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Forecasting Profitability and Earnings
Abstract
There is a strong presumption in economics that, in a competitive environment, profitability is mean reverting. We provide corroborating evidence. In a simple partial adjustment model, the estimated rate of mean reversion is about 38% per year. But a simple partial adjustment model with a uniform rate of mean reversion misses rich nonlinear patterns in the behavior of profitability. Specifically, we find that mean reversion is faster when profitability is below its mean and when it is further from its mean in either direction. We also show that the mean reversion in profitability produces predictable variation in earnings.
... The regressions model all percentiles from 1 to 99. (Distante et al. , 2018;Lotti et al. , 2003). This behaviour is in line with the observation by Fama & French (2000) who nd a similar pattern of competitive convergence when analysing corporate protability. According to Fama & French (2000), this property is a necessary condition for longrun convergence of rms within and between competitive sectors. ...
... This behaviour is in line with the observation by Fama & French (2000) who nd a similar pattern of competitive convergence when analysing corporate protability. According to Fama & French (2000), this property is a necessary condition for longrun convergence of rms within and between competitive sectors. Given competition, companies develop new products, mimic successful products and reallocate resources to grow, avoid bankruptcy and takeover. ...
... Given competition, companies develop new products, mimic successful products and reallocate resources to grow, avoid bankruptcy and takeover. Finally, this competitive behaviour by smaller companies deteriorates the larger rm's protability (Distante et al. , 2018;Fama & French, 2000). ...
... [12,13] is the first accounting study to argue that the customer satisfaction is an investment in the quality of firm's asset and, in return, that the customer satisfaction is the "intangible asset" that creates value in firms. If the information (especially accounting information) has the ability to capture and reflect firm value, one believes that the information is value relevant [14][15][16][17][18]. Various studies in accounting and finance have examined the value relevance of financial and non-financial information including financial statement numbers, financial disclosures, and customer satisfaction [19][20][21][22]. ...
... They argue that the customer satisfaction is an investment in the quality of firm's asset and, in return, that the customer satisfaction is the "intangible asset" that creates value in firms. If the information (especially accounting information) has the ability to capture and reflect firm value, one believes that the information is value relevant [14][15][16][17][18]. Various studies in accounting and finance have examined the value relevance of financial and non-financial information, including financial statement numbers, financial disclosures, and customer satisfaction [19][20][21][22]. ...
... (www.preprints.org) | NOT PEER-REVIEWED | Posted: 22 July 2024 doi:10.20944/preprints202407.1638.v116 ...
This study examines the change in customer satisfaction and the value relevance of customer satisfaction during COVID-19. The COVID-19 pandemic is an unprecedented experience and has caused difficulties for all areas of businesses. Customer relations are one of the biggest paradigm shifts of this period. Companies have placed great importance on customer relations, and customer relations are a critical factor in corporate sustainability. It is very important for firms to retain their customers in the market, create a potential demand, and, thus, increase the firm value. However, prior studies have provided mixed results on whether companies financially benefit from customer relations. Employing the value relevance model, we find that the customer satisfaction score has increased during the pandemic but that the value relevance of customer satisfaction has declined during the pandemic. Together, we interpret the results as indicating new customer satisfaction trends, especially reduction trends. The results are robust even after controlling endogeneity and outliers. This study has several implications for practitioners and academia regarding the new trends in the value relevance of customer satisfaction.
... Some accounting studies first argue that customer satisfaction is an investment in the quality of a firm's asset and, in return, that customer satisfaction is the "intangible asset" Sustainability 2024, 16, 8090 2 of 16 that creates value in firms [16,17]. If the information (especially accounting information) has the ability to capture and reflect firm value, one believes that the information is value relevant [18][19][20][21][22]. Various studies in accounting and finance have examined the value relevance of financial and non-financial information, including financial statement numbers, financial disclosures, and customer satisfaction [23][24][25][26]. ...
... If the information (especially accounting information) has the ability to capture and reflect firm value, one believes that the information is value relevant [18][19][20][21][22]. Various studies in accounting and finance have examined the value relevance of financial and non-financial information, including financial statement numbers, financial disclosures, and customer satisfaction [23][24][25][26]. ...
This study examines the impact of COVID-19 on customer satisfaction and the value relevance of customer satisfaction. COVID-19 is an unprecedented pandemic that has changed all areas of business. Customer relations are one of the biggest paradigm shifts of this period. Companies have placed more attention on customer relations than on any other areas, and customer relations are an essential element in corporate sustainability. The value relevance directly represents the sustainability of corporations. It is very important for firms to retain their customers in the market, create a potential demand, and, thus, increase the firm value. We investigate whether companies financially benefit from customer relations. Employing the value relevance model, we regress firm value on the customer satisfaction scores with other control variables. We find that the customer satisfaction score has increased throughout the sample period, and that the value relevance of customer satisfaction has declined after the COVID-19 outbreak. Together, we interpret the results as indicating the impact of COVID-19 on the value relevance of customer satisfaction, especially the decreasing trends in value relevance. The results are robust even after controlling endogeneity and outliers. This study has several implications for practitioners and academia regarding the impact of COVID-19 on the value relevance of customer satisfaction.
