Market evaluation of discovery of distorted earnings signals: Empirical tests of changes in cash flow expectations, riskiness, and earnings quality hypotheses.
Item
-
Title
-
Market evaluation of discovery of distorted earnings signals: Empirical tests of changes in cash flow expectations, riskiness, and earnings quality hypotheses.
-
Identifier
-
AAI9405520
-
identifier
-
9405520
-
Creator
-
El-Sabbagh, Amal.
-
Contributor
-
Adviser: Steven Lustgarten
-
Date
-
1993
-
Language
-
English
-
Publisher
-
City University of New York.
-
Subject
-
Business Administration, Accounting | Economics, Finance
-
Abstract
-
This study examined how discovery of distorted earnings leads equity investors to revise securities value. Little effort has been devoted to the discovery that prior earnings were in error. This study, therefore, enhances the evidence in this area. Using an informational perspective, the purpose was to examine the association between the disclosure and the change in securities price, riskiness, and earnings informativeness.;The study required use of the Dow Jones News Service data base, CRSP tapes, Compustat tapes, NAARS data base, Moody's, and annual reports. Securities abnormal returns were estimated under the CAPM. The results provide evidence of a statistically significant adverse market impact, regardless of the direction of the correction and regardless of the cause of the misrepresentation. Also, the results provide evidence of the perceived increased volatility of future prospects, reflected in unsystematic volatility of securities returns. However, the results reveal that earnings misrepresentations are firm-specific factors. They have no impact on systematic risk. The stronger market impact associated with intentional misrepresentations, relative to unintentional misrepresentations, does not sustain across the various models used, i.e., inconclusive evidence. Also, equity investors do not differentiate between quarterly and annual earnings misrepresentations. The evidence indicates that disclosure of earnings misrepresentations reveals factors that interfere with the quality of earnings messages. Differential ERC and stock price variability provide evidence of a lower market response to the subsequent earnings signal, relative to prior earnings signal.;Compared to prior research, this study: (1) examines the market adjustment that is not restricted to a certain type of earnings misrepresentations; (2) provides stronger evidence and, therefore, a better understanding of the market reaction to the information disclosed; (3) helps to gain some insights of the effect of the information as to the change in the assessment of riskiness and earnings informativeness; (4) examines the effect of some qualitative attributes of the distortion on the market's adjustments; and (5) incorporates a number of refinements in the research methods, which lead to more reliable and conclusive results.;However, the evidence provided in this study is subject to a major limitation, the sample size. Although the sample size is relatively large, tests of some hypotheses were performed on smaller subsets of sample firms. Therefore, some results may not be generalizable. Regardless of those limitations, results provide some insights that are still of interest. Other implications can be addressed in future research: (1) the differences in characteristics between companies experiencing earnings misrepresentations compared to their industry members; (2) the effect of earnings misrepresentations on avoiding violation of debt covenants and on serving the management's self-interest, i.e., a positive accounting theory perspective; and (3) the social cost of earnings misrepresentations.
-
Type
-
dissertation
-
Source
-
PQT Legacy CUNY.xlsx
-
degree
-
Ph.D.
