Are earnings strings restrained after SOX?

Kohlbeck, Mark J.; Sankara, Jomo; Stewart, Errol G.

doi:10.1108/raf-04-2016-0066

Cited by 3 publications

(3 citation statements)

References 57 publications

(88 reference statements)

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“…2. Kohlbeck et al (2018) find that analysts might play a monitoring role in restraining earnings strings. In this study, we focus on the analysts' role as information intermediaries in communicating their opinions about the likelihood of discontinuation of earnings strings to capital market participants.…”

Section: Discussionmentioning

confidence: 99%

Can analysts predict breaks in earnings strings?

Balashov

DeVides

2019

RAF

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Purpose This study aims to investigate the behavior of sell-side analysts covering firms that are about to experience breaks in strings of consecutive quarterly earnings increases. Design/methodology/approach The authors estimate the likelihood of analysts predicting a break by using logit regressions for nearly half a million earnings per share forecasts issued by individual analysts from 1992 to 2017. Findings The authors find that analysts can predict breaks in earnings strings by issuing less favorable earnings estimates ahead of a break announcement. The probability of detecting a break is higher for longer and more severe breaks, for more skillful analysts and for firms with richer information environments. The authors find that analysts’ warnings are heeded by investors and result in less severe reactions to break announcements. Originality/value Breaks in strings of earnings increases are situations in which information asymmetry exists and could be mitigated by information intermediaries such as sell-side analysts. Therefore, it is important to examine whether analysts have any informational advantages or disadvantages over insiders and institutional investors in the quarters prior to breaks in strings and whether they communicate such information to the market in a timely and accurate manner, thus reducing information asymmetry by “leveling the field” across the investment community.

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Section: Discussionmentioning

confidence: 99%

Can analysts predict breaks in earnings strings?

Balashov

DeVides

2019

RAF

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“…5. Kohlbeck et al (2018) finds that, post-sarbanes-oxley (SOX), earnings strings are shorter when the client is audited by more effective auditors, but they do not examine the break in the string in their study.…”

Section: Notesmentioning

confidence: 99%

Earnings string breaks, accounting litigation risk and audit fees

Robinson

Smith

Whitworth

et al. 2023

MAJ

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Purpose This study aims to investigate whether accounting-related litigation is associated with a break in the client’s earnings string and the auditor’s response to a break in the earnings string. Design/methodology/approach The authors use regression models on a sample of publicly-traded USA companies with earnings strings. Findings The authors find that clients’ earnings string breaks are associated with increased accounting litigation risk and audit fees. The results are more prevalent for larger breaks. Research limitations/implications The findings suggest auditors anticipate string breaks by clients which implies that audit fee research should consider earnings string characteristics in the fee models. Practical implications The auditor’s access to private information allows them to anticipate string breaks and potential increase in litigation risk. Originality/value An earnings string break represents a convergence of concerns highly relevant to the auditor: more users relying on the financial statements with greater expectations, increased likelihood of losses to those users, an environment where the likelihood of misstatement may increase, and explicitly stated professional responsibilities in response to the latter. Despite that, and a rich earnings string literature, prior studies have not directly examined auditors’ response to a client’s string break.

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“…Instead, we are interested in whether there 1 Here, we are referring to studies that examine quarterly earnings benchmarks. For studies examining annual benchmarks (Canace et al, 2018;Dechow et al, 2003;Kohlbeck et al, 2018), the third benchmark is achieving a positive earnings change over the prior year.…”

Section: Introductionmentioning

confidence: 99%

Quarterly earnings thresholds: Making the case for prior quarter earnings

Byun

Roland

2021

Business Fin & Account

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We provide evidence that the prior quarter earnings number is an important and informative benchmark that is relatively unexplored in the accounting literature. Our analyses suggest that managers appear to avoid negative earnings changes relative to the prior quarter. Moreover, we find that even after controlling for the information contained in other frequently used benchmarks (i.e., analysts' forecasts and earnings from the same quarter of the prior year), changes over the prior quarter's earnings are associated with stock returns. We find that this result is stronger post-Regulation FD and XBRL, perhaps as a result of the improved information environment. We also find that the informativeness of prior quarter earnings is greater for firms with less volatile earnings and that meeting-or-beating prior quarter earnings are associated with future performance.

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Are earnings strings restrained after SOX?

Cited by 3 publications

References 57 publications

Can analysts predict breaks in earnings strings?

Can analysts predict breaks in earnings strings?

Earnings string breaks, accounting litigation risk and audit fees

Quarterly earnings thresholds: Making the case for prior quarter earnings

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