Joshua Livnat

New York University | NYU · Leonard N. Stern School of Business

The Public Company Accounting Oversight Board recently expanded audit reports to disclose Critical Audit Matters (CAMs) and the audit procedures used to address them. We study the first wave of CAM disclosers from July 2019 through May 2020, which included large accelerated filers reporting on their 2019 fiscal year results. We examine whether mark...

Analysts and practitioners have long sought information on order backlog (OB) as indicators of future sales, and in turn, of future earnings and stock returns. OB disclosures, though mandatory for annual reports, are voluntarily included in some quarterly reports and are sometimes presented only in textual narration. Given that the required annual...

The market for China A-shares provides a unique setting in which to study the differences between local and foreign analyst coverage. Until recently, foreign brokerage firms were prevented from offering trading and investment banking services in China unless they established a joint venture with a local firm. In addition, foreign analysts had more...

We view director tenure as an indicator of a firm's stability. Longer board tenure indicates that shareholders are satisfied with their director appointments, that the board has the relevant mix of capital, that it is effective at monitoring and advising management, and that the firm is unlikely to face operational and strategic problems that requi...

Trading outside the main session occurs between 4:00PM-8:00PM and 4:00AM-9:30AM and is typically dominated by institutional investors, as retail investors are discouraged to trade in the extended trading hours. This study examines whether trading in the extended hours is predictive of future returns. It shows that on regular trading days, extended...

One of the most crucial decisions for investors and plan sponsors is the selection of funds among the thousands of available alternatives. We stress that an investor first needs to specify a target alpha, i.e., the expected fund return in excess of a benchmark, and that the target alpha determines the types of funds that are most likely to fulfill...

Finance and accounting research has recently focused on extracting the tone or sentiment of a document (such as an earnings press release, cover story about a company, or management's presentations to analysts) by using positive or negative words/phrases in the document. This chapter shows that signals based on tone or sentiment (extracted from qua...

We provide evidence that an option implied volatility-based measure predicts future absolute excess returns of the underlying stock around earnings announcements and annual meetings of shareholders, even after controlling for the realized stock return volatility shortly before these information events, and the volatility of excess stock returns aro...

Findings in the prior literature on the implications of Order Backlog (OB) for stock returns are both sparse and inconclusive. For example, Rajgopal et al. (2003) show that firms with larger ratios of OB to total assets earn lower subsequent returns than firms with smaller ratios; while Lev and Thiagarajan (1993) find that increases in OB beyond sa...

We examine how insider trading affects market responses to subsequent analyst forecast revisions in a global setting. We find stronger market responses to analyst forecast revisions subsequent to the insider trading than to other revisions. This stronger response is mainly driven by analyst forecast revisions that are in the same direction as the p...

We investigate whether large stock price changes are associated with short-term reversals or momentum, conditional on the issuance of analyst price target or earnings forecast revisions immediately following these price changes. Our study provides evidence that when analyst revisions occur immediately after large price shocks, stock prices exhibit...

The Post-Earnings Announcement Drift (PEAD) anomaly refers to the tendency of stock prices to continue drifting in the same direction as earnings surprises well through the subsequent earnings announcements; ignoring the autocorrelations in extreme earnings surprises across adjacent quarters. Currently, the two major competing theories to explain P...

Recent evidence shows that option volatility skews and volatility spreads between call and put options predict equity returns. This study investigates whether such predictive ability is driven by option traders’ information advantage. We examine the predictive ability of volatility skews and volatility spreads around significant information events...

Recent evidence has shown that option volatility skews and volatility spreads between call and put options can be used to predict future equity returns. This study investigates two non-mutually exclusive reasons for this predictability – superior information discovery or superior information processing by option traders. We find that the option mea...

This study explores the relationship between operational efficiency and profitability and growth in the US life Insurance industry, and provides a framework for linking operating performance and financial success. Earnings and growth have particular importance to life insurance companies; earnings and capital determine the viability of the insurer,...

This study examines the immediate and delayed market responses to revisions in analyst forecasts of earnings, target prices, and recommendations. Consistent with prior literature, revisions in earnings forecasts are positively and significantly associated with short-term market returns around the revisions. However, we show that short-term market r...

Financial analysis often involves decomposing variables into components, emphasizing the structured hierarchy among ratios. We distinguish between unconditional persistence (a variable’s autocorrelation coefficient), and conditional persistence (the power of a variable’s persistence to explain the persistence of a variable higher in the hierarchy)....

