Return windows and the value relevance of earnings

Abstract

Research on the value relevance of annual earnings commonly accumulate stock returns over a 12-month period starting from the fourth month of the fiscal year, resulting in a mismatch between the return window and the earnings period (i.e. the fiscal year). By comparing this return window with alternative windows, we show that the mismatch produces a downward bias in the estimated R 2 from the regression of stock returns on earnings, especially for firms that announce earnings early. Our results also show that both profits and losses are more value relevant when announced earlier, supporting regulatory calls for timely disclosure.

The impact of IFRS adoption on the value relevance of accounting information in Saudi Arabia

“…This also depends on how investors assess the potential profitability of loss‐making firms in the future (Dorminey et al ., 2018). Our results are consistent with prior research (Hayn, 1995; Chen et al ., 2001; Jiang and Stark, 2013; He et al ., 2020). With regard to the increase in the adjusted R 2 of 13.2 percent for profit‐making firms from 59 percent in the Saudi GAAP period to 72.2 percent in the IFRS period, similar results were found by prior studies (e.g., Karampinis and Hevas, 2011; Elbakry et al ., 2017), which confirm that the impact of IFRS is limited to only profit‐making firms.…”

“…Following the value relevance literature (Collins et al ., 1997; Brimble and Hodgson, 2007; Barth et al ., 2008; He et al ., 2020; Liao et al ., 2021), the yearly and pooled adjusted R 2 and regression coefficients of Model (1) will be used to test H1. The adjusted R 2 is the main metric to measure the combined value relevance ( and ) as it shows how much the variation in the dependent variable can be explained by the explanatory variables.…”

“…The reason that the Cramer test is appropriate for the pre‐ and post‐IFRS research deign is the assumption of independent samples which is met as each period represents an independent sample (Sami and Zhou, 2004; Liu and Liu, 2007; Tsalavoutas et al ., 2012). The Vuong test, on the other hand, requires the two models in the comparison to be non‐nested and have an identical dependent variable, which is the case in the comparative year research design (Hung and Subramanyam, 2007; Gjerde et al ., 2008; Goodwin et al ., 2008; Clarkson et al ., 2011; He et al ., 2020; Liao et al ., 2021).…”

“…This also applies to profit‐making firms versus loss‐making firms and to firms audited by Big4 versus firms audited by non‐Big4 accounting firms. The former is widely applied in prior research (Hayn, 1995; Ely and Waymire, 1999; Goodwin and Ahmed, 2006; Jiang and Stark, 2013; He et al ., 2020) with the argument that earnings (losses) of profitable (loss‐making) firms are expected to persist in future (perceived as transitory). The size of the audit firms is also often used as an indicator of accounting quality (Chen et al ., 2001; Alali and Foote, 2012; Lee and Park, 2013).…”

Should asset impairments be included in earnings when evaluating stewardship by management?

“…Subsequent researchers have considered the association of the level of earnings and changes in earnings with stock returns (Easton and Harris, 1991), and whether the association is changing over time (Collins et al , 1997). Attention has also been directed at whether the association is impacted by the timing of earnings announcements (He et al , 2020), and whether it increases over longer time periods (Easton et al , 1992). The latter identifies issues with timeliness regarding earnings recognition, and these are of particular concern if attention is being focused on asset impairments.…”