Prior research has examined how companies exploit Twitter in communicating with investors, and whether Twitter activity predicts the stock market as a whole. We test whether opinions of individuals ...tweeted just prior to a firm's earnings announcement predict its earnings and announcement returns. Using a broad sample from 2009 to 2012, we find that the aggregate opinion from individual tweets successfully predicts a firm's forthcoming quarterly earnings and announcement returns. These results hold for tweets that convey original information, as well as tweets that disseminate existing information, and are stronger for tweets providing information directly related to firm fundamentals and stock trading. Importantly, our results hold even after controlling for concurrent information or opinion from traditional media sources, and are stronger for firms in weaker information environments. Our findings highlight the importance of considering the aggregate opinion from individual tweets when assessing a stock's future prospects and value.
This paper finds that firms that meet or beat current analysts’ earnings expectations (MBE) enjoy a higher return over the quarter than firms with similar quarterly earnings forecast errors that fail ...to meet these expectations. Further, such a premium to MBE, although somewhat smaller, exists in the cases where MBE is likely to have been achieved through earnings or expectations management. The findings also indicate that the premium to MBE is a leading indicator of future performance. This premium and its predictive ability are only marginally affected by whether the MBE is genuine or the result of earnings or expectations management.
This study tests whether the observed patterns in stock returns after quarterly earnings announcements are related to the proportion of firm shares held by institutional investors, a variable used by ...prior research to proxy for investor sophistication. Our findings show that the institutional holdings variable is negatively correlated with the observed post-announcement abnormal returns. Our findings also show that traditional proxies for transaction costs (i.e., trading volume, stock price) as well as firm size have little incremental power to explain post-announcement abnormal returns when institutional holdings is an explanatory variable. If institutional ownership is a valid proxy for investor sophistication, these findings suggest that the trading activity of unsophisticated investors underlies the predictability of stock returns after earnings announcements. However, tests evaluating the validity of institutional holdings as a proxy for investor sophistication yield only mixed results. This calls for caution in interpreting our findings.
The release of the full set of financial statements in Form 10-Q provides investors with the data necessary to estimate the discretionary portion of earnings, thereby allowing them to better assess ...the integrity of reported quarterly earnings. We thus expect a negative association between unexpected discretionary accruals estimated using 10-Q disclosures and stock returns around 10-Q filing dates. Consistent with our expectations, we document a negative association between unexpected discretionary accruals and cumulative abnormal returns over a short window around the 10-Q filing date. Furthermore, this association varies systematically with investor sophistication. Finally, results from portfolio tests indicate that this association is economically as well as statistically significant. One interpretation of our findings is that accruals management has substantial valuation consequences, which are quickly impounded into stock prices.
We address two research questions in this study. First, is there a change in the prevalence of expectations management to meet or beat analysts' earnings expectations in the aftermath of the ...2001–2002 accounting scandals and the passage of the 2002 Sarbanes-Oxley Act (SOX)? Second, did the mix among the three mechanisms used for meeting or beating analysts' earnings expectations: accrual-based earnings management, real earnings management, and expectations management change in the Post-SOX period? We hypothesize and provide empirical evidence that the observed drop in the frequency of just meeting or beating analysts' earnings expectations is associated with both (1) a decline in the use of downward expectations management and upward accrual-based earnings management in the Post-SOX period relative to the preceding seven-year period and (2) an increase in upward real earnings management activities.
The primary goal of this study is to evaluate the ability of the Cross-sectional Jones Model and the Cross-sectional Modified Jones Model to detect earnings management vis-à-vis their time-series ...counterparts by examining the association between discretionary accruals and audit qualifications. These two cross-sectional models have not been formally evaluated by prior research, and their use may offer certain advantages to investors and researchers over their time-series counterparts. A sample of 173 distinct firms with qualified audit reports and a matched-pair control sample with clean audit reports are used. Only the two cross-sectional models are consistently able to detect earnings management. One limitation of this study is that its findings merely indicate the superiority of the cross-sectional models vis-à-vis their time-series counterparts in an audit qualification setting, not validate either the former or the latter.
SYNOPSIS Timely disclosure of financial statement information is a critical requirement for firms and well-functioning capital markets. Yet, every quarter or year, a non-trivial number of firms are ...late in filing their financial statements. This paper identifies and probes various capital market consequences for late filings of quarterly and annual financial statements. It examines the short- and long-window reaction to late filings, as well as how equity investors process statements accompanying late filing announcements, such as managers declaring intentions to file within/outside the SEC's allowed grace periods. This paper documents that delayed quarterly filings have distinctly different valuation implications than delayed annual filings over the short and long run, and that accounting problems play a unique role in signaling the seriousness of the delay. It also shows that investors do not accept management's delay-related assertions at face value, and that delayed filing announcements signal continued poor performance that is not fully reflected in stock prices at the time the announcements are made. Overall, this paper sheds new light on important capital market consequences of filing financial statements late.
ABSTRACT
We advance a theory asserting that CSR performance may exacerbate, not necessarily moderate, a company's negative stock price response to negative events. In testing this theory, we ...hypothesize and find that CSR performance alleviates (magnifies) the immediate negative stock price response to inadvertent (fraudulent) restatement announcements, and that these findings are robust to specifications that consider alternative CSR measures and a multitude of control variables shown by prior research to have explanatory power for the cross-sectional variation in stock returns. Overall, using restatement announcements as a channel through which CSR performance may affect company value, we show, in contrast to prior research, that depending on management conduct leading to the restatement, a company's CSR performance may destroy, not necessarily enhance, firm value. Our findings may, thus, inform researchers, market participants, and regulators.
Data Availability: The data used in this study are publicly available from sources indicated in the text.
This study investigates the determinants of the expected stock-price volatility assumption that firms use in estimating ESO values and thus option expense. We find that, consistent with the guidance ...of FAS 123, firms use both historical and implied volatility in deriving the expected volatility parameter. We also find, however, that the importance of each of the two variables in explaining disclosed volatility relates inversely to their values, which results in a reduction in expected volatility and thus option value. This can be interpreted as managers opportunistically use the discretion in estimating expected volatility afforded by FAS 123. Consistent with this, we find that managerial incentives or ability to understate option value play a key role in this behavior. Since discretion in estimating expected volatility is common to both FAS 123 and 123(R), our analysis has important implications for market participants as well as regulators. PUBLICATION ABSTRACT
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