This paper investigates earnings revisions that occur between preliminary earnings announcements and the immediate subsequent SEC filings. On average, the absolute value of the revision is 2.9% of the market value of equity where earnings were revised by more than $100,000. We find that earnings revisions are more likely to occur for firms that are...

The Securities and Exchange Commission (SEC) has mandated new disclosure requirements in Form 8-K, which became effective on August 23, 2004. The SEC expanded the list of items that have to be reported and accelerated the timeliness of these reports. This study examines the market reactions to 8-Ks filed under the new SEC regime and investigates wh...

This study explores whether the management discussion and analysis (MD&A) section of Forms 10-Q and 10-K has incremental information content beyond financial measures such as earnings surprises and accruals. It uses a classification scheme of words into positive and negative categories to measure the tone change in the MD&A section relative to prio...

This study classifies mergers and acquisitions (M&A) into three target groups: (i) those that choose M&A as an alternative to bankruptcy, (ii) highly liquid target firms, and (iii) the remainder of M&A. Each of these categories yields different market responses: stockholders of bankrupt-predicted target firms have the lowest abnormal returns while...

This study provides evidence that a significant percentage of analyst forecast revisions are issued promptly after a broad set of corporate public disclosures and that investors perceive these prompt revisions as more valuable than non-prompt revisions. These results hold for all revisions, non-earnings announcement triggered revisions, or revision...

There is growing evidence in the finance literature that investor sentiment affects stock prices. We examine whether stock price reactions to earnings surprises and accruals vary systematically with the level of investor sentiment. Using quarterly drift tests and monthly trading strategy (calendar time) tests, we find evidence that holding extreme...

We show that the vast majority of investors ignore value-relevant accruals information when it is first released, but that investors who initiate trades of at least 5,000 shares tend to transact in the proper direction. These investors trade on accruals information only when the previously-announced earnings signal is non-negative. Unconditionally,...

This study explores whether the management discussion and analysis (MD&A) section of Forms 10-Q and 10-K has incremental information content beyond financial measures such as earnings surprises and accruals. It uses a classification scheme of words into positive and negative categories to measure the tone change in the MD&A section relative to prio...

Using quarterly and rolling four-quarter data, this study explores the incremental roles of accruals and net operating cash flows in generating abnormal returns for the full population of U.S. listed companies and specific industries. Quarterly net operating cash flow (OCF) is a stronger signal of the next quarter's returns than are accruals. When...

Using quarterly and rolling four-quarter data, this study explores the incremental roles of accruals and net operating cash flows in generating abnormal returns for the full population of U.S. listed companies and specific industries. Quarterly net operating cash flow (OCF) is a stronger signal of the next quarter's returns than are accruals. When...

A new disclosure in Form 8-K is required when a company needs to warn investors that they cannot rely on previously issued financial statements. Using such disclosures in 2005, the authors find that the initial stock market reaction to the filing of the Form 8-K is negative, with an average three-day abnormal return centered on the Form 8-K filing...

This study investigates whether stock market reactions to earnings information of firms that release their earnings close to quarter-end (Early) are systematically different from their industry peers which report later during the quarter (Late). Unexpectedly, we find that immediate market reactions to early reporters are weaker than those to late o...

This paper investigates the relationship among trading volume around earnings announcements, earnings forecast errors, and subsequent returns. Prior research finds a positive relation between earnings announcement period trading volume and subsequent returns (the high-volume return premium) and between earnings forecast errors and subsequent return...

This study examines the motives for asset revaluations in a sample drawn from 35 countries that permit asset revaluations. Prior studies that examined this issue concentrated on one or two countries, the UK and Australia, and showed that revaluations are related to financing needs, the capital intensity of the firm as well as issues related to poli...

Post-earnings-announcement drift is the well-documented ability of earnings surprises to predict future stock returns. Despite nearly four decades of research, little has been written about the importance of how earnings surprise is actually measured. We compare the magnitude of the drift when historical time-series data are used to estimate earnin...

This study evaluates the impact of earnings on firm credit risk as captured by CreditDefault Swaps (CDS). We find that earnings (changes) are negatively correlated withone-year swap premia (changes) after controlling for equity returns but not with longer term premia (changes). We also find that earnings surprises are significantly correlated with...

