A Nonlinear Model of Security Price Responses to Unexpected Earnings

Freeman, Robert N.; Tse, Senyo Y.

doi:10.2307/2491123

Cited by 497 publications

(281 citation statements)

References 15 publications

Supporting

Mentioning

260

Contrasting

Unclassified

Order By: Relevance

“…3 Finally, the paper adds to our understanding of the nonlinear valuation response to accounting reports. In this paper, the underlying reporting incentives imply a nonlinear and S-shaped valuation response to accounting reports, in contrast to existing, non-strategic, explanations (e.g., Freeman and Tse [1992]) and Subramanyam [1996]). …”

Section: Introductionmentioning

confidence: 59%

“…Some consider the trade-off of permanent vs. transitory components of the reported earnings (e.g., Freeman and Tse [1992] and Das and Lev [1994]), which, in essence, look to the properties of the earnings-generation process for explanations. Along a similar line, Subramanyam [1996] considers the uncertainty about the precision of accounting numbers as the underlying reason for the non-linearity.…”

Section: Valuation In the Presence Of "Managed" Accounting Reportmentioning

confidence: 99%

See 1 more Smart Citation

Equilibrium Earnings Management, Incentive Contracts, and Accounting Standards*

Liang

2004

Contemporary Accting Res

View full text Add to dashboard Cite

Abstract:In this paper, we model earnings management as a consequence of the interaction among self-interested economic agents, namely the managers, the shareholders, and the regulators. In our model, a manager controls a stochastic production technology and makes periodic accounting reports about his performance; an owner chooses a compensation contract to induce desirable managerial inputs and reporting choices by the manager; and a regulatory body selects and enforces accounting standards to achieve certain social objectives. We show various economic trade-offs give rise to endogenous earnings management. Specifically, the owner may reduce agency costs by designing a compensation contract that tolerates some earnings management because such a contract allocates the compensation risk more efficiently. The earnings management activity produces accounting reports that deviate from what is prescribed by accounting standards. Given such reports, the valuation of the firm may be nonlinear and Sshaped, recognizing the manager's reporting incentives. We also explore policy implications, noting (i) the regulator may find enforcing a zero-tolerance policy -no earnings management is allowed -economically undesirable; and (ii) when selecting the optimal accounting standard, valuation concerns may conflict with stewardship concerns. We conclude earnings management is better understood in a strategic context involving various economic trade-offs.

show abstract

Section: Introductionmentioning

confidence: 59%

Section: Valuation In the Presence Of "Managed" Accounting Reportmentioning

confidence: 99%

Equilibrium Earnings Management, Incentive Contracts, and Accounting Standards*

Liang

2004

Contemporary Accting Res

View full text Add to dashboard Cite

show abstract

“…We report median ABSUE for each portfolio, and we regress CAR on unranked UE within each portfolio. 20 Prior research documents a nonlinearity in this specification (Freeman and Tse [1992]), possibly because extreme values of ABSUE are transitory. Consistent with this nonlinearity, the earnings response coefficient is decreasing as the ABSUE magnitude increases from portfolio 1 to portfolio 6.…”

Section: T a B L E 5 Effects Of Forecast Attributions On The Market'smentioning

confidence: 99%

“…The results on the attribution-related variables are robust to these alternative specifications. 20 We use unranked unexpected earnings to preserve the nonlinearity documented by Freeman and Tse [1992]. forecasts; and Price i = day −2 security price for firm i. ABSUE = the absolute value of UE.…”

Section: T a B L E 5 Effects Of Forecast Attributions On The Market'smentioning

confidence: 99%

Why Do Managers Explain Their Earnings Forecasts?

