1- Introduction

2- Hypothesis development

3- Research design

4- Empirical results

5- Conclusion

References

Abstract

This paper investigates the relation between the extent of media coverage and stock price synchronicity and whether this relation varies across different institutional infrastructures. We document three notable findings. First, media coverage is negatively associated with stock price synchronicity, suggesting that the media facilitates the incorporation of firm-specific information into stock prices. Second, a firm’s information environment and corporate governance play a moderating role in the relation between media coverage and the synchronicity of stock prices. Third, the synchronicity-reducing effect of media coverage is stronger in countries with weak institutional infrastructures. Overall, our study suggests that media coverage is an important determinant of stock price synchronicity.

Introduction

The role of the media in the economy has been debated for a long time. On the one hand, by uncovering new insights about firms or disseminating firm-specific news stories to a broad audience, the media helps reduce information asymmetry and thus affects security pricing (e.g., Fang & Peress, 2009; Tetlock, 2010, 2011). Furthermore, the media helps improve corporate governance by undertaking original investigation and bringing fraud to the public’s attention (Miller, 2006) or by aligning managers’ and shareholders’ interests (Liu & McConnell, 2013). On the other hand, the media can be harmful if it delivers fake news, as once was claimed by President Trump.1 Indeed, Ahern and Sosyura (2014) document that media news can be manipulated by firms to influence their stock prices. Taken together, it therefore remains unclear whether greater media news coverage is associated with a greater or lesser amount of firm-specific information that is incorporated into stock prices. This study attempts to fill this gap. To measure the extent to which the price of a stock is able to incorporate firm-specific information, we follow prior studies and use stock price synchronicity, a measure of the degree to which individual stocks co-move with the market, as a summary measure. A considerable body of research establishes that the level of stock price synchronicity depends on the relative amount of firm-specific and market-level information being capitalized into stock prices (Dang, Moshirian, & Zhang, 2015; Fernandes & Ferreira, 2008; Hutton, Marcus, & Tehranian, 2009; Jin & Myers, 2006; Morck, Yeung, & Yu, 2000; among others). A higher synchronicity of stock prices indicates that the stock prices reflect more market-wide information relative to firm-specific information, or less informative stock prices. Using media news data from RavenPack for a sample of firms from 40 countries over the period of 2000–2016, we examine whether media coverage is related to stock price synchronicity and whether this association varies across different country-level institutional structures. This international setting allows us to exploit the rich variation in media coverage and institutional infrastructures across countries to better understand the relation between media coverage and stock price synchronicity and to answer the question of whether country-level institutional characteristics matter for this relation.

This study investigates whether mandatory adoption of International Financial Reporting Standards (IFRS) has affected the long-term cost of equity and debt in Latin America, where the enforcement of accounting standards and investor protection mechanisms are weak in comparison to developed nations. Analyzing a sample of firms from Argentina, Brazil, Chile, Mexico, and Peru, we show that mandatory IFRS adoption led to reduction in the cost of equity even after controlling for firm-level reporting incentives. Test results also show that the cost of debt was reduced significantly after the IFRS adoption. Our results suggest that enhanced disclosure and comparability stemming from IFRS in comparison to previous domestic accounting standards helped to mitigate the information asymmetry problem, and resulted in positive economic consequences for Latin American firms.

Introduction

The movement towards mandating the adoption of International Financial Reporting Standards (IFRS) is considered the most widespread global financial reform in accounting history (Daske, Hail, Leuz, & Verdi, 2008). The premise of these standards is to improve the transparency and reliability of financial statements across the globe and facilitate cross border investments. As a result of this global dimension, determining the economic consequences of the accounting standards as part of financial regulatory reforms is both more challenging and important as more countries with diverse levels of development adopt IFRS (Zeff, 2012). A considerable body of literature investigates the economic effects of IFRS adoption in developed nations (Barth, Landsman, & Lang, 2008; Daske et al., 2008; Houqe, Monem, & Zijl, 2016) 1 . They report the consequences of the adoption of IFRS on several different users, including accountants, investors, analysts, governments and international regulators. However, few studies have investigated these effects in the Latin American context (Pelucio-Grecco, Geron, Grecco, & Lima, 2014; Rodríguez, Cortez, Méndez, & Garza, 2017). Examining these effects have significant potential economic and social implications for emerging countries, which can impact both national and international users of accounting information. Therefore, regulators are interested in whether adopting IFRS may have contributed toward reducing the cost of capital and consequentially signalling an increase in market efficiency and market liquidity (Han et al., 2016).