This study investigates a large sample of financial statement restatements over the period 1986-2001, and compares restatements caused by changes in accounting principles to those caused by errors. Typically, investors perceive restatements as negative signals due to three potential reasons: (i) the restatement indicates problems with the accountin...

This study explored the accrual anomaly. The study is unique because it analyzed originally reported - unrestated - quarterly data for 1991 through the first quarter of 2004 to calculate accruals and used U.S. SEC filing dates to identify the day on which investors first obtained information about accruals. The study found that the accrual anomaly...

The study reported here consisted of estimating earnings and sales (or revenue) surprises either with historical time-series data or with analyst forecasts. Post-earnings-announcement drift was found to be stronger when the revenue surprise was in the same direction as the earnings surprise. This result proved to be robust to various controls, incl...

This study explores a system to retrieve and classify the reasons for late mandatory SEC (Securities and Exchange Commission) fllings. From the source documents, the system identifles the reasons for the late flling and classifles them into one or more of seven categories. The system can be used by potential investors who have to track a large numb...

This paper examines the relation between revenue surprises and contemporaneous and future stock returns. It also investigates whether analysts update their earnings forecasts in response to revenue surprises in a timely and unbiased fashion. Stock price reaction on the earnings announcement date is significantly related to contemporaneous as well a...

Using the Vuolteenaho (2002) variance decomposition methodology, this study assesses the relative value relevance of cash flow, accrual (earnings) and expected return news on SEC and preliminary earnings filing dates, as measured by their contribution to the volatility of unexpected returns. Cash flow news is found to be more value relevant than ac...

Post-earnings announcement drift is the tendency for a stock's cumulative abnormal returns to drift in the direction of an earnings surprise for several weeks following an earnings announcement. We show that the drift is significantly larger when defining the earnings surprise using analysts' forecasts and actual earnings from I/B/E/S than when usi...

Using the Vuolteenaho (2002) variance decomposition methodology, this study assesses the relative value relevance of cash flow, accrual, and expected return news on SEC and preliminary earnings filing dates, as measured by their contribution to the volatility of unexpected returns. Cashflow news is found to be more valuerelevant than accrual news....

The market reacts to earnings surprises when firms report different earnings in SEC filings from earnings reported just a few weeks earlier in preliminary earnings announcements. This is a new finding. When SEC filings include material new information, investors incorporate this in pricing company shares. Market reactions are stronger in the case o...

This study investigates a large sample of financial statement restatements over theperiod 1986-2001, and compares restatements caused by changes in accounting principlesto those caused by errors. Typically, investors perceive restatements as negative signals due to three potential reasons: (i) the restatement indicates problems with the accounting...

Preliminary and incomplete The authors gratefully acknowledge Charter Oak Investment Systems Inc. for providing the preliminary and original Compustat quarterly data. The authors also gratefully acknowledge Compustat for providing the SEC filing dates data. The authors thank Bill Greene for valuable comments and suggestions.

The authors gratefully acknowledge the preliminary and original Compustat quarterly data provided by Charter Oak Investment Systems, Inc. The authors are also grateful for the contribution of Thomson Financial for providing forecast data available through the Institutional Brokers Estimate System. These data have been provided as part of a broad ac...

This study uses a unique database of quarterly earnings restatements to provide evidence on the quality of earnings that would be subsequently restated, and whether investors correctly assess the lower quality of these earnings at the time of the original disclosure. We find that variables hypothesized to proxy for earnings management incentives ar...

Consistent with prior studies, this study shows that extremely negative and extremely positive earnings surprises in the fourth quarter have lower levels of persistence than those in the first through third fiscal quarters. Furthermore, extremely negative earnings surprises in the fourth fiscal quarter have lower levels of persistence than extremel...

This study investigates investors' reactions to revenue and expense surprises around preliminary earnings announcements. Results show that investors value more highly a dollar of revenue surprise than a dollar of expense surprise. Results further show that these differential market reactions to revenue and expense surprises vary systematically for...

This study explores an additional factor that is associated with differential levels of the post-earnings-announcement drift (henceforth drift) the contemporaneous surprise in revenues. Consistent with prior evidence about greater persistence of revenues and greater noise caused by heterogeneity of expenses, this study shows that the earnings drift...

This study investigates market reactions to voluntary earnings guidance provided by managers after the enactment of Regulation FD, which requires companies to disseminate material news to all investors simultaneously. More managers now issue their guidance to the public instead of disclosure to a selective group of analysts, in conformity with Regu...

