The Impact of Earnings Announcements on a Firm's Information Environment

ArticleinSSRN Electronic Journal · January 2016with 20 Reads
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    The number of firms reporting earnings on a non-GAAP basis has increased dramatically over the last decade, and non-GAAP reporting is now commonplace in capital markets. This proliferation of non-GAAP reporting has renewed both regulators’ and standard setters’ interests in these alternative performance metrics. For example, the SEC, FASB, and IASB have all recently questioned what this increasing reporting trend means for IFRS- and US-GAAP-based reporting and whether these measures are misleading to investors. This increasing focus on non-GAAP metrics motivates us to synthesize the nearly two decades of research on non-GAAP reporting to provide insights on what academics have learned to date about this reporting practice. Then, we utilize a novel dataset of detailed non-GAAP disclosures to provide new descriptive evidence on current trends in non-GAAP reporting and its recent proliferation. Finally, we discuss important questions for future researchers to consider in moving the literature forward.
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    Purpose The purpose of this study is to examine changes in firms' level of information asymmetry in emerging market of Malaysia for the period of 2000-2016. Specifically, the study focuses on changes in the quoted spread and quoted depth following the fraud announcement. Design/methodology/approach The study uses a unique set of fraud sample using enforcement action releases (EARs) identified from Security Commission of Malaysia and Bursa Malaysia. To estimate the result, we employ event study methodology, OLS regression, and simultaneous model on a set of 67 fraudulent firms. Findings The results of event study, OLS regression, and simultaneous equation models suggest that information asymmetry increases on fraud discovery. We also employ the analysis on subsamples classified by the type of regulator (who issued the enforcement release) and type of fraud committed. However, we find no evidence of a difference in information asymmetry across these groups. Overall, the results support the reputational view of fraud that it damages the firms’ reputation and increases uncertainty in the capital market. Research limitations/implications These findings provide valuable insights into understanding the information asymmetry around fraud announcements especially for Malaysia, where the majority of the public-listed companies are family-controlled and under significant state control. The results of this study call for the active role that regulators can play to achieve a transparent and liquid capital market. Practical implications The research has practical implications. Specifically, for Malaysia, fraud is the primary area for National Results Areas (NKRA) in Government Transformation Program (GTP). Therefore, for regulators and policymakers to ensure a liquid and transparent capital market, identifying the factors that elicit the fraudulent behavior and improving the related governance mechanism are necessary steps to prevent the fraudulent practices. Originality/value A significant majority of studies have focused on corporate frauds in developed countries such as the US that is characterized by dispersed ownership system and a strong capital market. One of the vocal critics of Agency theory is that it neglects the social and institutional framework within which companies operate. In emerging markets, such as Malaysia, the published academic papers on fraud and information asymmetry are very limited. As emerging markets practice different culture, corporate governance mechanisms, and market regulations, the study is significant to investigate the behavior of investors in such markets.
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    We consider how audit quality impacts sell‐side analysts’ information environment. Using the method outlined by Barron et al. (1998), we examine whether higher audit quality is associated with differences in the weight analysts place on common information relative to private information, as well as the extent to which audit quality separately impacts the precision of analysts’ private and common information. Our results show that, in instances where analysts revise their earnings forecasts for year t+1 shortly after the release of year t earnings, higher audit quality results in analysts placing more weight on public information. The precision of private (as well as public) information is improved. These results extend our understanding of how audit quality impacts on attributes of analysts’ forecasts and provides support for the argument that audit quality has important capital market implications. This article is protected by copyright. All rights reserved
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