This study investigates the asymmetric effects of unanticipated monetary shocks on stock prices in India over the period 1994M4–2018M11. We find that the evolution of stock prices is state-dependent across different monetary policy processes. Unanticipated monetary shocks appear to have significantly asymmetrically lagged effects on stock prices, namely: (i) the positive effect of negative unanticipated shocks in bull markets; and (ii) the negative effect of positive unanticipated shocks in bear markets. Our findings imply that monetary policy-markers should attend to these situations for the future of money-supply policies to diminish the degree of uncertainty about the money supply in adjusting stock prices.

Introduction

The relationship between monetary policy and the real economy has been well developed in the specialized literature. Lucas (1972), Barro (1978), and Frydman and Rappoport (1987) indicated that if anticipated monetary policy is neutral, only unanticipated monetary shocks are probably to entirely impact real output. Interestingly, the literature argues that the impacts of unanticipated monetary shocks can be asymmetric on real economic activities. This is attributed to the following factors: (i) the business cycle’s different stages (Galí, 2015; Iacoviello, 2005); (ii) the contraction versus the expansion in the conduct of monetary policy (Jiang, 2018; Shiu-Sheng, 2007); and (iii) the different levels of monetary policy effect on real economic activities. In the same vein, regarding financial markets, several studies found that the relationship between the monetary policy process and stock market prices is also asymmetric (Ravn, 2014; Ülke and Berument, 2016). Most studies on the relationship between monetary policy and stock market employed such estimation techniques as event analysis (Val et al., 2018), VAR models (Fausch and Sigonius, 2018; Singh and Nadkarni, 2018), DSGE models (Ravn, 2014), and Markov Switching models (Ivrendi and Guloglu, 2012).

This study examines the impact of stock price crash risk on future CEO power. Using a large panel sample with 17,816 firm-year observations, we posit and find a significant negative impact of stock price crash risk on CEO power, suggesting that CEO power becomes smaller after stock price crashes. We also find that our results are stronger for firms with female CEOs and are largely driven by firms with shorter-tenure CEOs. In addition, we find that the significant negative impact of stock price crash risk on CEO power is diminished for firms with strong corporate governance. Our study responds to the call in Habib, Hasan, and Jiang (2018) by providing more empirical evidence on the consequences of stock price crash risk.

Introduction

A large body of finance literature (e.g., Hong and Stein, 2003) documents that stock returns often exhibit negative skewness (i.e., more negative stock price movements than positive price movements). One critical factor that causes the negative skewness is the managerial tendency to withhold bad news for an extended period of time (e.g., Jin and Myers, 2006). When the accumulation of bad news reaches a relatively high level, the manager has to release or disclose the bad news to the investors, leading to a large negative stock price movement (i.e., a large price drop). This type of price drop risk is known as stock market crash risk (hereafter crash risk), which has recently received tremendous attention in academic research. Habib et al. (2018) find that the majority of recent research has centered on the determinants of crash risk, but little research has been devoted to investigate the consequences of crash risk.1 Hence, Habib et al. (2018) call for more empirical evidence to better understand the consequences of crash risk by stating that “we believe that there is immense potential for future research in the area of crash risk consequences (page 36)”. The purpose of this study is to respond to the call in Habib et al. (2018) by providing more empirical evidence on crash risk consequences. Specifically, we explore the relation between crash risk and future CEO power, an important managerial characteristic that has been extensively studied in accounting and finance literature. We hypothesize that crash risk is negatively related to future CEO power for two reasons. First, CEO power increases crash risk (Mamun et al., 2019). Habib et al. (2018) argue that rational firms should limit or eliminate certain factors that increase crash risk after stock price crashes. Hence, we expect that after price crashes, rational firms curtail CEO power. Second, CEO power is associated with negative firm outcomes including low market valuation, poor performance and low bond ratings (e.g., Liu and Jiraporn, 2010; Bebchuk et al., 2011).

