This paper investigates triple bottom line (TBL) disclosures of fifty of the largest United States and Japanese companies. Twenty disclosure criteria were developed for each of the TBL disclosure areas: economic, social, and environmental. Disclosure information was examined in annual reports, stand-alone reports and special website reports.
Regression analysis was used to empirically examine the determinants of TBL disclosure practice. Our results indicate that, for total TBL disclosure (combining economic, social, and environmental categories), the extent of reporting is higher for firms with larger size, lower profitability, lower liquidity, and for firms with membership in the manufacturing industry. Further analysis indicates that the results for the total TBL disclosure are primarily driven by non-economic disclosures. We also find that the extent of overall TBL reporting is higher for Japanese firms, with environmental disclosure being the key driver. This result could be attributed to the differences in national cultures, the regulatory environment, and other institutional factors between the U.S. and Japan.
This study examines whether reported values for firmsí research and development (R&D) affect analystsí annual earnings forecast revisions following quarterly earnings announcements. Because R&D introduces uncertainty into earnings forecasts, analysts may benefit from additional information searches in an effort to increase forecast accuracy. Also, accounting standards mandate an immediate expensing of R&D, in essence projecting a zero value for the R&D. To the extent that R&D will produce future payoffs, the expense treatment reduces the informativeness of reported earnings for forecasting future earnings. Thus, the marginal benefit of analystsí efforts to produce more information may increase with the magnitude of the R&D component of earnings announcements and trigger additional forecast revisions. Alternatively, if the cost of information searches exceeds the benefit, analystsí forecast revisions may decrease.
Our results show a positive relation between R&D expenses and analystsí forecast revision activity. We also find a positive and significant association between the level of R&D expenses and the magnitude of analystsí forecast revisions following quarterly announcements. These results point to a greater amount of analyst scrutiny when reported earnings are accompanied by high levels of R&D expenses.
This study examines the accuracy and bias associated with the analysts' earnings forecasts of Taiwanese firms. Based on the forecast data of individual analysts over 1991-1997 from the I/B/E/S International database, the following results are documented. First, analysts' forecasts of earnings are generally more accurate than the predictions of a naive forecasting model, but this superiority seems to be largely confined to shorter forecast horizons. Second, on average, the analysts' earnings forecasts of Taiwanese firms are optimistically biased and the bias is increasing with forecast horizon. Further examination shows that the bias considerably depends on the nature of the earnings change. In cases of earnings decreases, analystsí forecasts contain a substantial optimistic bias. In contrast there is evidence of pessimistic bias when earnings increase. Analystsí earnings forecasts are found to display significant positive serial correlation, suggesting that financial analysts of Taiwanese firms fail to fully adjust their future earnings predictions in response to new information in previous forecast errors. In addition, our results show that analystsí forecasts of earnings changes tend to be too extreme, relative to ultimate realizations of earnings changes. Finally, analystsí forecasts appear to be more accurate for larger firms and the bias also decreases with firm size. We find some variation in forecast accuracy and bias across industries but the overall results are not driven by any specific time period.
This paper examines the value relevance of accounting earnings, book value of equity, and cash flows from operations for Korean firms during the 1995-1998 period. During the 1997-1998 Asian financial crisis, the economy of South Korea collapsed. As a result of the economic crisis, the accounting earnings and financial health of most Korean firms have been directly and adversely affected. Our results indicate that the value relevance of accounting earnings for Korean firms significantly declines from the pre-crisis (1995-1996) to the in-crisis (1997-1998) period. The declining importance of earnings, however, is not replaced by the increasing value relevance of book value of equity during the same period. On the other hand, we find evidence that cash flows from operations become more value-relevant in the 1997-1998 period. We also find that the declining relevance of earnings occurs even for a sample of firms that report positive earnings in each year of the 1995-1998 period. Additionally, it appears that the cash flows information becomes more relevant to firms with higher financial leverage than to firms with lower financial leverage during the time of the Asian financial crisis. Finally, our results hold after controlling for the amount of foreign exchange translation gains and losses included in earnings and book value.
Prior studies show that the beta coefficient of a security changes systematically as the length of the measurement interval is varied. This phenomenon, which is called the intervalling effect bias in beta, has been attributed to the friction in the trading system that causes the delays in the price adjustment process. This study shows that option listing is associated with a decline in the beta intervalling effect bias. The decline is most pronounced for small firms. We also find that our sample firms grow significantly after option listing. Since prior research indicates that market value is a major determinant of the magnitude of the intervalling effect, we re-examine our results using a subsample that controls for market value. The results indicate that the decline in the beta bias from the pre-listing to post-listing period is still prevalent after controlling for the change in firm size. Overall, the evidence is consistent with the notion that option trading reduces the delays in the price adjustment process, which in turn reduces the intervalling effect bias in beta.
