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Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings?

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Abstract

This paper investigates whether stock prices reflect information about future earnings contained in the accrual and cash flow components of current earnings. The extent to which current earnings performance persists into the future is shown to depend on the relative magnitudes of the cash and accrual components of current earnings. However, stock prices are found to act as if investors "fixate" on earnings, failing to reflect fully information contained in the accrual and cash flow components of current earnings until that information impacts future earnings.

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... Page 90 (Dechow et al., 2010). Prior studies have reported several earnings attributes that are closely related to earnings quality (Sloan, 1996;Dechow and Dichev, 2002;Barth et al., 2008). Subramanyam (2014) argues that quality earnings are persistent earnings with attributes of predictability, stability, variability and earnings management (discretionary accruals). ...
... This earnings attribute is quite intuitive because it gives an indication of sustainable profit (Canina and Potter, 2018). Early studies of earnings persistence as a proxy for earnings quality include Kormendi and Lipe (1987) and Sloan (1996). Sloan (1996) examines the extent to which current earnings will persist in the future by correlating accrual and cash components with future earnings. ...
... Early studies of earnings persistence as a proxy for earnings quality include Kormendi and Lipe (1987) and Sloan (1996). Sloan (1996) examines the extent to which current earnings will persist in the future by correlating accrual and cash components with future earnings. The results show that the ability of current earnings to persist depends on the size of the accrual and cash components. ...
Article
This study examines the relationship between director characteristics where earnings persistence is used as a proxy for earnings quality. The characteristics of directors include director age, busyness, gender diversity of directors, and nationality. Upper echelon theory with the premise that a person's actions are not entirely rational but influenced by personal characteristics (limited rationality) has been applied to develop hypotheses. The financial data were hand-collected from annual reports of Indonesian public companies from 2015-2022. As many as 3.119 firm-year observations were used for the test of hypotheses. Results show that the percentage of female directors has a positive correlation with earnings quality and firms with foreign director exhibit lower earnings quality. However, director busyness and age have no correlation with earnings quality.
... Most studies use accruals as one measure of earnings quality. Sloan (1996) proves the market reacts with reported earnings as indicated by changes in abnormal returns. Richardson (2005) follows up on Sloan's research results that high accrual component causes a decrease in future returns due to the accrual reliability. ...
... H2: There is a relationship between corporate governance and firm value. Sloan (1996) found investors reacted on reported earnings. This reaction is indicated by changes in abnormal returns. ...
... This reaction is indicated by changes in abnormal returns. Furthermore, Sloan (1996) identified that investor's reaction was more due to the cash flow component contained in earnings than the accrual component. If the accrual component in profit is high, future returns will decrease. ...
Article
Good Corporate Governance (CG) ensures the availability of better accounting information with higher transparency and accountability. Implementation of good CG in Islamic stock issuers should have a more positive impact than non-Islamic stock issuers as the former are selected based on a strong financial fundamental. This study aims to empirically examine the impact of CG on earnings quality. It also examines the impact of earnings quality on firm’s value. Thus earnings quality is considered as a mediating variable. This study uses the Structural Equation Model (SEM)-Partial Least Square (PLS). The final sample consists of 58 firms-years listed in Jakarta Islamic Index (JII) from 2008 to 2015. The study found that CG directly affects firm value with a positive direction. CG also increases earnings quality. The better the quality of CG, the better the quality of earnings. Then earnings quality increases firm value. In summary, earnings quality partially mediates the relationship between CG and firm’s value. This study uses the Corporate Governance Performance Index (CGPI) published by IICG (the Indonesian Institute for Corporate Governance) as the indicator of corporate governance quality. Predictability, neutrality, timeliness, and earning smoothness are used as the indicators of earnings quality. Tobin’s Q and corporate social performance represent firm value.