... It was found that there is no long-term persistence beyond chance, and the predictability is low with valuation ratios in the long run. Similar evidence was presented on limited short-term and non-existing long-term predictability [4]. Rautiainen and Jokinen [5] use a dataset of 105 Finnish public companies listed at the Helsinki Stock Exchange and find a positive and significant correlation between the viral factor and the percentage change in stock price. ...
... Node 2: If Net profit margin [0. 22,4.53], the next best predictor is Payable TOR (nodes 5-7). Node 3: If the Net profit margin (4.53, 10.72], then the next best predictor is Interest coverage (EBIT/Int.exp) ...
Security market valuations and their fundamentals, such as company earnings, are of the interest of not only investors, but also company finance managers, as well as central banks due to their focus on financial stability. Identification of the key financial ratios, which can predict stock market valuation levels is of crucial importance. In this study, relative stock market valuations, i.e. Price-Earnings, Price-Sales, Price-Book value, and Dividends-Price ratios, during period 2001-2017, are studied. Firstly, predictive CHAID decision tree algorithm is applied to investigate the relative importance and impact of 29 financial ratios on the market valuations. Secondly, regression analysis is used to study whether the growth of two measures of earnings, i.e. sales and net income, can justify the market valuations. The implications for computerized risk management are discussed and some future research opportunities are mentioned.
... InTable IA1in the Supplementary Material we show that a market implied long-term growth rate derived from a constant growth dividend discount model explains only up to 3% of the variation in corporate long-term growth rates.4 These findings relate our study to a body of literature that examines the impact of competition, persistence of profitability, and accounting rates of return (see, e.g.,Fama and French (2000),(2006),Penman (1991)). While the focus of that literature is primarily on profitability and accounting rates of return, we are interested in predicting growth for the purpose of valuation. ...
Long-term growth expectations are central to investment analysis and corporate valuation. Despite a dominant effect on firm value, the academic literature and practitioner conventions provide little guidance on determining this long-term growth rate. This article takes a step in addressing this gap: we estimate the relationship between long-term growth and an extensive selection of firm, industry, and market characteristics. Market prices do not seem to fully capture long-term growth information. Cross sectional tests yield substantial positive abnormal returns for firms with high expected long-term growth.
... Financial time-series forecasting plays a pivotal role in ensuring market stability and efficiency, directly impacting critical areas such as investment strategies, risk management, and the formulation of economic policies [4]. One of the most prominent tasks in this domain is stock movement prediction [29,30,32], which focuses on forecasting the direction of price changes, i.e. whether a stock will rise or fall. ...
Stock movement prediction, a fundamental task in financial time-series forecasting, requires identifying and retrieving critical influencing factors from vast amounts of time-series data. However, existing text-trained or numeric similarity-based retrieval methods fall short in handling complex financial analysis. To address this, we propose the first retrieval-augmented generation (RAG) framework for financial time-series forecasting, featuring three key innovations: a fine-tuned 1B parameter large language model (StockLLM) as the backbone, a novel candidate selection method leveraging LLM feedback, and a training objective that maximizes similarity between queries and historically significant sequences. This enables our retriever, FinSeer, to uncover meaningful patterns while minimizing noise in complex financial data. We also construct new datasets integrating financial indicators and historical stock prices to train FinSeer and ensure robust evaluation. Experimental results demonstrate that our RAG framework outperforms bare StockLLM and random retrieval, highlighting its effectiveness, while FinSeer surpasses existing retrieval methods, achieving an 8\% higher accuracy on BIGDATA22 and retrieving more impactful sequences. This work underscores the importance of tailored retrieval models in financial forecasting and provides a novel framework for future research.
... The profit shock in the period, z t , is the source of randomness in the model. Similarly to Fama and French (2000) and Zhang (2005), we assume profit shocks follow an AR(1) process in logs, which implies that firm profits will be mean-reverting over time. The stochastic process is given by where parameter c > 0 defines the mean profits of the firm and represents efficiency differences across firms in the market generated by idiosyncratic factors, such as proprietary technology, management skill, and quality of production inputs. ...
We use a dynamic model of the firm to study the two constituent parts of debt: the risk-free component, which can always be repaid in full, and the risky component, which implies a potential capital loss for lenders. We find that, under a standard parameterization of the model, the risk-free fraction of debt depends mainly on the operating costs and the bankruptcy costs. Alternatively, the risky fraction of debt depends largely on the elasticity of capital and the variability of cash flows. We also find that, as a proportion of firm value, both components behave counter-cyclically over the business cycle. Finally, a cross-sectional analysis shows that those elements of debt vary widely across U.S. industries.