This study examines the accuracy, rationality and dispersion of Canadian analysts' earnings forecasts over the period 1985-1990. The results show that the analysts' forecasts of annual earnings are generally more accurate than the predictions of a naive random walk model. Further examination indicates that this superiority is not uniform across firms. For firms that report earnings decreases, the analysts' superior forecasting ability appears to be largely confined to shorter forecast horizon. The results also suggest that Canadian analysts' forecasts do not appear to be formed in a rational manner. Specifically, analysts' forecasts tend to be overly optimistic. The optimistic bias generally increases with forecast horizon. Consistent with prior U.S. evidence, this study finds that Canadian analysts' forecast errors also exhibit significant positive serial correlation. This finding suggests that Canadian analysts do not correctly use the time-series properties of earnings numbers in setting their future forecasts. Finally, forecast dispersion is found to decrease as the forecast horizon shrinks. Forecast accuracy, however, does not appear to be significantly affected by the divergence of analysts' forecasts.
Systematic patterns in returns following earnings announcements are difficult to interpret. This study provides additional insights into the observation of price reversal and drift by examining the effects of both the method used to identify winners and losers and also the length of the subsequent period analyzed. The results show that both drift and reversal can be observed for the same sample and event. This evidence indicates that security price behavior following earnings announcements, especially in the short-term, depends not only on the earnings information, as in the drift studies, but also on the price reaction to the earnings information.
This paper examines the return behavior surrounding option introduction for a sample of 331 firms with option listings during 1983-1990. Using a longer test window and a sample that comprises exclusively post-1980 listings, our tests are better able to capture the "information environment" effect of option trading. In contrast to prior studies, this paper shows a significant reversal in price behavior surrounding option introduction. In particular, our results indicate that positive cumulative excess returns begin at least 100 days prior to the option introduction day. Starting from day -3 relative to introduction, however, the price behavior is dominated by a series of negative excess returns. The cumulative excess returns continue to drift downward for at least 100 days after the introduction day. In addition, the price effect is accompanied by an increase in trading volume.
This study finds that, for a sample of 335 open-market repurchase announcements during 1978 to 1992, the market reaction to the announcement is significantly associated with the firm's sales growth and accounting profitability in prior periods. This result holds after controlling for two known correlates of the market response, the announced fraction to be repurchased and prior returns. This result is consistent with the market reinterpreting previously released accounting information when interpreting a subsequent repurchase announcement by the firm. Further, the association between the market response and prior accounting information is more pronounced for firms that are smaller in size or have fewer analysts following them. This suggests that the degree of reinterpretation of prior accounting information at the time of the repurchase announcement increases in the information asymmetry between managers and investors.
Prior studies show that option listing and subsequent trading improve a firm's information environment and that the price-earnings relation is influenced by characteristics of the information environment. Motivated by these research findings, we examine whether option trading is associated with changes in the information content of security prices with respect to future accounting earnings. We find that before the listing of a firm's options, the firm's security returns from the previous fiscal year convey little information regarding the current year's earnings changes. In contrast, the returns from the previous fiscal year are a significant variable in explaining the current year's earnings changes after option listing. Our findings are robust after potential confounding factors, such as firm size, financial press coverage, and institutional concentration, are controlled. Overall, the evidence is consistent with the claim that option trading enhances the informativeness of security prices with respect to future accounting earnings.
This study examines the bias and accuracy of Australian analysts' earnings forecasts over the period 1987-1990. The results show that analysts generally provide more accurate forecasts than a naive random walk model but this superior forecasting ability appears to be largely confined to shorter forecast horizons. The results also indicate that Australian analysts' forecasts do not appear to be formed in a rational manner. Across all forecast horizons examined, analysts tend to overestimate future earnings. The overestimation bias increases with forecast horizon. Finally, analysts' forecast errors are found to exhibit significant positive serial correlation, which suggests that Australian analysts do not correctly use the time-series properties of earnings numbers in setting their future forecasts.