... A disponibilização de informações úteis se caracteriza como um dos principais objetivos da contabilidade, principalmente em função do impacto das decisões em cada parte interessada (Sloan, 1996). Avaliar a associação dessas informações com o valor de mercado das organizações foi objeto de estudo de diversas pesquisas em nível nacional e internacional (Sloan, 1996;Barth, Beaver, Hand & Landsman, 1999;Lustosa & Santos, 2006;Lopes, 2001). ...
... A disponibilização de informações úteis se caracteriza como um dos principais objetivos da contabilidade, principalmente em função do impacto das decisões em cada parte interessada (Sloan, 1996). Avaliar a associação dessas informações com o valor de mercado das organizações foi objeto de estudo de diversas pesquisas em nível nacional e internacional (Sloan, 1996;Barth, Beaver, Hand & Landsman, 1999;Lustosa & Santos, 2006;Lopes, 2001). No entanto, a perspectiva de julgamento dada pela administração das informações gera oportunidades para o gerenciamento de resultados. ...
... Estudos relacionados a value relevance, a exemplo de Dechow, Sloan e Sweeney (1994) que evidenciou uma maior capacidade explicativa do lucro em relação ao fluxo de caixa e de Sloan (1996) que evidenciou os reflexos das diferentes características entre os accruals e fluxo de caixa em relação ao retorno das ações, proporcionaram aos usuários primordiais informações no que concerne aos investidores, para o seu processo de decisão. Dentre essas informações, o lucro e o fluxo de caixa se destacam como relevantes e essenciais para esse processo (Barth et al., 1999;Sloan, 1996;Bartov, Goldberg, & Kim, 2001). ...
Article
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Objetivo: Analisar a relação do gerenciamento de resultado por meio de decisões operacionais na relevância do fluxo de caixa operacional para o valor de mercado das empresas de capital aberto. Fundamento: O gerenciamento por decisões operacionais é considerado mais prejudicial para a organização e para as partes interessadas, porque, além de impactar o caixa, oculta os efeitos negativos no desempenho corrente e futuro das entidades. Método: Utilizou-se a técnica de regressão linear múltipla em painel com efeito fixo, com erros robustos ao problema de heterocedasticidade para estimar o gerenciamento operacional através dos efeitos anormais do fluxo de caixa operacional e definir o grupo de empresas com alto e baixo níveis de gerenciamento operacional. Posteriormente, utilizou-se o modelo de value relevance, a fim de verificar a relevância da variável fluxo de caixa operacional sob o efeito das decisões operacionais. Resultados: O resultado evidencia significativo impacto da informação sob o efeito do gerenciamento por decisões operacionais no valor de mercado das empresas analisadas. Contudo, seu efeito positivo sugere que o mercado não incorpora a manipulação por decisões operacionais para a relação entre o fluxo de caixa operacional como value relevance. Contribuições: O mercado constata as consequências de alguns meios de gerenciamento, mas falha em observar o efeito do gerenciamento através do fluxo de caixa atribuído à decisões inerentes às vendas. Palavras-chave: Gerenciamento de Resultado. Value Relevance. Fluxo de Caixa Operacional.
... Several studies show that risk factors explain stock returns (e.g., Fama and French, 1993, 1996. However, many studies argue that the variation in stock returns stems from behavioural biases (e.g., investor mood) rather than risk premiums (Barberis et al., 1998;Daniel et al., 2020;Daniel et al., 1998Daniel et al., , 2001Hirshleifer and Jiang, 2010). ...
... 1. Net stock issues (Loughran and Ritter, 1995;Ritter, 1991) 2. Composite equity issuance anomaly (Daniel and Titman, 2006) 3. Accruals (Sloan, 1996) 4. Net Operating Assets (Hirshleifer et al., 2004) 5. Return on assets (Fama and French, 2006) 6. Asset growth (Cooper et al., 2008) 7. Investment to Assets (Hou et al., 2015;Titman et al., 2004;Xing, 2007) 8. Momentum returns (Jegadeesh and Titman, 1993) 9. Gross profitability (Novy-Marx, 2013) 10. ...