I exploit a regulatory change that mandated that Over-the-Counter Bulletin Board (OTCBB) firms must comply with the reporting requirements of the 1934 Securities Exchange Act. I use this change to examine the association between equity values and financial statement data in voluntary and mandatory disclosure environments. Before the change, disclosure of financial statement information was voluntary for most of these firms. I study firms that initiate SEC filing after the change and classify them as disclosing and nondisclosing based on whether they voluntarily disclosed financial statement information before the regulatory change. In these firms’ initial SEC filings after the eligibility rule, they retroactively disclose financial statement information for the year prior to compliance with the rule. Thus I can observe previously withheld financial data. I find that the choice to voluntarily disclose is negatively associated with firm characteristics related to proprietary costs and with situations in which accounting information plays a less important role in resolving information asymmetry. For nondisclosing firms, I find evidence that equity values reflect financial statement data, even though this information was not publicly available, and that compliance with mandatory SEC disclosure requirements strengthens this association. For disclosing firms, I find evidence that suggests investors viewed their voluntary disclosure of financial statement data as credible and fail to find evidence that compliance with mandatory reporting requirements enhances this association.

Introduction

Companies in the United States with securities listed on the national exchanges, including the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and NASDAQ, must meet the requirements of the Securities Exchange Act of 1934 (1934 Act) and publicly disclose their quarterly and annual financial statements with the U.S. Securities and Exchange Commission (SEC). However, before 1999, most firms trading on the OTCBB were exempt from these requirements. As a result, some OTCBB firms voluntarily chose to disclose financial statement information, while others did not.2 When the SEC approved the ‘‘eligibility rule,” firms were required to comply with the reporting requirements of the 1934 Act to remain trading on the OTCBB. In their initial filing with the SEC, firms disclosed their financial statements for their most recent year and at least one year before the most recent year. To illustrate, E’Prime Aerospace Corporation did not voluntarily disclose financial statement information for the fiscal year that ended September 30, 1997. However, in its initial filing with the SEC on March 9, 1999, E’Prime provided its financial statements for the years that ended September 30, 1998 and 1997. Thus it became possible to observe financial statements that were not previously disclosed. In this paper, I use the introduction of the eligibility rule to study the extent to which stock prices incorporate financial statement information, even when it was not publicly available to investors.

1- Introduction

2- Empirical model and data

3- Empirical results

4- Factor model

5- Conclusion

References

Abstract

We study the forecasting power of financial variables for macroeconomic variables in 62 countries between 1980 and 2013. We find that financial variables such as credit growth, stock prices, and house prices have considerable predictive power for macroeconomic variables at the one- to four-quarter horizons. A forecasting model that includes financial variables outperforms the World Economic Outlook (WEO) forecasts in up to 85% of our sample countries at the four-quarter horizon. We also find that cross-country panel models produce more accurate out-of-sample forecasts than individual country models.

Introduction

The crisis of 2007−2009 caused widespread disruptions in the financial market, followed by a global economic downturn. These developments have led to an intense debate on macrofinancial linkages. The present paper contributes to this debate in the context of macroeconomic forecasts. Building our analysis on the extensive body of literature on forecasting, we examine the forecasting power of financial variables for macroeconomic variables in 62 countries between 1980 and 2013. We show that incorporating financial variables such as credit growth, stock prices, house prices, and bond yields in an otherwise simple model improves the accuracy of macroeconomic forecasts significantly. Our rationale for using financial variables to forecast macroeconomic variables is threefold. First, in the presence of financial market imperfections when the Modigliani-Miller theorem does not hold, changes in credit conditions are likely to result in changes in future macroeconomic conditions. In addition, by affecting the wealth of firms and households, changes in asset prices also affect their investment and consumption decisions. Second, the forward-looking nature of financial variables means that they incorporate information about the future of the economy that is not yet reflected in current macroeconomic outcomes. Finally, contemporaneous financial variables such as stock prices and interest rates can help to nowcast macroeconomic variables in countries where the latter are collected with considerable time lags.