This study utilizes firm-specific time-series data to estimate the economic value of the research and development (R&D) expenditures that investors consider an asset to the firm. The study uses a modification of the Ohlson (199522. Ohlson J. A. (1995) Earnings, book values and dividends in security valuation Contemporary Accounting Research Spring...

This study investigates the association of the Spanish market prices with earnings information in two market settings; when earnings are also used to set taxable income, and when earnings are prepared according to a "true and fair" view of accounting. What makes the Spanish setting unique is the change in accounting emphasis which occurred in Spani...

This study examines the selective disclosure of labor-related costs by U.S. firms and estimates the proportion of these costs that the market values as an investment in human capital. Labor-related costs are separately identified in the financial reports of only a small fraction of all U.S. Compustat firms. Larger firms, firms in industries that ar...

This study examines market reactions to the preliminary earnings announcements of companies, when the announcements provide confirming or conflicting signals about sales and profit growth. Consistent with intuition, the authors show that when the signals are positive and confirming, i.e., when both sales and profits increase substantially, the mark...

We examined whether traffic data on sites owned by publicly listed Internet companies provide information about the future of those companies that is useful in portfolio management. The study shows that when Internet companies are classified into portfolios according to above-median and below-median traffic data, the more popular sites provide sign...

This paper examines an investment strategy based on free cash flows. The strategy selects securities into a "long" portfolio that outperforms the market index, returns of similar size securities, and returns of similar risk (beta and book-to-market) securities. The portfolio includes firms that are consistent free cash flow generators, that have lo...

This study examines the disclosure of labor-related costs by US firms, and estimates the proportion of these costs that are valued as an asset (human capital) by the market. Separate identification of labor-related costs in US financial reports is voluntary, and is made consistentlyonly by about 10% of all US Compustat firms. The probability of dis...

Using a new measure that indirectly captures a firm's restructuring efforts on the basis of changes in its labor and capital expenditure patterns, this study examines the link between restructuring and financial performance for an international sample of firms during the years 1989-1997. Results show that firms that curbed the growth in labor expen...

This study empirically documents that firms with large ratios of current capital expenditures to prior four-year average capital expenditures enjoy positive contemporaneous abnormal returns. It further documents that average capital expenditures across Compustat-covered U.S. corporations are significantly greater (smaller) in the fourth (first) qua...

This study estimates individual-firm style loadings for classification of individual securities into growth (glamour) and value groups. Style loadings are similar to betas, measuring the comovement of a firm's return with the return on a particular style index. The study examines this classification by comparing the extent of unrecorded economic as...

This study examines managers' adoption-timing motives related to SFAS No. 106. Results suggest that firms attempt to correct the market's perception of the magnitude of the postretirement benefit (PRB) obligation by choosing early adoption. We find that 1991 adoptors of SFAS No. 106 had lower unexpected PRB liabilities than 1992 adoptors, who in tu...

This study empirically investigates the information dynamics of the Ohlson valuation framework. Single-period lagged linear autoregressive relationships among dividends, earnings, and book values of equity are estimated for a sample of stochastically stationary firms and are found not to support the valuation framework. This study further extends t...

This study examines the variables that affect the cross-sectional distributions of earnings/price (E/P) ratios both within and across countries. A theoretical model shows that the following variables affect the variation in E/P ratios: (i) interest rates, (ii) dividend yield, (iii) growth (abnormal earnings), and (iv) estimation risk (the uncertain...

This study investigates the direct effects of corporate diversification on accounting reports, and the implications of these effects for accounting research. The study shows that firms which diversify into unrelated areas of business devote a larger proportion of their capital investments to acquisitions and are, therefore, characterized by smaller...

This study examines whether components of operating, financing, and investing cash flows are differentially associated with annual security returns, as predicted by theoretical models in finance and economics. The results of the study indicate that disaggregation of net income into cash from operations and accruals does not contribute significantly...

This study develops and tests a measure of efficient corporate diversification (ECD) that compares the variability of a firm’s revenues with the variability of a minimum-variance portfolio of businesses that maintain the same sales growth rate. According to ECD, which incorporates the exposure of a firm to business cycle fluctuations, a firm is con...

This study investigates empirically the underlying motives for selecting the mode of corporate diversification and attempts to match the form of capital investments with a corresponding theoretical rationale for diversification. The empirical results seem to support both the transaction-costs rationale for diversification and the motive that arises...