... B.1. Accruals Dechow et al. (1995) and Sloan (1996) find that firms with low accruals outperform those with high accruals. We define accruals as follows: annual change in current assets (WC02201) − annual change in cash and cash equivalents (WC02001) − annual change in current liabilities (WC03101) + annual change in short-term borrowing (WC03051) − annual depreciation, depletion, and ...
Article
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Studies of the Ramadan effect argue that higher stock returns in Muslim countries during Ramadan relate to higher investor sentiment. However, Islamic countries rank low on the Hofstede Individualism Index, a proxy for investor overconfidence. Therefore, this study examines the impact of investor sentiment on stock market anomalies in two advanced Islamic finance jurisdictions: Malaysia and Indonesia. It hypothesizes that stock market anomalies are stronger following high sentiment if investors in Malaysia and Indonesia are overconfident. The results show that the long and short legs of the stock market anomalies earn relatively low returns following high investor sentiment, indicating overpricing during high sentiment. Moreover, the short leg earns relatively lower returns than the long leg following high sentiment because the short leg is more overpriced than the long leg when sentiment is high. Therefore, consistent with the hypothesis, the long-short returns of anomalies are stronger following high investor sentiment because of the relatively lower returns of the short leg than the long leg.
... Furthermore, earnings quality is also measured in previous studies and accounting textbooks in terms of persistence and sustainability (e.g., Ahmed, Billings & Morton, 2004;Beneish & Vargus, 2002;Chan, Chan, Jegadeesh & Lakonishok, 2006;Penman & Zhang, 2002;Richardson, 2003;Richardson, Sloan, Soliman & Tuna, 2005;Sloan, 1996). Revsine, Collins and Johnson (2002) states that earnings are of high quality when they are sustainable; and Bodie, Kane and Marcus (2002) define quality of earnings as the extent to which we might expect the reported level of earnings to be sustained. ...
... Earnings variability is sometimes considered a negative sign as investors do not know whether the company's earnings in one year can be sustained in the next. Sloan (1996) posits that past earnings variability is generally, considered undesirable because it makes investors less certain of future earnings per share and dividends. As such a history of earnings variability may be expected to penalize a firm's stock with lower-than-average priceearnings ratio. ...
Thesis
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Abstract Earnings quality has emerged as an issue of interest to analyst, investors, managers and other market participants in view of the fact that it is one of the most striking and challenging issues in studies related to Accounting and finance. While managers are much concerned about meeting analyst forecast by maintaining sustainable growth of the companies as means to protect themselves analysts are interested on how best to measure the quality of earnings. This in order to maximise the portfolio of investors who now more than ever increasingly demand for information about quality of earnings and its association with returns. This study investigated the moderating effect of audit firm size on the relationship between reported earnings quality properties and market performance of quoted industrial goods companies in Nigeria. The study adopted longitudinal research design. The population of this study comprised of all the 13 Industrial Goods Companies listed on the Nigeria Exchange Group (NSE) as at 31st December, 2020 on which filters were employed to arrive at an adjusted population of 11 firms. The entire firms of the adjusted population were studied. Panel data were extracted from the annual financial statements of the firms for the period 2011 – 2020 to examine the moderating effect of audit firm size on the relationship between reported earnings quality properties represented by accruals quality, income smoothing, earnings predictability, earnings persistence, earnings variability, timeliness of earnings, earnings conservativism, value relevance and market performance of the firms. While audit firm size was measured using Big4 audit firms, market performance was measured using Tobins Q. The study employed the use of multiple regression analysis technique to analyse the data with the aid of STATA 16. According to the random effect regression, audit firm size has significant moderating effect on the relationship between accrual quality, income smoothing, earnings persistence, timeliness of earnings, earnings conservatism, value relevance and market performance while the moderating effect of audit firm size has insignificant effect on the relationship between earnings predictability, earnings variability and market performance of quoted industrial goods companies in Nigeria. Based on the findings, the study concluded that audit firm size as a corporate governance mechanism possess the attributes to facilitate monitoring activities over the management and to ensure greater reported earnings quality. Based on the result, the study recommended among others that the Securities and Exchange Commission (SEC) should continually subject the earnings of industrial good sector to stress quality tests to insulate the investing public from possible rip off.
