Jacob K. Kandathil Thomas's research while affiliated with Yale University and other places

Publications (35)

Article
Basu (1997) proposes a measure of financial reporting conservatism based on asymmetry in the conditional earnings/returns relation. Patatoukas and Thomas (2011) show upward bias in this measure, because a placebo—lagged earnings—also exhibits similar asymmetry. Ball, Kothari, and Nikolaev (2013a) and Collins, Hribar, and Tian (2014) propose alterna...
Article
Financial economists view the tax benefits of leasing as a complex function of the tax deductions and income associated with rentals, depreciation, and interest attributed to lessors and lessees facing different tax rates. We offer two ways to simplify that complexity using the concept of present value depreciation, which reflects the decline in an...
Article
We identify how targets and acquirers collaborate to manage earnings and cash flows around acquisitions. Using a sample of 2,128 completed deals from 1985-2010, we find that targets depress earnings and cash flows when investor attention declines once the deal parameters are set. Our results suggest that acquirers induce targets to understate perfo...
Article
We incorporate revisions in expected future earnings to better represent concepts underlying the Basu (1997) discussion of conservatism and to disaggregate Basu’s asymmetric timeliness (AT) coefficient into two components that reflect conservatism by capturing asymmetry between bad and good news relating to: (i) the variance of unexpected earnings,...
Article
Ball, Kothari, and Nikolaev (2011) make two major claims in their recent working paper titled “On estimating conditional conservatism.” While they agree that the effect documented in Patatoukas and Thomas (2011) biases the conditional conservatism estimate proposed in Basu (1997), they claim that the source of bias is not scale effects but a non-li...
Article
Both intuition and evidence suggest that tax expense reflects value lost to taxes paid. Inconsistent with this traditional valuation role for tax expense, some recent research finds that tax expense surprise, especially its current component, is positively associated with stock returns. Holding pre-tax income surprise constant, a higher tax expense...
Article
Under U.S. GAAP, reported balance sheet and income statements are based on immediate expensing of R&D expenditures. We capitalize those expenditures and derive adjusted equity book values and earnings using simple amortization techniques (straight-line over assumed industry-specific useful lives). After confirming that such adjustments increase the...
Article
Despite the conceptual appeal and popularity of the differential timeliness (DT) measure of conditional conservatism proposed in Basu (1997), Dietrich et al. (2007) and Givoly et al. (2007) have identified considerable biases associated with that measure. We renew their call to avoid using the DT measure because it is affected unexpectedly by two e...
Article
We investigate the joint hypothesis that a) tax expense contains information about core profitability that is incremental to reported earnings and b) that information is reflected in stock prices with a delay. We find that seasonally-differenced quarterly tax expense, our proxy for tax expense surprise, is related positively to future returns. This...
Article
While levels of actual and consensus forecast earnings per share (EPS) vary with scale (measured typically by share price), magnitudes of the difference do not vary with scale. That is, forecast errors within a certain range (e.g., plus/minus 5 cents per share) are equally likely for both high-price and low-price shares. We also find a similar lack...
Article
The differential timeliness measure proposed in Basu (1997), which estimates the fraction of observed bad news reported in contemporaneous earnings minus the corresponding fraction for good news, has been used widely to study conditional accounting conservatism. Timeliness is measured as the slope from a regression of earnings, scaled by lagged pri...
Article
The earnings announcement anomaly literature documents positive returns in general at earnings announcements, with more positive returns for small firms. These findings are anomalous because the returns are earned unconditional on news released at earnings announcements. We observe a different pattern of returns for the subset of firms with earning...
Article
While levels of actual and consensus forecast earnings per share (EPS) vary with scale (measured typically by share price), magnitudes of the difference (or forecast errors) do not vary with scale. That is, forecast errors within a certain range (e.g., plus/minus 5 cents per share) are equally likely for both high-price and low-price shares. We als...
Article
ABSTRACT Prior research has documented that earnings announcements provide information not only about the announcing firm but also about other firms in the same industry. We document a stock market anomaly associated with this phenomenon of intra-industry information transfers by showing that the stock price movements of late announcers in response...
Article
Contrary to the common perception that operating cash flows are better than accounting earnings at explaining equity valuations, recent studies suggest that valuations derived from industry multiples based on reported earnings are closer to traded prices than those based on reported operating cash flows. The question addressed in the article is whe...