Purpose – In the process of discussing the relationship between volume and price in the stock market, the purpose of this paper is to consider how to take the flow of foreign capital into consideration, to determine whether the inclusion of volume information really contributes to the prediction of the volatility of the stock price. Design/methodology/approach – By comparing the relative advantages and disadvantages of the two main non-parametric methods mainstream, and taking the characteristics of the time series of the volume into consideration, the stochastic volatility with Volume (SV-VOL) model based on the APF-LW simulation method is used in the end, to explore and implement a more efficient estimation algorithm. And the volume is incorporated into the model for submersible quantization, by which the problem of insufficient use of volume information in previous research has been solved, which means that the development of the SV model is realized. Findings – Through the Sequential Monte Carlo (SMC) algorithm, the effective estimation of the SV-VOL model is realized by programming. It is found that the stock market volume information is helpful to the prediction of the volatility of the stock price. The exchange market volume information affects the stock returns and the price-volume relationship, which is achieved indirectly through the net capital into stock market. The current exchange devaluation and fluctuation are not conducive to the restoration and recovery of the stock market. Research limitations/implications – It is still in the exploratory stage that whether the inclusion of volume information really contributes to the prediction of the volatility of the stock price, and how to incorporate the exchange market volume information. This paper tries to determine the information weight of the exchange market volume according to the direct and indirect channels from the perspective of causality. The relevant practices and conclusions need to be tested and perfected. Practical implications – Previous studies have neglected the influence of the information contained in the exchange market volume on the volatility of stock prices. To a certain extent, this research makes a useful supplement to the existing research, especially in the aspects of research problems, research paradigms, research methods and research conclusion. Originality/value – SV model with volume information can not only effectively solve the inefficiency of information use problem contained in volume in traditional practice, but also further improve the estimation accuracy of the model by introducing the exchange market volume information into the model through weighted processing, which is a useful supplement to the existing literature. The SMC algorithm realized by programming is helpful to the further advancement and development of non-parametric algorithms. And this paper has made a useful attempt to determine the weight of the exchange market volume information, and some useful conclusions are drawn.

Introduction

The managed floating exchange rate system has been put into action in China since July 21, 2005. Facing the abnormal fluctuation (represented by abrupt appearance and disappearance of circuit-breaker mechanism) in the stock market at the beginning of 2016 and under the background that RMB has showed the depreciation trend upon being added to SDR, it is essential to delve deeper into the issue whether the stock market fluctuation is buffered to some extent as a result of capital control for its restriction of capital flight, or aggravated for the gambling operation of the foregoing capital in the stock market. When exploring the stock price-volume relationship in the stock market, this dissertation makes tentative efforts to take the intention or strength of capital flight into consideration. In the foreign exchange market, capital flight will lead to the supply demand change of RMB and eventually demonstrate as an important factor of exchange rate fluctuation. Based on the analytical framework of stock price-volume relationship, the spot inquiry of financial institutions can represent more directly the intention and strength of capital flight in the foreign exchange market. With this, the spot inquiry volume of foreign exchange, as the direct representation, ranks to be a more targeted, direct and effective proxy variable compared with the exchange rate volatility. Therefore, this dissertation attempts to judge the forecast function of volume on stock price fluctuation by integrating foreign exchange volume information into the analytical framework of stock price-volume relationship, and to identify the external effect of capital control on stock market volatility, so as to provide experience reference for the existing policy adjustment in Chinese stock and foreign exchange market by virtue of research design and conclusions.