... Sebaliknya, perusahaan dengan fluktuasi yang besar dalam permintaan dan harga cenderung mengalami pendapatan yang tidak stabil, yang mengindikasikan risiko bisnis yang lebih tinggi (Nst, 2017). Fama & French (2000) menyatakan bahwa stabilitas pendapatan merupakan faktor penting dalam analisis keuangan karena mencerminkan ketahanan dan kemampuan prediksi bisnis. Perusahaan dengan pendapatan yang stabil sering kali dipandang lebih menarik oleh investor karena menunjukkan kemampuan jangka panjang dan manajerial yang solid. ...
Kajian ini bertujuan mengetahui dan menganalisis faktor-faktor yang memengaruhi struktur modal perusahaan property dan real estate dengan jumlah sampel 22 perusahaan dicatatkan BEI tahun 2019-2023. Penelitian ini bersifat kuantitatif. Metode yang digunakan yaitu purposive sampling melalui teknik Analisis Regresi Data Panel dengan model random effect. Data yang dimanfaatkan berupa sekunder yang diperoleh dari website resmi. Hasil temuan menyatakan bahwa ukuran perusahaan memiliki pengaruh signifikan terhadap struktur modal. Namun, faktor-faktor lain seperti asset tangibility, non-debt tax shield, dan stabilitas pendapatan tidak menunjukkan pengaruh yang signifikan terhadap struktur modal perusahaan. Temuan ini menunjukkan bahwa ukuran perusahaan merupakan salah satu faktor penting dalam pengambilan keputusan modal, sementara variabel lain tidak memainkan peran besar dalam konteks struktur modal perusahaan di Indonesia.
... They conclude that the fundamentals related to the evolution of corporate cash flows are basic determinants of this dimension of non-diversifiable risk highlighted by Fama and French (1993) and mention classic variables such as volatility, profitability, and indebtedness. Fama and French (2000) link the risk associated with the book to market (BTM) factor to two basic concepts: earnings and financial insolvency. ...
This paper aims to investigate the determinants of different types of market risk faced by Spanish firms from 2012 to 2019. Using Fama and French's (Journal of Financial Economics, 1993, 33, 3) three‐factor model, we estimate total risk, diversifiable risk, and systematic or non‐diversifiable risk in the three dimensions proposed by these authors: market risk, size risk, and valuation risk. Risk determinants are derived from a series of economic and financial variables obtained from the information contained in financial statements. This information is summarised using a factor analysis that aims to resolve the correlation issues between the proposed measures. The study demonstrates that the systematic risk factors proposed by Fama and French in their 1993 three‐factor model incorporate dimensions of systematic risk that are relevant to investors and that the set of economic and financial variables proposed can explain these risks. Among these variables, profitability and the market to book ratio have the greatest impact in explaining company risk, while factors such as operating and financial leverage, growth, or company insolvency have a much smaller effect as explanatory factors for risk.
... In the practical context, significant uncertainties related to business, political, or economic elements can affect the precision of a firm's performance predictions. The task of deriving valuable information or signals that assist in assessing a firm's performance remains a challenge in both business operations and research (Fama and French, 2000). This challenge arises because the signals observed about the economy's state may be either exogenous or endogenous to managerial decisions, and may be influenced by multiple economic shocks. ...
The study seeks to enhance the current understanding of how corporate social responsibility (CSR) and environmental,
social, and governance (ESG) factors influence firm performance. We establish a theoretical framework
and provide empirical data on the influence of CSR/ESG on the sustained financial performance of publicly
traded Fortune 500 companies between 2018 and 2021. Our model explains the way CSR/ESG activities affect a
firm’s ongoing financial success by revealing valuable signals to stakeholders. We employed quantile regression
analysis to assess the connection, and found that a firm’s CSR/ESG initiatives have both immediate and lasting
long-term effects. Our findings contribute to and expand the literature on firm performance and sustainable
competitive advantage. Companies adopting CSR/ESG can enhance a firm’s performance and attain a sustainable
competitive advantage.
... Furthermore, the results provide a trivial support to the information content of dividends in year 2 following dividend changes in year t and in year 1 following dividend increases for one measure of profitability as displayed in Table 5. Grullon et al. (2005) argue that the linear analysis in the previous section is likely to produce biased results because it assumes uniformity of the mean reversion and the level of autocorrelation across all observations. To overcome misspecifications and to control for the non-linearity, they suggested the use of the modified partial adjustment model developed by Fama and French (2000) as follows: ...
We explore the reasons behind corporate dividend changes and factors driving those changes during 2001–2021 in Oman, as a unique environment. The implications of our paper contrast with the relevant existing literature which demonstrates a positive correlation between dividends and stock prices in Oman, in support of the signaling theory. Employing multiple methods and after controlling for the nonlinearity in the profitability process, we find virtually no evidence for the signaling theory of dividends for dividend reductions, in terms of future earnings. Furthermore, our analysis affirms the importance of current profitability in influencing the magnitude of and the propensity to change (increase or decrease) dividends in listed Omani firms. We also find that the catering theory of dividends does not have any explanatory power on dividend changes. Further, firms’ life-cycle status and real investments have been found to significantly affect the decision to change dividends. Our results, which depart from the findings in the conventional literature, can be attributed to the distinct institutional features in Oman. Our game-theoretic model of dividend signaling/dividend catering provides some explanations.