In this paper we use the agency cost/corporate control arguments to explain the time-series patterns in dividend payout ratios during the 1980s for Britain, Japan, Germany, and the U.S. Although these four countries had very similar payout ratios in the mid-1970s, they experienced very different changes in the 1980s. The two countries with active corporate control markets, the U.K. and U.S. saw the payout ratios increase during the 1980s. The two countries with inactive takeover markets, Germany and Japan, saw their payout ratios decline over the same period. We argue that this international evidence is consistent with the agency cost/corporate control theories, which suggests that paying out large cash dividends is the price that must be paid by firms with severe agency problems to reduce the possibility of a hostile takeover.
Co-owners of natural gas properties take shares of natural gas at various times that do not necessarily coincide with the ownership interests in the properties. The purpose of a gas balancing agreement, the authors explain, is to set out the terms for eventually balancing the shares of natural gas taken form the co-owned property. In the latter part of 1994, the IRS issued final regulations under section 761 that outline the tax consequences of gas balancing agreements.
The authors note that the regulations are mandatory for any group of producers that wishes to be excluded from the partnership provisions of Subchapter K and who aren't otherwise considered an association taxable as a corporation. They add that any worldwide arrangement that could be considered a partnership must adhere to them.
The authors conclude that the regulations appear to offer taxpayers two methods of handling gas balancing agreements. The default method is the cumulative gas balancing method (similar to the "sales method" described in accounting literature), which treats taxpayers as though they own an undivided share of the reservoir. Alternatively, taxpayers may elect to use the annual gas balancing method, in which they are treated as owning their respective shares of the hydrocarbons as they are produced.
This articles takes a practitioner's approach at examining the intricacies of these new regulations. The authors believe that it should be especially helpful to persons with less experience with gas balancing arrangements.
Prior theoretical and empirical research indicates that option trading enhances the availability and timeliness of market information, and that the market's earnings expectation (belief) is influenced by characteristics of the information environment. Motivated by these research findings, we investigate whether option listing is associated with changes in the market's expectations about future earnings. Assuming that the distribution of analysts' earnings forecasts serves as a proxy for the market's earnings expectations and using I/B/E/S consensus analyst forecasts, we examine two properties of analyst forecasts: accuracy and dispersion. The results indicate that consensus analyst forecast accuracy improves after option listing and that the variability of analyst forecasts increases after option listing. The accuracy and dispersion results are somewhat weaker but still present after controlling for firm size and analyst following.
Prior research suggests that option trading affects the availability and timeliness of predisclosure information about firms and that the price-earnings relation is influenced by characteristics of the predisclosure information environment. Motivated by these research findings, this study (1) examines various firm-specific attributes that are likely to explain the different information environments of firms with and without exchange-traded options, and (2) investigates the price-earnings relation of such firms. The price-earnings relation is examined in both "event study" (short-window) and "association study" (long-window) contexts. The short-window analysis tests the hypothesis that the "surprise" in quarterly earnings reports (measured by the abnormal stock return variability around earnings announcements) is greater for nonoption firms than for option firms. The long-window analysis tests the hypothesis that security prices signal future earnings changes earlier for option firms than for nonoption firms. The hypothesis also predicts that nonoption firms are more likely than option firms to exhibit post-FYE (fiscal year-end) drift.
The results indicate that option firms are associated with five firm-specific attributes: (1) larger firm size, (2) higher institutional concentration, (3) higher analyst coverage, (4) higher trading volume, and (5) more Wall Street Journal Index news releases. Based on 3,721 quarterly earnings announcements of 431 firms during the 1980-1983 period, the results support the first hypothesis; abnormal return variability surrounding quarterly earnings announcements is significantly greater for nonoption firms than for option firms.
To examine how the five firm-specific attributes provide alternative explanations for the observed results, the empirical tests are repeated by using a unilateral matching approach. In addition, a control portfolio is constructed that conservatively controls for the five proxy variables (i.e, the nonoption firms in this portfolio are associated with larger firm size, higher institutional concentration, higher analyst coverage, higher trading volume, and more Wall Street Journal Index news releases). Both the matching and control portfolio results support the first hypothesis. Finally, multiple regression results indicate that option trading possesses incremental explanatory power over the other variables in explaining the differential content of earnings releases for option and nonoption firms.
With respect to the second hypothesis, the results for the entire sample, the matched subsamples, and the control portfolio indicate that the security prices of option firms anticipate accounting earnings earlier than do those of nonoption firms. For option firms, about 50 percent of the price change associated with economic events contributing to the current year's earnings change is realized in the previous fiscal year. For nonoption firms, however, a significant portion (about 70 percent) of the price change associated with the earnings change occurs in the current fiscal period and in the 12 months following the fiscal year-end. In addition, the magnitude of the post-FYE drift is greater for nonoption firms than for option firms.