Earnings Quality and Short Sellers

This paper examines the effects of the IFRS adoption on earnings quality of 1245 Canadian firms. I analyze the effects IFRS adoption on earnings persistence, earnings predictability, persistence of earnings components, cash flow predictability, accruals quality, value relevance, earnings smoothness, conservatism, and timeliness. I find that earnings quality of Canadian firms, on average, improves following the adoption and the improvements are mostly driven not by U.S. adopters but by IFRS adopters, suggesting that IFRS has a positive impact on earnings quality. Partitioning the sample, I find that firms with incentives for transparent reporting have stable earnings quality throughout the sample period whereas firms without such incentives show an improvement in earnings quality following the adoption. I also find that earnings quality declines to a greater degree for firms in extractive/high-litigation-risk industries relative to firms in non-extractive/low-litigation-risk industries. Further analyses reveal that (1) earnings quality seems to deteriorate for firms with intense reliance on fair value accounting after the adoption but not for firms with minimal reliance on fair value accounting, that (2) R&D intensive firms see some weak improvements in earnings quality following the adoption in comparison to non-R&D intensive firms, and that (3) IFRS adoption is associated with a greater improvement in earnings quality for loss firms than for profitable firms. Finally, the effects of IFRS seem unlikely to be uniform across different measures of earnings quality. Taken all together, the findings suggest that standard setters and researchers should probably not consider the effects of IFRS in isolation of firms' reporting incentives and that the SEC, that the Financial Accounting Standards Board's (FASB) concerns about the lack of implementation guidance in extractive and high-litigation-risk industries are warranted, and that fair value accounting is likely to be harmful to earnings quality.

By employing a Heckman two-stage selection model, we identify whether employing a financial expert with or without accounting expertise on the audit committee is optimal and how earnings quality varies across these optimal and suboptimal choices. Using four earnings quality measures (informativeness, timely loss recognition, earnings persistence, and accruals quality), we find no differences in earnings quality between firms optimally choosing an expert with or without accounting expertise, consistent with Demsetz and Lehn (J Polit Econ 93:1155–1177, 1985) and others who argue that when firms optimize their choice (i.e., accounting expertise), there should be no difference across the characteristic (i.e., earnings quality) being examined. We do find, however, earnings quality is significantly higher for firms that optimally choose an accounting expert relative to firms that choose (with/without accounting expertise) suboptimally. Finally, firms suboptimally choosing an accounting expert exhibit no improvement, or even lower earnings quality, than firms that optimally choose no accounting expert. Our results provide important evidence of the impact accounting expertise has on earnings quality when considering the firm’s choice.

This study examines whether the characteristic of family or non-family businesses matters in explaining earnings quality. This study analyzed 312 firms listed on the Indonesia Stock Exchange (IDX) for the period 2016–2020. To obtain robust results on the relationship between FB/NFB characteristics and earnings quality, this study measures earnings quality comprehensively, including measurements of available opportunities for earnings management, earnings management practices, earnings persistence, earnings restatement, and investor responsiveness to earnings quality. The regression analysis panel is employed to examine the effect of FB and NFB characteristics on earnings quality. Overall, the results prove that FB earnings quality is better than NFB earnings quality. The results of this study extend the implementation of socioemotional wealth theory in explaining the characteristics of FB, in which the characteristics of FB and non-FB have an impact on earnings quality. The results of this study are useful for financial statement analysts in interpreting earnings quality based on the characteristics of FB and NFB. The results of this study are also useful for investors in understanding financial statements as part of the fundamental analysis of investment decisions. Keywords: Earnings Quality, Family Business (FB), Non-family Business (NFB), Socioemotional Wealth Theory

Accruals and Short Selling: An Opportunity Foregone?

