SYNOPSIS: This study examines the role of revenue in valuing firms beyond earnings and investigates whether this (1) is pervasive or limited to certain situations in which earnings may be less informative, (2) is sensitive to nonlinearity in the relation between returns and earnings, and (3) has changed over time. Our analysis indicates that revenue is useful both as a summary measure for valuation purposes and in conveying new information to the market, after controlling for earnings information. These results are not driven by technology firms, extreme earnings news or loss situations, or by model misspecification because of nonlinearities. The role of revenue in firm valuation is greater, and the role of earnings is smaller, in extreme earnings situations. We also find that revenue is more useful in summarizing the performance of technology firms and for profit observations. While the combined ability of revenue and earnings to summarize contemporaneous value-relevant information has remained stable over time, the new information conveyed by earnings has declined whereas the ability of revenue to incrementally convey new information has not diminished.
This paper investigates the relation between industry‐wide information disclosures by the trade association for the semiconductor industry and both share prices and analyst forecasts. Such disclosures may have little impact on investors and analysts, since prior theoretical research suggests that trade associations may be unable to secure reliable data from firms in an industry. At the same time, such disclosures may be important, since prior empirical research suggests that share prices and analyst forecasts reflect industry‐wide earnings effects earlier than firm‐specific effects. We document significant stock price movements on release dates of industry Flash Reports by the Semiconductor Industry Association (SIA) each month that contain aggregate industry data on new orders and shipments. The magnitude of the price revisions on Flash Report disclosure dates is positively associated with changes in the numbers disclosed and varies across sample firms in a manner associated with identifiable characteristics of the firms. Further tests indicate that the Flash Report provides mainly forward‐looking information on new orders that is linked to firm‐specific sales changes and has explanatory power for quarterly stock prices beyond firm‐specific earnings. This information is used by security analysts mainly in assessing the persistence of firm‐specific quarterly sales changes. Our findings support the hypothesis that the SIA is able to obtain data from firms, compile it into reliable aggregate statistics, and then distribute these statistics in a timely fashion.
SYNOPSIS I investigate the extent and nature of income conservatism in the financial statement numbers of firms in the U.S. technology sector. Technology firms are predicted to have greater income conservatism than other U.S. firms because they are subject to both higher shareholder litigation risk and conservative accounting standards such as SFAS 2. In the absence of a generally accepted measure of conservatism, I examine several proxies, including loss incidence and accounting rates of return, operating cash flow and nonoperating accrual levels, and regression coefficients from the earnings-return model in Basu (1997). Relative to other companies, technology firms' earnings are characterized by higher (and intertemporally increasing) levels of both conditional and unconditional conservatism. These differences are both statistically and economically significant. Further analysis suggests that technology firms' higher conservatism results primarily from lower operating cash flows due to R&D expensing and more income-decreasing accounting accruals linked to litigation risk. The results of this study are potentially useful to financial analysts, researchers, regulators, managers, and other users of financial statements. Data Availability: Data are available from public sources.
The scandal that followed Enron's failure to disclose billions of dollars of debt held by off-balance-sheet entities (OBSEs) prompted investor interest in these entities and motivated auditors to request more accounting guidance. The SEC responded by issuing Financial Release No. 61 (FR-61) to remind managers to follow SEC guidance for disclosures on liquidity and capital resources in the Management's Discussion and Analysis section of the annual report. FR-61 identifies disclosure objectives but does not require specific disclosures. We study how the OBSE-related disclosures of companies that sponsored OBSEs before Enron changed after Enron/FR-61. We find that while OBSEs were widely used by S&P 500 firms before Enron/FR-61, a majority of these firms either did not disclose their OBSEs or, if they did, provided little useful information. After Enron/FR-61, OBSE disclosure levels increased significantly but not uniformly across firms. The pattern of increases suggests that FR-61 reduced regulatory uncertainty and increased the perceived minimum level of required OBSE disclosure. Our results are consistent with the view that general guidance (of the type found in principles- or objectives-based accounting standards) may result in underdisclosure or a large disparity in level of disclosure, and that reminders of responsibility and suggestions to consider specific disclosures partially remedy both problems.
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