... Asset pricing models explain the cross-sectional volatility in equity returns. However, most research studies examine the cross-sectional asset pricing theory in manufacturing firms (Fama & French, 2000;Fama & French, 2008;Hou et al., 2015). Insurance companies, banks, and other financial institutions are typically considered the areas of research related to equity return due to the high leverage, regulated nature of institutions, and uniqueness of handling accounting items (Semir et al., 2018). ...
This research analyzes the impact of firm-specific characteristics on the cross-section of equity returns of insurance companies in Nepal. For this purpose, the study used 22 insurance companies listed in the Nepal Stock Exchange (NEPSE), comprising seven life and 15 non-life insurance companies. To make a balanced panel, those companies are selected as samples that have completed at least seven years of operation until the end of 2021 and are listed in NEPSE. The secondary data from 2015 to 2021 is analyzed using panel regression models. The Breusch-Pagan and Hausman tests are used to select the best panel model, and the random effect model is the best estimation model. The study reveals that systematic risk associated with the stock can explain the stock’s risk premium, proving that the notion of CAPM holds in the context of Nepal as stock beta is positive and significant in all tested models. Similarly, the book-to-market ratio is found to be negatively affecting the stock return. On the other hand, earning yield positively affects the stock return, and firm size negatively impacts equity returns. However, the investment rate and leverage are insignificant to affect equity returns. Therefore, stock investors are recommended to select alternatives based on systematic risk, earnings yield, and BM ratio. The findings also suggest to corporate policymakers that merger and acquisition cannot maximize shareholders’ wealth because it only increases paid-up capital, and this leads to decreased equity returns due to an increase in the book-to-market ratio and size of the firm.
... This led to the famous three factor model for asset pricing, including independent risk. In yet another paper, Fama and French (2000) also examined the value premium between US value stocks and the market from 1926 to 1963 which led to the conclusion that US value stocks produced a 2.39% return higher than the market. These reports provide compelling evidence of the existence of market inefficiencies and the relevance of selecting undervalued stocks for investment purposes (Enow, 2022). ...
To date, there are many myths surrounding security selection and fundamental analysis due to the notion that all available information is perfectly priced in a security. However, fundamental analysis is still very useful in determining the financial health of a security, which is much needed for long-term investing. The aim of this study was to perform a valuation analysis of international stock markets so as to recommend buy or sell signals suitable for investment decisions. This study made use of the coefficients of a multiple regression analysis and value drivers for the S&P 500, Nasdaq, JSE, DAX, Nikkei 225, BIST 100, FTSE, and SSE as of January 23, 2023. The findings revealed that the JSE, DAX, Nikkei 225, and FTSE are undervalued, which translates to a buy signal, while the S&P 500, Nasdaq, BIST 100, and SSE are overvalued. These findings imply that investing in the JSE, DAX, Nikkei 225, and FTSE will produce decent capital gains on a risk-adjusted basis.
... It is therefore only patterns of the investment and hence the firm's earnings that have an impact on the price of the share or even the firm's value. This theory continues to explain that the investors aren't even concerned with the dividends policy of the company because they can end up selling a portion of their investment portfolio if they are in needs of the cash (Fama & French, 2001). Miller and Modigliani (1961) were able to present a very strong argument saying the 12company value won't be impacted by any policy of dividends all over the world without the transactional cost or taxation. ...
This study is an attempt to join on the argument on whether dividend policy is either relevant or irrelevant on the firms' market value in Nigeria. To achieve this, the data were obtained from selected 20 quoted firms from ten sectors of the Nigeria economy spanning from 2015 to 2021, taking care of the variables; dividend per share, earnings per share, and market value proxied by market price per share obtained from Nigeria Exchange Group and the firms' annual and accounting reports for the periods. In testing the specified models, all the variants of the Panel data Analysis techniques; Pooled Regression, Fixed Effects and Random Effects were employed. In addition, the prepositions of the Pooled Regression versus Fixed Effects and Random Effects versus Fixed Effects were compared using Likelihood and Hausman test respectively. The results of Pooled Regression, Fixed Effects and Random Effects found dividend per share and earnings per share significantly impacted on market value. Again, both the Likelihood and Hausman tests favour the fixed effect that the unobserved factors in firm are significant or that the correlation between observed and unobserved factors are significant. In the light of the findings, the researchers recommended among others that investors should be consistent with their dividend payment (smooth dividend payment) to attract investors. Again, this study has added to the stream of knowledge that firms should consistently pay dividends to their shareholders as a form of shareholders wealth maximization. This is a form of financial signaling or dividend announcement that will attract investors.