Objective - This study aims to prove whether the earnings quality of family businesses is better than non-family businesses to address two conflicting theories regarding the quality of family business earnings: agency theory and socioemotional wealth theory. Methodology/Technique –. This research uses a regression model to examine the influence of family business/non-family business characteristics on earnings quality. To obtain robust results, this research measures earnings quality using 5 measurement proxies, including measurements of available opportunities for earnings management, earnings management practices, earnings persistence, earnings restatement, and investor responsiveness to earnings quality. The screening sample was carried out on firms listed on the Indonesia Stock Exchange (IDX) for the period 2016–2020, resulting in 932 research observations. Findings - Overall, this research proves that FB earnings quality is better than NFB earnings quality. The results of this study extend the implementation of socioemotional wealth theory in explaining the characteristics of FB, in which the characteristics of FB and non-FB have an impact on earnings quality. Novelty - Financial statement analysts can utilize the results of this study in interpreting earnings quality based on the characteristics of FB and NFB. Type of Paper: Empirical JEL Classification: M41, M49. Keywords: Earnings Quality, Family Business (FB), Non-family Business (NFB), Socioemotional Wealth Theory Reference to this paper should be referred to as follows: Purba, G.K; Surya, A.N; Joshi, P.L; Tyagi, A. (2023). Is the Earnings Quality of Family Businesses Better Than Non-family Businesses?, Acc. Fin. Review, 8(2), 36 – 53. https://doi.org/10.35609/afr.2023.8.2(1)

PurposeThe purpose of this study is to examine whether institutional investors monitoring attenuate (exacerbate) weaker earnings persistence in politically connected firms (PCFs). In addition, it investigates whether earnings persistence do vary according to different types of political connections.Design/methodology/approachThis study employs earnings persistence as measure of earnings quality and ordinary least squares (OLS) model to examine: (1) the moderating effect of institutional investors’ ownership on the association between earnings persistence and PCFs and (2) the association between different types of political connections and earnings persistence.FindingsThis study finds that institutional investors' ownership attenuates weaker earnings quality in PCFs, indicating effective monitoring. However, stronger earnings persistence is associated with PCFs with longer political ties, audited by big four audit firm and with higher CEO power.Originality/valueThis study reveals the lower earnings persistence in PCFs can be attenuated by institutional investors monitoring. However, findings also suggest that earnings persistence in PCFs is affected by duration of political ties, big four audit firm and CEO power. This suggests that PCFs should not be viewed as a homogeneous group of firms.

The purpose of this study is to analyse empirical evidence of the effect of differences between accounting earnings and fiscal profits (book tax differences), operating cash flows and accrual amounts on the persistence behavior of corporate earnings. This study uses data from manufacturing companies in the Indonesian stock exchange during the period 2015 to 2017. The sample selection is have purposive sampling method and obtained a sample of 71 manufacturing companies in Indonesia that have met the research criteria. Data is analyzed with multiple regression to have the effect of independent variables on earnings persistence. The results showed that differences in accounting profit and taxable income and the magnitude of accrual did not affect earnings persistence while operating cash flow had an effect on earnings persistence.

Short sellers trade more on days with qualitative news – i.e. news containing fewer numbers. We show that this behavior is not informationally motivated but can be explained by short sellers exploiting higher liquidity on such days. We document that liquidity and noise trading increase in the presence of qualitative news thus enabling short sellers to better disguise their informed trades. Natural experiments support our findings. For example, qualitative news has a bigger effect on short sellers’ trading after a decrease in liquidity following a stock's deletion from S&P 500 and a lower effect when investor attention is distracted by the Olympic Games.

Do Short Sellers Target Firms with Poor Earnings Quality? Evidence from Earnings Restatements

The purpose of this research is to empirically prove the effect of operating cash flow and firm size on earnings persistence. The method used in this research is a quantitative method. The population of this research is 108 food and beverage sub-sector manufacturing companies listed on the Indonesia Stock Exchange in 2016-2018. The sampling technique in this research used the purposive sampling method so that the number of sample data used in this research was 36 manufacturing companies in the food and beverage sub-sector listed on the Indonesia Stock Exchange in 2016-2018. The variables in this research consisted of independent variables, namely operating cash flow and company size, while the dependent variable in this research was earnings persistence. The data analysis technique in this research used multiple linear regression analysis. The hypothesis testing of this research was conducted through the t-test with a significance level of 0.05, the F-test with a significance level of 0.05 and the coefficient of determination. The results of this research found empirical evidence that operating cash flow has a positive effect on earnings persistence while firm size has a negative effect on earnings persistence. Keywords: Operating Cash Flow, Firm Size, Earnings Persistence, Bursa Efek Indonesia