... Hirshleifer, Hou, and Teoh (2009) study the accrual anomaly at the aggregate level. Previous firm-level studies find that investors overestimate the implications of accruals and underestimate the implications of cash flows for future earnings assessment (i.e., Sloan, 1996). Accruals are therefore a negative predictor of abnormal stock returns. ...
... We follow Sloan (1996) and calculate accruals as follows: ...
Article
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We examine whether or not conditional conservatism is observed at the aggregate level. Using both the Basu (1997) model and the Ball and Shivakumar (2006) models, we find some evidence consistent with conditional accounting conservatism at the aggregate level. Our results show that the interactive slope coefficient measuring the difference in sensitivity for aggregate accounting earnings is approximately three times as sensitive to negative returns as it is positive returns. Our results also demonstrate that the inclusion of macroeconomic indicators and discount rate variables to the conditional conservatism models improves model specification significantly. For example, when equal-weighted return is used as a gain or loss proxy the inclusion of macroeconomic indicators and discount rate proxies into the regression model increases the adjusted R2 from 5% to 53%. Based on empirical evidence from this study we recommend that researchers who study the relation between aggregate accounting earnings and the fundamental characteristics of accounting information use both macroeconomic indicators and discount rate variables as explanatory variables in regression models.
... Bernard & Thomas 1990). Sloan (1996) provides evidence that prices over-react to the transitory accrual component of earnings. Hand (1990) finds a market reaction to a component of earnings that reflects previously announced information (with regard to a debt-equity swap). ...
... The market anomalies (i.e. information not being fully absorbed into prices) observed by Sloan (1996), Hand (1990), Bernard and Thomas (1990) and others can be explained by the cost of information extraction. The IRH does not imply that investors are irrational, but that the cost of extracting information not impounded in prices will not generate sufficient profits. ...
Article
The move to the NZ IFRS has been surrounded by complaints of too much information being provided. This is not simply a matter of the cost of providing the information, but the possibility of data overload. Data overload is an important issue as it impacts information search strategies and decision outcomes. This is relevant for assessing whether the NZ IFRS has achieved its goals of reducing the cost of financial analysis. This paper develops a model of information processing capacity and then examines the impact of the move to international financial reporting by New Zealand listed entities on the quantity of data provided in their annual reports. Our analysis shows that the annual report length increased for 92% of our sample firms. The average increase in size was 29% above the prior years’ annual report and arose through notes to the accounts and accounting policies. Even after transitional information (e.g. accounting policies and reconciliations) the increase was 15%.
... We measure the quality of earnings as a proxy of earnings predictability and smoothen. The study measures earnings predictability as the square root of error variance from the equation model as stated below according to the studies of Pagalung and Sudibdyo (2012): Sloan (1996);and Francis et al. (2004). ...
... On the other hand, the study measures the earnings smoothness of a firm as the standard deviation of net income before extraordinary items divided by the aggregate assets of the firm, to the standard deviation of the cash flows from operations scaled down by the aggregate assets of the firm as contained in Table 1. The study measures earnings quality through a long-term dimension of earnings quality of earnings predictability and smoothness according to Pagalung and Sudibdyo (2012): Sloan (1996); and Francis et al. (2004). ...