Article
Contrary to the common perception that operating cash flows are better than accounting earnings at explaining equity valuations, recent studies suggest that valuations derived from industry multiples based on reported earnings are closer to traded prices than those based on reported operating cash flows. We extend those analyses to determine if the...
Article
We thank K.R. Subramanyam and workshop participants at University of Southern California and the University of Utah (2 nd Annual Winter Accounting Workshop) for helpful comments and the Faculty Research Fund of Columbia Business School for financial support. Very preliminary. Comments welcome.
Article
We find that the negative relation between accruals and future abnormal returns documented by Sloan (1996) is due mainly to inventory changes. We propose three explanations for this result, derived from the prior literature, but find evidence inconsistent with all three explanations. To assist future investigations in formulating additional explana...
Article
In this paper we seek to document errors that could affect studies of earnings management. The book income adjustment (BIA) of the alternative minimum tax (AMT) created apparently strong incentives to manage book income downward in 1987. Five earlier papers using different methodologies and samples all conclude that earnings were reduced in respons...
Article
While prior research, as noted in our paper, often uses various accrual prediction models to detect earnings management, not much is known about the accuracy, both relative and absolute, associated with these models. Our paper investigates the accuracy of six different accrual prediction models, and offers the following findings. Only the Kang – Si...
Article
We seek to document errors that could affect studies of earnings management. The case of earnings management in response to the book income adjustment (BIA) of the alternative minimum tax (AMT) offers a unique laboratory because the incentives to manage book income downward in 1987 appear so strong that there was little doubt that earnings would be...
Article
The returns earned by US stocks since 1926 have generated an "equity premium puzzle", since they exceed estimates derived from theory, from other periods and markets, and from surveys of investors. To determine if this historic estimate is biased upward, we offer a new approach based on accounting data and analysts' earnings forecasts, which is use...
Article
We offer ex ante estimates of the equity risk premium based on forecasted accounting numbers. Although our approach is isomorphic to dividend growth models, it generates various diagnostics that help to narrow the range of reasonable assumed growth rates. Our results, based on IBES consensus earnings forecasts over the 1985-1998 period, contrast sh...
Article
Although much market-based accounting research is based on regressions of abnormal returns on contemporaneous unexpected earnings, many have despaired about the intrinsic ability of accounting earnings to explain stock returns. These regressions exhibit low R2, lower than expected coefficients on unexpected earnings (ERC's), and various unusual fea...
Article
Both the economic nature of events and extant accounting rules cause reported earnings to have different components, each with different valuation implications. The price-earnings link is described better by separating components of unexpected earnings and multiplying each by a different response coefficient, rather than applying a single earnings...
Article
A number of recent analytical and empirical papers seek to identify the variables that best explain stock prices. We derive the relation between prices and earnings for three one-parameter “excess earnings” evolution processes that describe three different ways in which current period shocks to earnings persist in future. In each case, we show that...
Article
ABSTRACT The returns,earned,by U.S. equities,since 1926 exceed,estimates,derived,from theory, from other periods and markets, and from surveys of institutional inves- tors. Rather than examine historic experience, we estimate the equity premium from,the discount,rate that,equates,market,valuations,with,prevailing,expecta- tions of future,f lows. Th...

Citations

... Some studies have examined the relationship between expected profits and company value, showing that these forecasted cash flows have an higher predictive power than historical cash flows. Therefore Liu and Thomas (2000) showed that forecasted profit and interest rates outlines better the market value of equity than historical profits registration. More recent studies also reveal that company's multiples estimated by using forecasted revenues were more accurate than those estimated based on historical results. ...
... Previous studies show that the cost of equity capital is mainly affected by the enterprise's own operating risk and information environment [15][16][17]. By implementing ESOPs, enterprises can not only reduce corporate risks by transferring part of the risks borne by external shareholders to internal employees [18] but also reduce information asymmetry between external shareholders and internal employees by improving the company's information disclosure environment [19], which can both affect the cost of equity capital of enterprises. erefore, based on the background of equity financing preference of Chinese-listed companies, this paper discusses the impact of ESOP in the new period (ESOP in China means ESOPs implemented after the issuance of the Guiding Opinions) in China on the cost of equity capital of enterprises. ...
