Anwer S. Ahmed

Stock market valuation of gains and losses on commercial banks' investment securities An empirical analysis

Abstract Prior studies document an insignificant effect of unrealized gains/losses (URGL) and a negative effect of realized gains/losses (SGL) on bank stock returns. We argue that these results may reflect the omission of changes in value of other net assets resulting from interest rate changes. We find that after controlling for effects of other (on-balance sheet) net assets, both URGL and SGL have significant positive effects on bank returns in normal periods. But the SGL effect is significantly lower in periods of low capital and earnings. These findings are relevant to the market value accounting debate.

Evidence on the Role of Accounting Conservatism in Monitoring Managers' Investment Decisions

Watts (2003), among others, argues that conservatism helps in corporate governance by mitigating agency problems associated with managers’ investment decisions. We hypothesize that if conservatism reduces managers’ ex ante incentives to take on negative NPV projects and improves the ex post monitoring of investments, firms with more conservative accounting ought to have higher future profitability and lower likelihood (and magnitude) of future special items charges. Consistent with this expectation, we find that firms with more conservative accounting have (i) higher future cash flows and gross margins, and (ii) lower likelihood and magnitude of special items charges than firms with less conservative accounting.

Accounting Conservatism and the Valuation of Accounting Numbers: Evidence on the Feltham-Ohlson (1996) Model

We empirically investigate the effects of accounting conservatism on (1) the stock market valuation of operating assets in the context of the Feltham-Ohlson (1996) model and (2) the weight on operating assets in the Feltham-Ohlson abnormal operating earnings dynamics (hereafter referred to as the LIM conservatism parameter). Consistent with the Feltham-Ohlson (1996) model, we find that accounting-based conservatism proxies are positively related to the valuation weight on operating assets. Furthermore, the accounting-based conservatism proxies have incremental explanatory power even after controlling for (1) size, (2) book value (or sales) growth, and (3) leverage. These results are robust with respect to alternative empirical specifications of the valuation model and the choice of proxies for accounting conservatism. We also find, consistent with prior research but not with the Feltham-Ohlson model, that the sign of the LIM conservatism parameter is on-average negative. We provide evidence on the types of firms for which the linear information dynamics appears to hold better or worse. More specifically, the firms with negative values of the parameter are significantly smaller, less profitable and experiencing lower growth rates than firms with positive values of the parameter. Moreover, the relation between accounting-based conservatism proxies and the LIM conservatism parameter is fairly strong for the subsample of firms with high levels of profitability.

An Empirical Analysis of the Effects of Online Trading on Stock Price and Trading Volume Reactions to Earnings Announcements

This study provides evidence on the effects of online trading on stock price and trading volume reactions to quarterly earnings announcements. We test for differences in stock price and volume reactions to quarterly earnings announcements between a period with a significant amount of online trading (1996-1999) and a period without online trading (1992-1995). We conjecture that online trading has increased the proportion of naive investors in the market. We predict that this will result in (i) a decrease in the average precision of investor information prior to earnings announcements implying higher ERCs, (ii) an increase in differential interpretation of earnings leading to higher trading volume reactions that are unrelated to price change, and (iii) a decrease in differential prior precision leading to a decrease in the association between trading volume and absolute price change. We find evidence consistent with all three predictions. Our findings are relevant for assessing the validity of concerns about online trading expressed by regulators and the validity of theoretical models of trade with asymmetrically informed investors.

Audit Quality, Alternative Monitoring Mechanisms, and Cost of Capital: An Empirical Analysis

Prior studies document that firms using a Big 4 auditor have a lower cost of capital than other firms. We extend this literature by examining whether using an industry specialist auditor reduces cost of capital for clients of Big 4 audit firms. We document that firms that use Big 4 auditors that are industry specialists have significantly lower cost of both equity and debt than firms that use non-specialist Big 4 auditors. We further investigate whether the benefits of using an industry specialist auditor vary with the strength of alternative monitoring mechanisms. We show that using an industry specialist auditor is especially important when alternative monitoring mechanisms, such as boards of directors or institutional shareholders, are relatively weak. In other words, the benefits of using an industry specialist auditor dissipate when alternative monitoring mechanisms are strong. This evidence suggests some degree of substitutability between audit quality and alternative monitoring mechanisms.

Earnings Characteristics and Analysts’ Differential Interpretation of Earnings Announcements: An Empirical Analysis

This study provides empirical evidence on factors that drive differential interpretation of earnings announcements. We document that Kandel and Pearsons forecast measures of differential interpretation are decreasing in proxies for earnings quality and pre-announcement information quality. This evidence yields new and useful insights regarding which earnings announcements are less likely to generate newfound disagreement among analysts and investors. Recent research suggests that investor disagreement can increase investment risk, increase the cost of capital, and cause stock prices to deviate from fundamental value. Therefore, our results support prior intuition that increasing the quality of earnings and pre-announcement information can improve the efficiency of capital markets.

Dissecting Stock Price Momentum Using Financial Statement Analysis

The literature on stock price momentum documents that past price performance predicts future price performance (over the next 3–12 months). We argue that past price performance can be driven either by fundamentals or by non‐fundamental reasons and financial statement analysis (FSA) can help distinguish between these drivers of past returns. We find that price momentum reverses where fundamentals are inconsistent with past price performance, allowing us to develop an investment strategy that outperforms a pure momentum strategy over 80 percent of the time. Overall, we document robust evidence on the usefulness of FSA for enhancing momentum strategies.

The Effects of Earnings and Firm Characteristics on Differential Interpretation of Earnings Announcements

This study examines whether differential interpretation of earnings announcements is affected by earnings and firm characteristics. We find that Kandel and Pearsons (1995) forecast measures of differential interpretation are: 1) negatively related to earnings predictability, firm size, and price-to-book ratio, and 2) positively related to earnings surprise, negative earnings, and analyst coverage. This evidence suggests that differential interpretation of earnings announcements is decreasing in the quality of the earnings, the quality of pre-announcement disclosure, and the cost of analyzing a firms value.