a redistribution of wealth between shareholders and lenders. Consistent with this prediction, we find significant market reactions to IFRS reconciliation announcements. These market reactions are more pronounced among firms that face a greater likelihood and costs of covenant violation and early announcements. While the association between later announcements and weaker market reactions is consistent with contractual implications of technical changes to earnings, which investors quickly learn to predict, it is inconsistent with IFRS forcing all firms in the sample to reveal firm‐specific information through accruals. Thus, by showing that mandatory IFRS also affects debt contracting, we expand on existing IFRS research that focuses on how accounting quality and cost of capital are impacted.

ABSTRACT Using an international sample of 16 countries, this paper examines if analyst- and country-specific characteristics explain the variation in target price (TP) accuracy. We find that significant variation in average TP accuracy across countries is due to differences in accounting disclosure quality, the origin of the legal system, cultural traits, and IFRS regulation. We also find that analysts exhibit differential and persistent ability to forecast target prices accurately, which confirms that some analysts have superior TP forecasting ability. Data Availability: Data are available from public sources indicated in the text.

This study examines the relationship between government subsidies and income smoothing using a sample of US‐listed firms. We find that subsidized firms smooth their earnings more aggressively than their unsubsidized peers. This finding is consistent with the reasoning that subsidized firms bear higher political costs and have more incentives to smooth earnings to avoid public attention. In addition, smoothing by subsidized firms is more pronounced when the subsidies are granted through non‐tax‐related channels than through tax‐based channels, and the positive association between government subsidies and income smoothing is stronger for firms under higher public scrutiny and with less transparent information environments. Further analysis shows that smoothing by subsidized firms serves mainly to obfuscate earnings and that subsidized firms that smooth earnings tend to continue receiving subsidies in the future. Overall, our results help explain the role of government subsidies in shaping firms' accounting and disclosure choices.