Introduction

Organizations need financial resources to expand their operations or growth.1 Growth can be achieved through launching new products and services or expanding operations beyond the existing resources. There are two resources used for achieving growth, i.e. internal resources and external resources.2 The business organizations mostly rely on internal sources (retained earnings) for expansion of the business. However, any significant growth opportunity will motivate organizations to rely on external resources, if there are limited internal resources. The external sources may include loans from banks, partnerships, merger with another company or acquiring other organization. The Mergers and Acquisition (M&As) are the emerging strategies adopted for expansion of the business in the corporate world. Due to its rapid growth, many organizations adopted these strategies for expanding their business and approximately four thousand transactions are recorded each year in the business world.1 Literature indicates numerous reasons for occurrence of Merger and Acquisitions1 between organizations. It includes organizational synergy where the merged venture receives high value than each individual firm.3 It may decrease expenses of the new ventures, maximize shareholder wealth, survival in the dynamic environment and structure, achieve economies of scale and scope, reduce costs and increase returns on equity.4 The M&As remained a favorite subject among researcher because of its significant importance in the corporate world.5 At the beginning of the era, the early M&As transactions have been reported in US in the eighteen century. Afterwards these transaction have been found in European markets in the nineteenth century.6 These strategies were adopted by many successful businesses of the world. The M&As strategies has been mostly practiced in developed countries, while less often in the developing countries. In addition Hoyle et al.,7 found a total of 9602 M&As in the corporate world since 2000. They concluded that most of these transactions were recorded in developed countries of the United States and European market, that’s why most studies in this field have been conducted in the developed economies.8 However, in a developing country like Pakistan, these strategies are less practiced and therefore less literature is available in this context. However, in a developing country like Pakistan, M & As have not much used in early nineties, but it is now becoming a useful strategy for growth and expansion in businesses. About one hundred and twenty one events were announced in the financial and non-financial sector during the years 1995 to 2011.2 The financial sector reported fifty seven mergers and acquisitions from the year 2002e2011 due to competitive environment and changes in regulations from time to time by the Central Bank to improve the banking sector in Pakistan.9 The State Bank Pakistan, for instance, has changed the minimum capital3 requirement for schedule banks from time to time. The paid-up capital was first increased and then decreased to financially strengthen the scheduled banks (SBP, 2008, 2009). In order to fulfill the minimal capital requirement, banks have two options to either issue new shares or to acquire or merge with other banks or firms to meet criteria set by the central bank. The changes in policies and some other factors like political and financial crises have increased transactions4 of M & As in the banking sector of Pakistan. It is necessary to measure the impacts of these transactions. The study therefore attempts to analyze the pre and post impacts of the phenomenon of mergers and acquisition. The main objective of this study is to analyze the impacts of mergers and acquisitions on the shareholders wealth as well as on the financial performance of banks after mergers and acquisitions in Pakistan.

Purpose – This study aims to find the response by stock market against the announcements of quarterly earnings is empirically tested by exploiting event study methodology. Efficient market hypothesis (EMH) on Saudi stock exchange is also tried on. Design/methodology/approach – The market model is applied to help gauge the expected returns and to illustrate abnormal returns around the event date. Findings – The results established that Saudi Stock Market does not bear semi-strong form of EMH. How efficient is the Saudi market is also reflected through evidence of significant abnormal returns and postearnings announcement drift around earning announcements dates. Research limitations/implications – The authors have not used analysts’ forecast as the expected earnings which are the limitation. As mentioned earlier, the authors used the quarterly earnings of the previous year as a proxy and that proxy could have been replaced by analysts’ forecast. Another limitation is that the trading volume in the event window is not considered. Practical implications – The behavior of Saudi capital market is of much concern, and the study of this with a perspective of EMH is the significance of this paper. Social implications – All stakeholders closely watch earnings announcements and its share price movement around the announcement date. Recently, Saudi Arabia has opened its doors to foreign investors, and big foreign investors are going to enter into Saudi capital market, and after their entry, the behavior of market could be different. In the authors’ opinion, this is the right time to study the efficiency of Saudi market before the entry of foreign investors. Originality/value – This study is based on the gap created by EMH of Saudi market using event methodology, observed in the existing literature, and it will be a contribution to literature.