يتمثل الهدف الرئيسي للدراسة الحالية في دراسة أثر عدم تماثل سلوك التكلفة على كلاً من سياسة توزيعات الأرباح والقيمة السوقية للمنشأة، مع إجراء دراسة تطبيقية بغية تقديم الأسانيد العلمية التطبيقية على صحة الأساس النظري المقدم في الدراسة، لاختبار فرضي الدراسة المنبثقين من الإطار النظري، وذلك بالتطبيق على عينة مؤلفة من 116 شركة من الشركات المقيدة بالبورصة المصرية ولسلسلة زمنية ممتدة من 2014 حتى 2023. وقد اعتمدت الدراسة الحالية في قياسها للسلوك غير المتماثل على فحص سلوك تكاليف التشغيل (Operating cost) معتمدة في ذلك على مقياس (Weiss, 2010) للسلوك غير المتماثل، كما استخدمت توزيعات الأرباح للسهم (Dividend per share) كمؤشر على سياسة التوزيعات، وكذلك استخدمت مقياس (Tobin’s Q) في قياس القيمة السوقية للشركة، وذلك تمهيدا لاختبار فرضي الدراسة احصائيا، وفي ظل مجموعة من المتغيرات الرقابية شائعة الاستخدام في الدراسات السابقة.
وتوصلت الدراسة إلى قبول فرضها الأول حيث وجدت أثر ذو دلالة احصائية موجب لعدم تماثل سلوك تكاليف التشغيل (OC-Sticky) على توزيعات الأرباح للسهم (DPS). وكذلك قبول الفرض الثاني، حيث أسفرت نتائج التحليل الاحصائي عن وجود أثر ذو دلالة احصائية موجب لعدم تماثل سلوك تكاليف التشغيل على القيمة السوقية للمنشأة بالنسبة لشركات العينة.
Controlling for firm characteristics and risk, we find that inter‐firm human capital migration network centrality (HCMNC) is a strong predictor of future stock returns. Using publicly available employee profiles, we show that a portfolio based on HCMNC yields an annualized four‐factor alpha of 5.5%. The predictive power of HCMNC is stronger for firms with lower investor attention and higher valuation uncertainty. HCMNC also correlates with higher future operating performance and profitability, suggesting that the market underreacts to HCMNC.
Using a large sample of approximately 2,500 listed firms in China over the past thirty years, I examine the relationship between innovation output and firm performance, as measured by return on assets (ROA). I document a significant increase in the number of patents granted to Chinese listed firms domestically. My findings indicate that patent intensity—measured as the number of patents scaled by total assets—is positively associated with future ROA, even after controlling for various patent-related covariates, as well as year and industry fixed effects. These results contribute to the existing literature on the positive impact of innovation on firm performance, which has been well-documented in Western economies such as the United States and European countries. Furthermore, I identify heterogeneities in this relationship across industries, patent types, and firm sizes. Specifically, the effect of patent intensity on subsequent ROA is more pronounced among firms in the manufacturing sector, those with a higher intensity of invention patents, and those with greater market equity. This study provides new evidence on the real effects of innovation output on firm performance in the context of China’s listed firms.
This study investigates semi-strong form market efficiency in Indian banking sector by examining the alignment between Return on Equity (ROE) forecasts based on company fundamentals and those inferred from stock price movements. Using Gradient Boosting models, two prediction frameworks are developed-one utilizing 24 fundamental financial variables and the other incorporating stock returns. The analysis spans 21 banks, measuring predictive accuracy through R2, RMSE, and efficiency ratios. Results reveal that most banks exhibit high predictive accuracy, with ROE forecasts closely aligning with stock price movements. However, deviations are observed in some banks, driven by investor sentiment and short-term fluctuations. The study highlights cognitive biases, market sentiment, and information lag as critical factors causing misalignment. The findings contribute to understanding market efficiency, providing insights for investors, policymakers, and financial analysts in enhancing equity valuation and investment decisions.
The purpose of the article is furnishing recommendations for judicious buy or sell signals conducive to informed investment decisions.
The methodology of this article was based on theoretical and empirical research methods: a comprehensive analysis of the value of Kazakhstan stock market, as well as the the utilization of coefficients derived from a multiple regression analysis and the consideration of key value drivers for the KASE Index, as of November 15, 2023.
Originality/value of the research : Nowadays there exists a multitude of misconceptions surrounding the practices of security selection and fundamental analysis, predominantly emanating from the fallacious belief that the entirety of available information is accurately incorporated into security prices. Nevertheless, fundamental analysis retains its pivotal role in evaluating the financial robustness of securities, particularly within the realm of long-term investment strategies.
Conclusion : Based on the analysis of KASE Index stocks with a focus on Earnings Yield (EY), PE Ratio to Price (PEP ratio) as well as B/P ratio, it was found that KZTO KZ and KEGC KZ shares are fairly priced and it was also found that KCEL KZ and KAP KZ shares have attractive opportunities for investors in the long term. We believe that the information provided is of practical importance for investors and traders who aim to optimise their decision-making process and overall trading strategy.