2004

View full text Add to dashboard Cite

Managers often explain their earnings forecasts by linking forecasted performance to their internal actions and the actions of parties external to the firm. These attributions potentially aid investors in the interpretation of management forecasts by confirming known relationships between attributions and profitability or by identifying additional causes that investors should consider when forecasting earnings. We investigate why managers choose to provide attributions with their forecasts and whether the attributions are related to security price reactions to management earnings forecasts. Using a sample of 951 management earnings forecasts issued from 1993 to 1996, we find that attributions are more likely for larger firms, less likely for firms in regulated industries, less likely for forecasts issued over longer horizons, more likely for bad news forecasts, and more likely for forecasts that are maximum type. Furthermore, attributions are associated with greater absolute price reactions to management forecasts, more negative price reactions to management forecasts (forecast news held constant), and a greater price reaction per dollar of * University of Georgia; †Indiana University; ‡Harvard University. We thank Andrea Astill, Ben Ayers, Linda Bamber, Dave Barrett, Neil Bhattacharya, Walt Blacconiere, Christine Botosan, Claire Bush, Jenny Gaver, Ken Gaver, Eric Lie, Laureen Maines, Roger Martin, Marlene Plumlee, Jamie Pratt, Aamer Sheikh, Kimberly Smith, David Upton, Jim Wahlen, Wanda Wallace, Isabel Wang, an anonymous referee, and workshop participants at the University of Utah, Indiana University, the University of Georgia, the University of Missouri, the College of William and Mary, and Louisiana State University for comments on earlier versions of this paper. We also gratefully acknowledge the contribution of IBES International Inc. for providing earnings per share forecast data. These data have been provided as part of a broad academic program to encourage earnings expectations research. unexpected earnings. Our findings hold after control for the aforementioned determinants of attributions and after control for other firm-and forecastspecific variables that are often associated with security prices.

show abstract

“…Les révisions de prévision de bénéfice ont alors un intérêt pour les investisseurs puisqu'ils révèlent alors un changement d'opinion des analystes. Green [2006] (Freeman and Tse [1992], Basu [1997]), le lien entre résultat passé et valeur est plus ténu, (ii) les firmes répugnant à communiquer une information négative (Waymire [1985], Miller [2002), l'information publique se raréfie, (iii) la motivation des analystes est plus grande car ils craignent la dégradation de leur réputation (Stickel [1989], Mikhail et al [1999]). De leur côté, Frankel et al [2006] soutiennent que le contenu informatif des révisions des analystes est plus élevé si la nouvelle est négative que si elle est positive car dans ce dernier cas, elle a déjà été largement prise en compte par le marché.…”

Section: Les Analystes Transmettent Une Information Pertinente Au Marchéunclassified

La réactivité des analystes financiers en temps de crise au sein de la zone Euro

Cousin

Levasseur

Romon³

2013

Comptabilité Contrôle Audit

View full text Add to dashboard Cite

Cet article étudie la relation entre les révisions de prévision de bénéfice par action formulées par les analystes financiers de la zone Euro, et les variations des cours boursiers des titres analysés, lors de la crise financière de 2007-2008. L’étude montre qu’en 2008, année de crise financière, les rentabilités des titres ont eu un pouvoir explicatif plus important et ont impacté de manière plus significative les révisions des prévisions de ces mêmes titres que durant l’année 2006, année de référence. À partir de ces résultats, nous concluons que les analystes n’ont pas délaissé les informations provenant des bourses lors du krach boursier, mais au contraire, ont tenu plus fortement compte des sentiments du marché dans l’ajustement de leurs propres prévisions, contrairement à ce qu’avaient observé Ang et Ma (2001) sur les places asiatiques en 1997. Bien plus, ils n’ont pas hésité à diminuer fortement leurs prévisions à court terme de résultats, allant bien au-delà des effets des facteurs estimés avant la crise. Ceci se traduit par une sensibilité accrue des variations des prévisions des analystes aux fluctuations des cours boursiers et reste cohérent avec une perception par l’ensemble de ces acteurs du caractère transitoire de ces dégradations.

show abstract

A Nonlinear Model of Security Price Responses to Unexpected Earnings

Cited by 497 publications

References 15 publications

Equilibrium Earnings Management, Incentive Contracts, and Accounting Standards*

Equilibrium Earnings Management, Incentive Contracts, and Accounting Standards*

Why Do Managers Explain Their Earnings Forecasts?

La réactivité des analystes financiers en temps de crise au sein de la zone Euro

Contact Info

Product

Resources

About