Introduction

Financial information about any company is vital while appraising the value of stock prices. Investors do consider this public financial information to assess the potential future perspective of any firm. Earnings represent the measure of firm’s profits or loss from business activities and events during a stipulated period. Dividend and earnings announcements are the two most important financial information used by the investors for decisions regarding buying and selling of any firm’s share (Lonie and Abeyratna, 1996). A firm’s return represents the capital market’s measure of performance of the firm over a period. The information of earnings announcements is used by capital market as a yardstick to assess the profitability and financial strength of any firm. New financial information is normally unpredictable by definition; otherwise, it would have been reflected in the share price far before the announcement. Earnings based on current period for any firm reflects two sorts of information: current period wealth created for equity shareholders and about possible future earnings which will be ultimately distributed to the shareholders. Beaver (1968) described the following three links between earnings announcements and share prices: (1) earnings of current period provide information to predict earnings of future period; (2) earnings of current period provide information for expected dividends of future periods; and (3) earnings of current period provide information to determine the present value of expected future dividends.

Abstract

Purpose – The purpose of this paper is to research the impact of firms’ political connections on the stock price crash risk. Design/methodology/approach – Empirical methodology is used in this study. Findings – Using a large sample of Chinese firms for the period 2008-2013, the authors find that corporate political connections can reduce the stock price crash risk. When managers are still in politics or firms are in high financial transparency of local governments, the relationship between political connections and the stock price crash risk is weakened. In addition, the authors’ research shows that the corporate political connections influence the stock price crash risk by affecting the speed of confirmation of bad news. Research limitations/implications – The findings in this study suggest that political connections will affect corporate disclosure. Practical implications – These results can help senior executives and investors make better decisions to prevent the stock price crash risk. Originality/value – This paper empirically analyzes the impact of different types of political connections on the stock price crash risk for the first time.

Introduction

China is a typical guanxi-based (i.e. social networks) society. Political connections are arguably the most valuable among all the social relationships. Empirical evidence shows that firms enjoy political connections when the president or chairman of a firm is either a former or a current government official. As an important type of informal institutional arrangements, political ties are widespread in China’s current transitional economic system in China[1]. Corporate behaviors shaped by political connections through senior executives are appealing to academics. In this study, we investigate the economic consequence of political connections. Specifically, we study the impact of political connections on the stock price crash risk. Firms have incentives to appoint executives with political backgrounds as Chairman or CEO to enhance the firm’s competitive advantage. Existing research shows the positive economic consequence of political connections. For example, Jou et al. (2017) find that political connections can help companies obtain external financing from the banks. Yu et al. (2012) and Li and Xie (2014) find that the political background of executives background helps strengthen the resource-seeking ability of private enterprises. Recent behavioral corporate finance literature links political connections to increased tax benefits (Wu et al., 2009), more mergers and acquisitions (Li et al., 2009), greater convenience in bond issuance (Du, 2011), stronger competitive advantages (Faccio, 2006), and enterprise value (Chen, Kim and Yao, 2017; Chen, Li, Luo and Zhang, 2017; Chen, Ghoul and Guedhami et al. 2017). Thus, Zhang and Fang (2013) argue that companies are willing to disclose information to maintain the benefits of such political connections. Most of the existing studies focus on the impact of political connections on firm operations. To the extent that business operations are finally priced into stock prices, we investigate one important dimension of stock price – the risk of future stock price crash.