... Second, following the placebo tests in Dietrich et al. (2007) and Patatoukas and Thomas (2016), we employ commonly used determinants of conditional conservatism to test whether OI BDP it falsely displays evidence consistent with prior predictions that examines determinants of conditional conservatism. Based on their prevalence in prior research (e.g., Lafond and Roychowdhury 2008;Patatoukas and Thomas 2011;Ramalingegowda and Yu 2012;Ball et al. 2013b;Lawrence et al. 2013;Banker et al. 2016) and their foundation for the widely used Khan and Watts (2009) C Score measure, we examine beginning-of-the-period book-to-market (BM it−1 ), leverage (Leverage it−1 ), and size (Size it−1 ) as determinants of variation in conditional conservatism. ...
... Note even if Hypothesis 2-a is supported the Hypothesis 2-b may hold because the comparisons are done to the aggregate of non-family firms and family firms without family CEO and the sample universe is different although the intersection is not null.We used the beginning book value of total assets as a divisor for the dependent variable, unlikeBasu (1995 and1997) who uses the stock price. One reason is that Patatoukas andThomas (2009Thomas ( , 2010) point out empirical irregularities triggered by the relationship between EPR and stock returns irrespective of the existence of accounting conservatism. We also detect possible simultaneity problems inherent in standard Basu (1997) regressions. ...
... Specifically, equation (1) expresses stock price in terms of expected dividends before investor level taxes on dividends. If dividend taxes are incorporated into stock prices, the implied cost of capital (r e ) will vary with dividend tax rates (Li, Shackelford, and Thomas 2002). Therefore, we test for dividend tax capitalization by examining whether the implied cost of capital is increasing in dividend yield: H1: A firm's implied cost of capital is increasing in dividend yield during periods when dividends are taxed at a higher rate than capital gains. ...
... The signalling effect is premised on the grounds that through capitalisation, preparers send an informed and credible positive signal on future economic benefits to investors and other users (Healy et al., 2002;Lev et al., 2008;Lev, 2019). Indeed, amounts capitalised under IFRS are found to be value relevant, both for equity and debt holders (e.g., Tsoligkas and Tsalavoutas 2011;Shah et al., 2013;Dinh et al., 2016;Kreß et al., 2019). ...
... The most significant factors affect the leasing market development and the lease payments formation are the cost of borrowing, the informational opacity of activity of the leasing services consumers, the level of tax burden, and the legislation imperfection. The problem of the effective implementation of leasing in an innovative economy is revealed in the works of the following domestic and foreign researchers: (Bell and Thomas, 2013;Boorsma, 1995;Chekmareva, 2004;DeGraba, 1994;Dou et al., 2017;Gutman and Yagil, 1993;Jaworski et al., 2014;Li and Xu, 2015;Ling et al., 2012;Minhat and Dzolkarnaini, 2016;Nechaev and Antipina, 2015;Prilutsky, 1997;Vecchi and Hellowell, 2013 et al. However, a lot of problems are still unresolved. ...
... Quantity has a significant impact on precision and asymmetry. The former result is consistent with the ability of investors to improve their assessment of future cash flow and discount rates news as the number of (perfectly uncorrelated) signals increases, even when the average precision of individual signals is low (Lipe, 1986;Wild, 1992;Ramakrishnan and Thomas, 1998). The positive association between quantity and asymmetry reflects that, as the level of publicly available information increases, the cost of private information acquisition increases, which reduces information asymmetry between informed and uninformed investors (Welker, 1995;Healy et al., 1999;Heflin et al., 2005). ...
... While some studies analyze times-series data (e.g. Ramakrishnan and Thomas (1992), Bar-Yosef et al. (1996), Morel (1999), Myers (1999), Qi et al. (2000), and Morel (2003)), other studies use cross-sectional (e.g. Barth and Kallapur (1996), Aboody and Lev (1998), Lev and Zarowin (1999), Dechow et al. (1999) and Easton and Sommers (2003)) or panel data (e.g. ...
... (2) Frankel and Lee (1998) show that the clean surplus relationship is almost always satisfied under GAAP accounting, and they, along with Claus and Thomas (2001), substitute equation ...