We develop a dynamic two‐stage trade‐off model with refinancing when earnings are mean reverting. Our model predicts a negative relation between profitability and leverage at refinancing due to conservative debt increases. With multiple rounds of refinancing, the leverage–profitability relation may turn positive when firms have substantial debt tax shields. Our empirical analysis of US firms reveals that firms with moderate incentives to shield tax benefits with debt internalize the temporary increase in earnings caused by mean reversion at refinancing. However, firms with strong incentives to shield tax benefits take on excessive debt despite the temporary increases in profitability.
Synopsis
The research problem
We investigated three questions: (1) Has the usefulness of accounting information in predicting future earnings and cash flows out-of-sample (OOS) changed after the mandatory IFRS adoption? (2) If there is a change in this type of usefulness, is it universal or conditional on institutional characteristics of the adopting countries, such as legal enforcement, securities regulation, and the differences between their domestic accounting standards (DAS) and IFRS? (3) If there is a change in this type of usefulness, does it have an economic significance in terms of improved investment performance?
Motivation or theoretical reasoning
The IASB indicates in its conceptual framework that the objective of financial reporting is to provide information to help existing and potential stakeholders assess the amount, timing, and uncertainty of future net cash inflows to an entity. Therefore, examining whether IFRS achieve this objective using the OOS prediction tests needed in investment practice is critical in evaluating the benefit of the switch from DAS to IFRS. Equally important is to shed light on the debate, in an IFRS setting, about the usefulness of earnings and accruals relative to cash flows in future cash flow prediction.
The test hypotheses
With respect to our first research question, we expected that mandatory IFRS adoption improves national accruals-based accounting systems and strengthens the reporting of cash flows. With respect to our second research question, we expected the level of improvement in the predictive ability of accounting information to vary with national institutions such as legal enforcement, securities regulation, and differences between DAS and IFRS. With respect to our third research question, we expected the enhanced predictive ability of accounting information to translate into improved economic significance of forecasts under IFRS.
Target population
We employed a sample of 1,197 firms from 12 European Union (EU) countries, Australia, and South Africa that mandatorily adopted IFRS in 2005.
Adopted methodology
We developed OOS earnings and cash flow forecasts and tested the statistical significance of the changes in OOS prediction performance using a bootstrapping approach. We also evaluated whether the change in the predictive ability of accounting information following IFRS adoption translated into improved economic significance in terms of portfolio investment performance based on the OOS forecasts.
Analyses
Our analyses focused on comparisons of OOS prediction performance between the pre- and post-IFRS periods, while controlling for economy-wide conditions unrelated to IFRS adoption by constructing a constant matched benchmark sample using non-IFRS firms that have only used DAS. In addition, we analyzed the effect of IFRS adoption on OOS prediction performance conditional on national institutions in both univariate tests and multivariate regression analyses. Finally, we performed portfolio analyses based on the OOS forecasts to evaluate the economic significance of the effect of IFRS adoption.
Findings
We found that the earnings and cash flow forecast accuracy improved after adoption, and the effect persisted after controlling for firm characteristics and institutional characteristics. Total accruals generally remained (became) useful in the prediction of earnings (cash flows) after adoption regardless of national institutions. Earnings did (did not) better inform about future cash flows than cash flows alone under weak (strong) enforcement/regulation and high (low) DAS differences from IFRS. Stock portfolios based on the OOS forecasts generated higher hedge returns after adoption, with exceptions in low-legal-enforcement countries, corroborating the improved forecast accuracy. Overall, our findings suggest that mandatory IFRS adoption comes with an improved accruals-based accounting system and reporting of cash flows.
Logistics companies contribute significantly to economic growth and play an important role in global supply chains. Profitability is the main indicator of business success. The profit forecasting model helps managers improve financial performance efficiently and effectively. This research optimizes the financial performance of PT Samudera Indonesia Tbk by forecasting net profit using the linear regression method. Financial data from 2018 to 2023 was collected from the IDX website. Simulation analysis using Python shows that the independent variables in linear regression have a significant effect on the profitability of PT Samudera Indonesia Tbk. The regression coefficient shows the strength of the relationship between the independent and dependent variables. Linear regression models can predict profitability based on the variables considered. The aim of this research is so that PT Samudera Indonesia Tbk can carry out better financial planning and decisions based on accurate predictions. This research contributes to improving the operational efficiency and effectiveness of the company's business strategy, which has a positive impact on profitability and long-term growth. Overall, the application of the linear regression method in forecasting, with an RMSE value of 0.0645, is an effective tool for PT Samudera Indonesia Tbk to optimize financial performance amidst complex business competition.
Purpose
Prior research on meeting or beating earnings thresholds documents that firms with earnings momentum are awarded with valuation premiums. However, it is unclear from this strand of literature why this is the case. Therefore, this study aims to investigate the effects of time-varying earnings persistence on earnings momentum and their pricing effects.