Article
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Information on earnings is an important earnings quality metric in financial reporting. Poor disclosure of such information could lead to poor information asymmetry, which often triggers negative reactions from the market and stakeholders. Therefore, this study investigates the relationship between audit committee attributes and earnings quality among listed financial services firms in Nigeria. The study conducts robust regression analysis with 11-year panel data for 41 listed firms. Our findings reveal the effect of audit committee attributes on earnings quality. In specific terms, the findings of the study reveal that audit committee independence, audit committee accounting expertise, the expertise of women on the audit committee, and the audit committee meetings improve earnings quality. The findings of the study confirm the code of corporate governance in Nigeria and agency theory postulations. The study makes some appreciable contributions to the literature by examining gender diversity beyond women's inclusion on the committee to include expertise, examining audit committee independence from the point of view of the representatives of the shareholders, and earnings quality from a long-term sustainable point of view.
... Uma extensão adicional é determinar se outros elementos ou variáveis das demonstrações financeiras, além das declarações, por exemplo, divulgações das notas de rodapé, são incrementais sobre os ganhos atuais na previsão de ganhos futuros (Fairfield & Yohn, 2001). Sloan (1996) relatou que, os investidores não são plenamente cientes dos diferentes níveis de persistência dos componentes de acréscimo e fluxo de caixa dos lucros. Lucros mais persistentes produzirão uma maior avaliação do mercado de ações, podendo aumentar as estimativas de persistência que produzirão retornos positivos (contemporâneos) no mercado de ações (Collins & Kothari, 1989e Melo, 2017. ...
... Os investidores reduzem suas expectativas de persistência de lucros na presença de AFD e são capazes de precificar eficientemente os ganhos e provisões para essas empresas, encontrando portfólio de retorno insignificante de hedge (Kotsupatriy, Ksonzhyk, Skrypnyk, Shepel, & Koval, 2020). Collins e Kothari (1989) apresentaram em seus resultados uma significância na presença dos AFD, fazendo com que os investidores reduzam suas expectativas sobre persistência de lucros e, Sloan (1996) exibiu os resultados em sua pesquisa de que, em média, os investidores precificam corretamente a persistência de lucros para todas as empresas. Hanlon (2005) afirma que existem vários fatores que suportam e mostram que os AFD podem demostrar informações sobre a qualidade de lucros e, apresentou em seu estudo que, para empresas-anos com grandes diferenças de AFD, é menos persistente nos lucros futuros do que para empresas-anos com pequenas diferenças de AFD. ...
Article
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A qualidade de lucros fornece informações que são relevantes sobre os desempenhos econômico e financeiro de um banco, para uma tomada de decisão e, os lucros podem conter uma parcela não discricionária de suas operações. Os Ativos Fiscais Diferidos podem tornar a qualidade de lucros poluídos pelo seu uso, pois, os lucros apresentados estarão inflados por esses ativos, sendo decisões resultantes de operações financeiras discricionárias. O presente artigo tem como objetivo identificar os efeitos dos Ativos Fiscais Diferidos na perspectiva de qualidade de lucros dos bancos do Sistema Financeiro Nacional. As proxies utilizadas para identificar a qualidade de lucros foram persistência de lucros (H1) e alisamento de lucros (H2). A amostra foi composta por 121 bancos, classificados como múltiplos, comerciais, de investimentos, de desenvolvimentos e caixa, durante o período de 2017 a 2021, sendo estimados por dados em painel. O impacto dos Ativos Fiscais Diferidos de pequenos bancos foi comparado com os médios e grandes, utilizando-se de estatística descritiva e regressão linear para garantir maior comparabilidade. Os resultados sugerem que, por tamanhos de bancos, os médios apresentaram significância no uso dos Ativos Fiscais Diferidos para a persistência de lucros, e os pequenos para a persistência e o alisamento de lucros, sendo beneficiados quanto às movimentações de empréstimos concedidos e de estoques dos ativos, tornando-os mais persistentes e alisados ao longo do período amostral. A perspectiva de qualidade de lucros exibida nos resultados evidencia a validação dos modelos propostos, contribuindo não somente para o tema Ativos Fiscais Diferidos e a qualidade de lucros, mas, também, a associação do uso discricionário desses ativos como geradores de resultados poluidores dos bancos.