Purpose – Social media have recently become an important strategic marketing tool to increase firm value. Based on an integrated theoretical framework, this study aims to examine the market reaction at the time of the creation of a Twitter platform for 312 firms from the Fortune 500 firms. Design/methodology/approach – To test the hypotheses related to the effect of social media platforms on firm value, the event history analysis (EHA) was used, also known as event study, usually designed to examine the impact of a historical phenomenon for the US Fortune 500 firms that developed a Twitter platform. Findings – A significant market reaction was found around the starting date of Twitter activities for the subsample of firms that are not contaminated by any other corporate announcements, but not for the overall sample. The market reaction is higher for firms with two-way interaction strategies rather than one-way messaging in both the uncontaminated subsample and the overall sample. It is higher in smaller firms, firms with losses and those with a family and/or a dominant shareholder. Further, firms in the contaminated subsample are likely to follow a two-way strategy after a positive revision of their earnings per share. We have run several robustness checks, including cross-validation on a holdout sample, and these findings remain consistent. Research limitations/implications – The integrated theoretical framework is another significant contribution. To our knowledge, this is the first study across disciplines that integrates the social exchange theory (SET), social representation theory (SRT), social network analysis (SNA), social identity theory (SIT), signaling theory (ST) and the impression management theory (IMT) into one framework that is built around information as a resource and social interaction. Practical implications – The results suggest that Twitter can be used to add value if firms interact and reciprocate with the various stakeholders. Social implications – Firms using social media must interact and reciprocate with the various stakeholders. Originality/value – This research is different than the published research on this topic in that it examines the impact on stock prices of the introduction of a specific social media platform, i.e. Twitter. The present results of the paper add to the prior research on database marketing and show that marketing “with” the customer is adding more value than marketing “to” the customer. The use of the net extends the scope of database marketing into a certain form of interaction marketing with “face-to-face” interaction within the relationships between the firm and its customers. Finally, the conditions under which social media platforms are used in an interactive manner are shown, and depicts that firms are more likely to use a two-way interactive strategy following a one-year period of positive momentum.

Introduction

One bad Twitter “tweet” can lose companies as many as 30 customers (Sarah Shannon – November 25, 2009, Bloomberg). Social media is a technological phenomenon that facilitates communication and collaboration embedded in humans’ lives (Goldenberg et al., 2012; Tucker, 2014). Firms adopt policies and plans to achieve business goals in which insights gleaned from information exchange support the decision-making process (Bayus, 2013; Holsapple and Singh, 2000). Social media platforms are more frequently used as strategic marketing tools and channels to promote new products – goods and services (Park et al., 2010), to reach, observe and get closer to customers (Gopinath et al., 2013), to better understand their individual preferences (Li and Shiu, 2012) and to build customer equity (Drèze and Bonfrer, 2008). Further, these platforms provide stakeholders with several benefits and services including location-based recommendations (Zhao and Lu, 2012), user reviews (Hoehle et al., 2012) and development of personal and company brands, which is likely to result in a greater incremental value. However, the credibility of a social media strategy depends on how effective it is in helping the firm achieve its strategic goals and objectives. Despite the increasing number of companies using social media platforms, little is known about how the use of a particular social medium may affect the value of originator firms. In a recent survey looking at the use of social media by trading and investment firms, OneMarketData (2013) – a leader in tick data management and analytics – indicated a growing interest in social media in financial markets, but also some skepticism about the ability of social media to transmit quality signals to the market[1].

1- Introduction

2- Background, related literature, and hypothesis development

3- Research design and sample selection criteria

4- Descriptive statistics and empirical findings

5- Summary and conclusions

References

Abstract

The FASB, PCAOB, SEC, and AICPA have all acknowledged that the accounting field needs to revisit the statement of cash flows (SCF). While the overall number of restatements has held steady over the past five years, the percentage of cash flow restatements (CFRs) has risen from 8.7% of all restatements in 2009 to 20.2% of all restatements in 2014. We examine the determinants of CFRs, investors’ differential beliefs about CFRs, and the information content of CFRs by focusing on abnormal trading volume and price reactions to CFRs. We then examine whether the guidance the SEC/AICPA published in early 2006 changed the information content of CFRs. Finally, since the proper classification within the SCF is a current regulatory issue, we examine whether classification shifting within the SCFs impacts the market. The market finds CFRs to be informative with some investor disagreement as shown by higher abnormal trading volume. We also find an incremental volume reaction to changes in operating cash flows after the SEC allowance period. While the market responds negatively to CFRs, we find that the market does not differentiate between whether classification shifting occurs or does not occur with the CFR. This study has implications for policymakers, auditors, and investors since it is one of the first to examine the capital market consequences of CFRs.