Design/methodology/approach
This study exploits a firm that reports earnings momentum as research setting to examine whether earnings persistence is significantly higher for firms with consecutive earnings increases. In addition, it investigates a relation between earnings momentum and fundamentals-driven earnings persistence and estimates return associations of earnings momentum conditional on economic-based persistence of earnings.
Findings
The empirical evidence suggests that firms with earnings momentum reflect higher time-varying earnings persistence. It further reveals that longer duration of earnings momentum is associated with higher fundamentals-driven earnings persistence. More importantly, valuation premiums are exclusively assigned to earnings momentum determined by strong firm fundamentals, not momentum itself.
Originality/value
This study provides new empirical evidence that valuation premiums accrued to firms with earnings momentum are conditional on time-varying earnings persistence. The research implications are relevant to investors, regulators and auditors, as the results bring conclusions that earnings momentum reflects successful business models not poor accounting quality. This leads to a more complete view of earnings momentum and helps allocate resources when evaluating earnings-momentum firms.
This study examines the dynamic behaviour of corporate profits in selected developed economies using the quarterly data. Firstly, the non-linear and asymmetric behaviour is considered: the presence of general form of nonlinearity (based on linear autoregressive model, third order moments and Brock–Dechert–Scheinkman test), of steepness and deepness asymmetry (using the ‘triples test’), and of the cycle-specific asymmetry (using asymmetry in mean and variance models with cycle dummies). Secondly, we examined the possibility of mean-reversion in the series, using a battery of recently developed unit root tests that account for the presence of structural breaks and nonlinearities. The findings indicate mean reversion and trend-stationarity of the profits for most of the economies, thus suggesting impossibility of sustained growth in profits in times of sluggish economic growth and productivity slowdown. The profits were also found to contain non-Gaussian characteristics, to exhibit asymmetric fluctuation in mean (but not variance), and to demonstrate deepness asymmetry.
This research consists of verifying whether CIT has an effect on capital given the financing risk incurred. A review of several capital theories has shown that CIT is one of the main determinants of a firm's capital structure. The inclusion of CIT in capital structure models continues to divide the world of corporate finance. Debt interest deduction in computing CIT reinforces the controversy over the question of the capital structure that optimizes the tax savings provided by this deduction. The consequence is the existence of two opposing groups on the optimum capital structure: on the one hand, the group of those who believe that there is one and only one optimal capital structure, and on the other, the group of those who reject out of hand any possibility of an optimal capital structure. The sample starts with a case study of two hypothetical identical firms, one indebted and the other non-indebted, with the same profitable investment project over a period of time, and ends with 101 pairs of identical firms belonging to different classes of financing risk. The hypothesis of non-gratuity of cost and income is used, and capital markets are assumed to be pure and perfect. The results confirm that CIT has no effect on the structure, value, cost and return of capital for a given financing risk, and reveal the existence of a third source of financing called "public capital", whose cost is the corporate capital tax rate (CCTR). There is no longer any question of thinking about the optimum capital structure, which is a pure financial illusion. This paper is one of the first to show that CIT does not affect capital, and to propose a model that explains capital structure behavior in the presence of CIT.
We investigate whether managers vary disclosure specificity strategically, by examining how the voluntary disclosure of a key performance indicator, the book‐to‐bill (BTB) ratio (the ratio of orders received to orders billed), varies with future firm performance. Consistent with theoretical predictions from prior research, we find that managers are more likely to provide precise BTB disclosures when the news is positive, while offering less precise disclosures when the news is negative. We find that managers strategically vary specificity more when valuation incentives are higher and monitoring is lower. We find that the tone of qualitative descriptions is informative, with or without precise disclosure, inconsistent with the predictions of strategic withholding models. Our results are consistent with persuasion models in which managers vary the specificity of news strategically, to affect the weight stakeholders place on the signal.
Introducción/Objetivo:
el estudio examinó la relación entre la rentabilidad y la antigüedad de microempresas en Ecuador en el 2021.
Metodología:
para analizar la relación entre las variables de estudio, rentabilidad y antigüedad, se utilizó un enfoque cuantitativo de tipo descriptivo con datos de corte transversal. Se aplicó una técnica de aprendizaje no supervisado llamada ‘clúster’ en una muestra de 1810 microempresas ecuatorianas que tienen registrados sus estados financieros ante la Superintendencia de Compañías, Valores y Seguros en el periodo de estudio.
Resultados:
los resultados indicaron una relación inversa débil entre rentabilidad y antigüedad, y se identificaron tres grupos mediante la técnica de K-medoides. Dos grupos compartieron una antigüedad media de 9 años, pero difieren significativamente en cuanto a rentabilidad, con un promedio del 1 % y 55 %, respectivamente. El tercer clúster, compuesto por microempresas más antiguas con un promedio de 32 años, registró una rentabilidad promedio del 2 %.