... Similarly, investors are not motivated to make decisions based on abnormal accruals (Kumar, and Krishnan, 2008). This situation has worsened due to accrual mispricing (Sun, 2020;Sloan, 1996). This means that abnormal accruals are not good indicators of stock prices or firm value (DuCharme et al., 2004;Louis, 2004). ...
... Other variables ACC i,q Total accruals calculated in the same way as in Sloan (1996) but on a quarterly basis. ...
Article
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This paper challenges the prevailing view that intra-industry information transfers are primarily driven by public information. Contrary to conventional wisdom, I find that investors in late-announcing firms impound more private information after early-announcing peers report earnings. This increase is substantial, leading to an 18.2% decrease in analyst forecast consensus and a 24.9% increase in forecast precision. Moreover, the probability of informed trading rises by 2% on days with peer announcements. This finding is important because investors tend to overweight (underweight) private (public) signals, thereby exacerbating over- and underreaction anomalies. Our study confirms that these anomalies are more pronounced when early announcements stimulate private information production, offering a theoretical explanation for their puzzling coexistence. These findings have significant implications for investor behavior and market efficiency. Investors should diligently evaluate both public and private information, particularly following peer announcements. Policymakers can leverage these findings to design regulations that promote transparency and foster efficient information dissemination.
... Section 4 presents the results, and Section 5 concludes the paper. Sloan (1996) has investigated whether stock prices reflect information about future earnings that is contained in the accrual and cash flow components of current earnings. The extent to which current earnings performance persists into the future was found to depend on the relative magnitudes of the cash and accrual components of current earnings, although stock prices act as if investors fail to identify correctly the different properties of the two components of earnings. ...
Article
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The concern over accounting regulation has resulted in studies of auditor independence and audit quality, as measured by auditor tenure, accounting conservatism, and the type of audit firm the client employs (Big 4 or non-Big 4).In this study, we continue the line of research on conservatism and auditor tenure by examining whether accounting conservatism is related to auditor tenure for Chinese firms. We extend the studies by Jenkins and Velury (2008) and Li (2010) in order to examine Chinese firms that have non-Big 4 auditors, and we investigate whether the association exists for the most important and least important clients of these audit firms. Our findings indicate that least important clients employ more conservative accounting techniques as auditor tenure increases. For the most important clients, there is less conservatism, compared to the least important clients, in the early years of the auditor’s tenure. Our study provides more information about the regulatory issue of mandatory audit firm rotation because our results suggest that mandatory auditor rotation may have an adverse effect on the least important clients of these Chinese audit firms.
... Table 2 shows the descriptive statistics for all research variables used to test the hypotheses. Countries 2015 2016 2017 2018 2019 2020 2021 2022 Indonesia 18 20 22 26 30 35 39 49 Malaysia 25 26 28 32 32 37 63 156 Philippines 9 11 12 13 13 14 17 20 Thailand 17 21 22 26 40 76 103 135 Singapore 17 17 17 21 28 48 55 60 Sub Total 86 95 101 118 143 210 277 420 Total 1.450 firm-year observations Following the EP estimation model by Lipe (1990) and (Sloan (1996). Time-series regression of each firm's annual earnings from 2015 to 2019: Earnings t+1 = α+βEarnings t + e Figure 2 illustrates the country-specific characteristics related to CC and CR. ...