Introduction

The purpose of this study is to examine the determinants and information content of cash flow restatements (CFRs). This study is the first to examine the abnormal trading volume and market price reactions to CFRs using a comprehensive multivariate analysis. We contribute to the literature by analyzing a dataset of CFRs that has rarely been studied, despite regulators’ recent interest in CFRs. We also analyze how investors perceive and react to this type of restatement. We contribute to literature on restatements by showing that the information content of CFRs is incrementally informative for investors and is incremental to the information contained in earnings restatements. While we provide evidence that the abnormal trading volume reaction to changes in operating cash flows increases after the SEC allowance period, we find that when classification shifting occurs within the statement of cash flows resulting from a CFR, there is no significant difference with abnormal trading volume or market returns reaction.2 The American Institute of Certified Public Accountants (AICPA), Financial Accounting Standards Board (FASB), Public Company Accounting Oversight Board (PCAOB), and the Securities and Exchange Commission (SEC) have all acknowledged that the accounting profession needs to revisit the statement of cash flows (SCF). While the overall number of restatements has held steady over the past five years, the percentage of CFRs has not. The SEC first dealt with the issue of misclassification of items in SCFs in 2005. The result was the SEC gave firms an allowance period to correct misclassified SCFs without penalty in 2006. The Center for Public Company Audit Firms (CPCAF) published Alerts #90 and then #98 to help firms determine whether or not to restate the SCFs. Most restatements at that time were related to the misclassification of items among the operating, investing, and financing categories within the SCFs. Following the SEC allowance period there was a decline in CFRs from 2006 to 2009. However, there has been a resurgence of cash flow restatements; the percentage of SCFs that were restated rose from 8.7% in 2009 to 20.2% in 2014.3 The reasons for restatements vary, but most do not involve complex determinations of underlying cash flow problems, and many of the issues with the original SCFs have been related to misclassifications. As a result, in 2014, the FASB acknowledged that the SCFs have been neglected by the standard setting bodies (FASB, 2014). The following year, the FASB asked the Emerging Issues Task Force to consider nine issues related to the SCFs to address this problem. The SEC also noted an increase in the number of restatements related to errors in SCFs (Crews, 2014). They called for companies to tighten accounting procedures and controls pertaining to the SCFs. The PCAOB also noted the same issue and hired inspectors to evaluate auditors’ testing of the SCFs (PCAOB, 2015). Consequently, the statement of cash flows continues to be a topic of interest for regulators.

Introduction

We investigate the association between comparability and cost of equity capital. Our study is motivated by the Financial Accounting Standards Board’s (FASB’s) Concept Statement No. 8 Qualitative Characteristics of Useful Financial Information, which defines comparability as, “the qualitative characteristic that enables users to identify and understand similarities in, and differences among, financial statement items. Unlike the other qualitative characteristics, comparability does not relate to a single item. A comparison requires at least two items” (FASB 2010, Con. 8: QC21). The FASB’s position complements past academic research suggesting that improvements in accounting quality, such as comparability, decrease investor information risk by improving estimates of future firm cash flows, leading to a lower cost of capital (e.g., Feltham and Xie 1994; Holmstrom 1979).

The FASB in Concept Statement 8 considers comparability distinct from attributes of accounting information involving data from only one firm, such as relevance and faithful representation. We label such attributes ‘within-firm’ accounting quality and argue that comparability is distinct from within-firm accounting quality because it requires ‘between-firm’ comparisons of financial statement items.1 Past research provides evidence of a significant negative association between within-firm accounting quality and cost of equity (e.g., Francis, LaFond, Olsson and Schipper 2004). For this reason, we control for within-firm accounting quality when assessing the relation between comparability and cost of equity capital. To our knowledge, our study is the first to provide evidence of the cost of capital benefits of comparability as being separate from within-firm accounting quality, thus providing support for the FASB’s position justifying comparability as a separate element of the its conceptual framework.