Conclusiones:
se concluye que la rentabilidad disminuye con el aumento de la antigüedad de las microempresas, tema que resulta de interés para la toma de decisiones de empresas en etapa de maduración, porque pueden cambiar sus expectativas de la rentabilidad deseada y del nivel de estrategias empleadas por estas empresas para alcanzar lo esperado.
We develop a model of investor information choices and asset prices in which the availability of information about fundamentals is time-varying and responds to investor demand for information. A competitive research sector produces more information when more investors are willing to pay for that research. This feedback, from investor willingness to pay for information to more information production, generates two regimes in equilibrium, one having high prices and low volatility, the other the opposite. The low-price, high-volatility regime is associated with greater information asymmetry between informed and uninformed investors. Information dynamics move the market between regimes, creating large price drops even with no change in fundamentals. In our calibration, the model suggests an important role for information dynamics in financial crises.
This paper was accepted by Kay Giesecke, finance.
Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2021.01213 .
In the hope that it may help to overcome these obstacles to effective empirical testing, this paper will attempt to fill the existing gap in the theoretical literature on valuation. We shall begin, in Section I , by examining the effects the effects of differences in dividend policy on the current price of shares in an ideal economy characterized by perfect capital markets, rational behavior, and perfect certainty. Still within this convenient analytical framework we shall go on in Section II and III to consider certain closely related issues that appear to have been responsible for considerable misunderstanding of the role of dividend policy. In particular, Section II will focus on the longstanding debate about what investors "really" capitalize when they buy shares; and Section III on the much mooted relations between price, the rate of growth of profits, and the rate of dividends per share. Once these fundamentals have been established, we shall proceed in Section IV to drop the assumption of certainty and to see the extent to which the earlier conclusions about dividend policy must be modified. Finally, in Section V , we shall briefly examine the implications for the dividend policy problem of certain kinds of market imperfections.
Stock pride change associated with a given unexpected earnings change (the earnings response coefficient) exhibits cross-sectional and temporal variation. We predict and document evidence that the earnings response coefficient is a function of riskless interest rates and the riskiness, growth and/or persistence of earnings. The earnings response coefficient also varies cross-sectionally with the holding period return interval. Collectively, our results explain the previously reported differential earnings response coefficient with respect to size. Moreover, by including the factors noted above, the empirical specification of the earnings/returns relation is significantly improved.
The article reports on the relation between analysts' earnings forecast errors and prior-year earnings changes and securities returns. Adjustment of the forecasts in order to incorporate the information in the associations between analysts' earnings forecast errors, prior-year earnings changes, and securities returns will reduce the errors in firms with poor prior-year earnings performance. These findings show an asymmetry in the ability of incentives of analysts to give truthful forecasts. Also, there may be only minor relevance in analysts' forecasting errors to the valuation of securities.
The earnings ‘time-series literature’ in accounting focuses on the statistical characteristics of the processes which generate corporate earnings. In order to further our understanding of earnings behavior, this study investigates the question whether inter-firm differences in these statistical characteristics (autocorrelations and variances of earnings changes) can be explained by economic factors. Various relationships between economic factors and earnings behavior are derived from the economic literature and examined empirically in this study. Findings indicate that autocorrelations and variability of annual earnings and earnings over equity changes are systematically associated with the following factors: the type of product, the height of industry barriers-to-entry (a surrogate for degree of competition), the degree of capital intensity (‘operating leverage’), and the firm size.
Studies of the information content of accounting earnings typically assume earnings response coefficients do not vary across firms. Valuation models relating earnings to security prices, however, predict that earnings response coefficients are positively associated with revision coefficients (coefficients relating current earnings to future earnings) and negatively associated with expected rates of return. A random coefficient regression model provides evidence consistent with these predictions. This evidence has implications for interpreting multiple regression models that relate abnormal returns to unexpected earnings and other information variables.
Conservatism is interpreted to mean that accountants more frequently report current "bad news" about future cash flows in contemporaneous earnings than current "good news." Thus, earnings reported under GAAP should be more timely in reporting "bad news" about future cash flows than "good news." This paper, using the firm's stock return as a measure of news, shows that the contemporaneous association between earnings and negative returns is two to five times as large as the contemporaneous association between earnings and positive returns. It is also shown that the greater timeliness of earnings relative to cash flow measures is largely due to a greater sensitivity to concurrent negative returns. This result is consistent with accountants recording accruals conservatively. Another implication of conservatism is that negative earnings surprises are likely to be less persistent than positive earnings surprises, because earnings reports more bad news concurrently than good news, with the latter being spread over several periods. This is shown to be true empirically. It is predicted and found that earnings response coefficients are higher for positive earnings changes than for negative earnings changes, which is consistent with the market correcting for the difference in persistence in conservatively determined earnings. It is also found that the sensitivity of earnings to negative returns has more than quadrupled since 1980, while the sensitivity of earnings to negative returns has declined by two-thirds, suggesting that earnings measurement has become more conservative. Increases in accounting conservatism are found to be correlated with increases in auditor liability, but no causal inferences are drawn.