Article
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The study provides empirical evidence on the cost implications of socially responsible investing (SRI) in relation to Environmental, Social, and Governance (ESG) preferences. Specifically, it examines whether socially responsible investors incur higher costs to meet non-pecuniary goals and how government involvement can offer rewards to socially responsible investors in supporting the realization of the United Nations’ Sustainable Development Goals (SDGs). Using panel data regression, this study analyzes ESG scores and financial and return data of 1,450 firm-year observations in ASEAN-5 countries over the period 2015–2022. The findings reveal that firms implementing ESG practices experience an increase in their cost of capital (CoC), supporting the notion that ESG investment requires a sacrificial cost. Even firms with low operational risks face rising CoC when implementing ESG principles. However, the study also finds that firms located in countries with better government effectiveness and stronger control of corruption benefit from a reduction in CoC, despite ESG implementation. Conversely, country risks, particularly those related to environmental pollution, exacerbate the CoC for firms adhering to ESG criteria. Overall, the results suggest that while country-level governance can reward socially responsible investors by mitigating CoC, country risks such as pollution pose additional burdens, highlighting the need for government intervention to incentivize SRI and align it with global sustainability goals. AcknowledgmentThis research was funded by the Indonesian Ministry of Education, Research, and Technology (DRTPM), Fundamental Research Grant in 2024 [0609.10/LL5-INT/AL.04/2024,359/D.01/LPPM/2024].
... The author Amat (2019) dealt with the detection of legal and illegal accounting manipulations and with warning signs of them. As a suitable tool for detecting possible manipulation in financial statements, he emphasized the indicator of the difference between profit and cash, which was originally proposed by Sloan (1996). This ratio of difference between profit and cash is calculated as net profit minus cash from operations divided by assets (p. ...
Article
In practice, the methods of committing economic crime take the form of corruption, misappropriation of assets and fraudulent financial reporting. In the case of fraudulent financial reporting, it is primarily a falsification of financial and non-financial information. Some Slovak companies were revealed as tax fraudulent entities. Some methods of detecting accounting fraud were used in their cases in the article. Findings in this context brought interesting connections.
... Earnings persistence, according to Sloan, (1996) refers to the company's ability to maintain a consistent level of profitability from year to year. In his research, Sloan presents the concept of earning persistence as a measure of the company's ability to sustain consistent earnings over a longer period. ...
Article
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This study aims to test and analyze whether prudence affects the earnings response coefficient, whether earnings persistence affects the earnings response coefficient, whether financial flexibility can moderate the influence of prudence on the earnings response coefficient, and whether financial flexibility can moderate the influence of earnings persistence on the earnings response coefficient. The sampling method used in this study is purposive sampling. The research sample consists of 59 basic material sector companies listed on the Indonesia Stock Exchange (BEI) over the past 4 years from 2019 to 2022, totaling 236 data points. The results of the study indicate that prudence significantly affects the earnings response coefficient, while earnings persistence does not significantly affect the earnings response coefficient. Financial flexibility as a moderating variable also does not have a significant influence in moderating the effects of prudence and earnings persistence on the earnings response coefficient. For future model improvements, it is necessary to calculate the ERC values for each company differently each year by reducing the time period level in the calculation, using daily data. This will result in monthly CAR data, which will then be used to estimate ERC values for specific years using monthly CAR data. Companies are advised to focus on implementing prudence principles in their financial reporting. By providing more accurate and transparent information, companies can enhance investor trust and, in turn, strengthen market responses to their reported earnings.
... QV is a publicly available systematic value investing strategy that performs rigorous financial analysis across several financial statement metrics to maximize a portfolio's compound annual growth rate (CAGR) over a long-term horizon. Given a universe of stocks, QV rigorously analyzes each company by integrating several financial statement metrics and stock price metrics from Sloan (1996), Beneish (1999), Campbell, Hilscher, & Szilagyi (2008), Greenblatt (2006), Piotroski (2000), Boudoukh, Michaely, Richardson, & Roberts (2007), Michaely (2007), Richardson, & Roberts (2007), and Gray & Carlisle. A final score is produced for each stock by combining the metrics into a single number. ...