This study aims to examine the effect of investment opportunity set, company characteristics and board of commissioners on earnings quality with intervening variable earnings persistence. The population is manufacturing companies listed on the Indonesia Stock Exchange (IDX) in the 2015-2017 periods which consist of 156 companies. The research sample of 66 companies was obtained using purposive sampling method, so that a total of 198 units of analysis were obtained. Of the total unit analysis, outlier data was reduced by 85 data then the final total unit of analysis is 113 data. This study uses descriptive statistical analysis technique and path analysis. The results shows that IOS, board of commissioners and earnings persistence do not affect the earnings quality. Liquidity and capital structure have a significant negative effect on earnings quality. The board of commissioners does not affect the earnings persistence. The Sobel Test results show that earnings persistence is not able to mediate the influence of the board of commissioners on earnings quality. The conclusion of the study is liquidity and capital structure have a significant negative effect on earnings quality. This is a negative signal because management is considered unable to maintain the stability of the company’s condition.

This research aims to analyze and provide empirical evidence of the influence of earnings persistence variables on earnings quality, to analyze and provide empirical evidence of the influence of default risk variables on earnings quality, to analyze and empirical evidence that accounting conservatism moderates the effect of earnings persistence on earnings quality, to analyze and empirical evidence of conservatism accounting moderates the effect of default risk on earnings quality. This type of research is associative quantitative research, using secondary data. The data analysis method used is a panel data regression test using Microsoft Excel and Eviews 12 applications. The population in this study are all companies listed on the Indonesian Non-Financial Stock Exchange for the period 2020 - 2022. The data collection technique in this research is a purposive sampling technique with The results of the 842 research population were 89 companies with 3 years of observation, so that 267 data were processed in this research. The research results show that earnings persistence influences earnings quality, default risk influences earnings quality, accounting conservatism strengthens the relationship between earnings persistence and earnings quality and accounting conservatism is also able to strengthen the relationship between default risk and earnings quality.

This study examines the impact of firm-specific competition on earnings quality, focusing on a large sample of property-casualty insurers in the United States. Our findings support the hypothesis based on multimarket competition theory, revealing an inverted U-shaped relationship between multimarket contact (MMC)—the degree of market overlap between firms—and earnings quality. Initially, as MMC increases, insurers report higher quality loss reserves. However, beyond a certain point, further increases in MMC lead to a decline in loss reserve quality. These findings suggest that while heightened multimarket competition enhances earnings quality, excessive MMC results in mutual forbearance, which deteriorates earnings quality. Quantile regression analyses indicate that this inverted U-shaped relationship is more pronounced among insurers with lower earnings quality. Additionally, our results are robust across various earnings quality measures, instrumental variable analyses, and subsample analyses. Overall, we provide initial evidence that MMC significantly influences financial reporting quality.

This article aims to measure the effect of the audit firm rotation on the earnings quality of Brazilian public companies listed on BM&FBOVESPA in the period from 2008 to 2015. We use discretionary accruals as a measure of earnings quality, using two approaches: earnings management and the estimation errors. Results show that audit firm rotation reduced the volume of discretionary accruals and, thus, increases the earnings quality, when these are measured from the perspective of earnings management. However, we do not observe the effect of audit firm rotation on earnings quality when the discretionary accruals are measured from the perspective of accounting estimation errors. The results also show that companies that rotate audit firms voluntarily have greater discretionary accruals and, consequently, lower earnings quality.

This study aims to examine the effect of the performance of intellectual capital in the form of human capital, employed capital, and structural capital with company characteristics consisting of firm size, leverage, profitability as control variables on earnings quality. This research uses Penman's (1998) model as a measure of earnings quality, while Pulic's (1999) model as a measure of intellectual capital. Sampling used a purposive sampling method and produced 380 selected samples. The data used is secondary data taken from the annual financial reports of manufacturing companies listed on the IDX for 2019 – 2021. The results show that capital employed and structural capital have a significant positive effect on earnings quality, while human capital has no effect on earnings quality. The control variable firm size has a significant positive effect on earnings quality, while leverage and profitability have no effect on earnings quality.