Preprint
This paper defines systematic value investing as an empirical optimization problem. Predictive modeling is introduced as a systematic value investing methodology with dynamic and optimization features. A predictive modeling process is demonstrated using financial metrics from Gray & Carlisle and Buffett & Clark. A 31-year portfolio backtest (1985 - 2016) compares performance between predictive models and Gray & Carlisle's Quantitative Value strategy. A 26-year portfolio backtest (1990 - 2016) uses an expanded set of predictor variables to show financial performance improvements. This paper includes secondary novel contributions. Quantitative definitions are provided for Buffett & Clark's value investing metrics. The "Sak ratio" is proposed as an extension to the Benjamini-Hochberg procedure for the inferential identification of false positive observations.
... Better audit quality will generally reduce this level of manipulation. According to (Sloan, 1996) the calculation formula is as follows: DAt = TAt / Asset t-1 Vol. 10, No. 3, 2024, pp. 828-842 834 Journal homepage: https://jurnal.iicet.org/index.php/jppi ...
Article
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This study examines the relationship between audit fee stickiness and audit quality to determine whether they mutually affect each other. Using panel data and fixed-effects as well as common-effects regression methods, the study evaluates how total assets, leverage, audit changes, and the Covid-19 pandemic influence both variables. This methodology was chosen for its ability to control for individual differences and handle panel data, allowing for a more accurate analysis of the relationship between audit fee rigidity and audit quality. The main findings show that total assets and audit changes have a significant positive effect on audit fee stickiness, while the Covid-19 pandemic does not significantly affect audit fee stickiness. Additionally, total assets and leverage have a significant positive impact on audit quality, whereas audit changes do not influence audit quality and the Covid-19 pandemic actually improves audit quality. Although audit fee stickiness contributes to the enhancement of audit quality, audit quality does not have a significant effect on audit fee stickiness, indicating that there is no reciprocal relationship between the two. The study suggests the need for adjustments in the audit fee setting mechanism to ensure that audit quality is maintained optimally without being influenced by fee rigidity.
... Since its introduction by Akerlof in 1970, information asymmetry has been extensively examined not only in the economic literature, but also more rigorously in the financial markets in areas such as mispricing (Fama, 1970) and the role of financial reporting and disclosure (Watts & Zimmerman, 1986;Sloan, 1996;Dechow et al., 1996;Lev & Zarowin, 1999). The information asymmetry among economic agents can affect decision-making, market efficiency, and regulatory outcomes. ...
Article
This paper investigates the geographic distances among the auditors, audit clients, and the regulatory agency Securities & Exchange Commission (SEC) and their impact on audit quality. Consistent with the exacerbated information asymmetry issue caused by distance, we find the audit quality is negatively associated with the distance between the client/auditor and the SEC offices. We further find that auditors charge higher fees when they are closer to the SEC office, irrespective of the client’s distance to the SEC. This suggests that the distance between auditor and the SEC has a more prominent influence than the client’s location on the audit quality.
... Part II is deliberately focused on more "classical" material and thus could easily complement related material that focuses on more contemporary work in financial accounting research. Part II starts with research from the 1960s-such as Fama et al. (1969), Ball and Brown (1968), and Beaver (1968)-and covers some of the most important studies of subsequent decades, including Bernard and Thomas (1989), Sloan (1996), and key earnings management papers of the 1980s and 1990s. ...
... We also include Acc (accruals), which is defined as the change in operating working capital per split-adjusted share from the fiscal year-end two years before that in the preceding year divided by the book equity per share in the preceding year. Our inclusion of accruals follows Sloan (1996) in attributing low returns to high accruals, while Fama and French (2018) argue that accruals differences arise because accounting decisions cause book earnings to differ from cash earnings. Next, Op (operating profit) is defined as revenue minus the cost of goods sold, minus selling, general, and administrative expenses, minus interest expense, all divided by book equity in the preceding fiscal year. ...
... 26. Similar to Sloan (1996), the size-adjusted returns are computed by taking the raw buy-and-hold return subtracting the return on a size-matched portfolio of firms. The size portfolios are based on the market value of equity deciles firms provided by CRSP. ...
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