Mark E. Zmijewski

Cross-sectional variation in the stock market response to accounting earnings announcements☆

Studies of the information content of accounting earnings typically assume earnings response coefficients do not vary across firms. Valuation models relating earnings to security prices, however, predict that earnings response coefficients are positively associated with revision coefficients (coefficients relating current earnings to future earnings) and negatively associated with expected rates of return. A random coefficient regression model provides evidence consistent with these predictions. This evidence has implications for interpreting multiple regression models that relate abnormal returns to unexpected earnings and other information variables.

An Evaluation of Alternative Proxies for the Market's Assessment of Unexpected Earnings

This study examines the association between abnormal returns and five alternative proxies for the markets assessment of unexpected quarterly earnings. We examine the role that measurement error potentially has in multiple regression tests of abnormal returns (occurring around the time of earnings announcements) on an unexpected earnings proxy and other non-earnings variables. The results indicate a potential measurement error interpretation of such multiple regression tests. We examine three procedures which reduce, to an unknown degree, the measurement error problem. Our procedures appear to be more (less) effective at reducing measurement error for small (large) firms and recent (non-recent) forecasts.

Extensions and violations of the statutory SEC form 10-K filing requirements☆

Abstract We present evidence that 20 percent of the 10-Ks in our sample are filed with the SEC after the 90-day statutory due date. Firms that delay filing their 10-K are not a random sample of firms; up to 25 (10) percent of the firms experiencing unfavorable (favorable) economic events delay their 10-K. Firms that delay their 10-K are, on average, small, have negative accounting rates of return, negative earnings changes, low liquidity, and high financial leverage; they also experience negative market- adjusted stock returns.

Contemporaneous Announcements of Dividends and Earnings

The information content of dividends is well documented in the literature. The marginal information content of dividends in the presence of contemporaneous earnings announcements, however, is ambiguous empirically and theoretically. This paper documents that quarterly dividend announcements convey information beyond that contained in contemporaneous quarterly earnings announcements. Earnings provide information beyond that provided by dividends regardless of the type of information in the dividend announcement, but especially when dividends and earnings provide consistent information or when dividends provide no information. The marginal information content of dividends, however, appears to be a result from the subsample of observations for which earnings indicate “favorable” news about the firm and dividends contemporaneously indicate “unfavorable” news. Dividends convey little, if any, information that is not already conveyed in contemporaneous earnings for other subsamples of firms.

The Association Between The Magnitude Of Quarterly Earnings Forecast Errors And Risk-Adjusted Stock Returns

Since the seminal work of Ball and Brown [1968] numerous studies have examined the association of both quarterly and annual earnings forecast errors and risk-adjusted stock prices.1 The research findings from these studies are consistent with the notion that there is a positive association between the signs of earnings forecast errors and risk-adjusted stock prices. Moreover, Beaver, Clarke, and Wright [1979] (hereafter BCW) also found an association between unsystematic security returns and the magnitude of annual earnings forecast errors over a 52week preannouncement period. They suggested that an important extension of their work would be to examine the association between the magnitude of quarterly earnings forecast errors and unsystematic returns. This is the primary focus of the present study.

Estimating models with binary dependent variables: Some theoretical and empirical observations

Many mathematically similar models are being used by business researchers to link binary dependent variables with a set of predictor variables. Typical research results indicate little difference between models in their ability to properly classify observations. But, there appear to be major differences in the interpretation of coefficients resulting from the calibration of these competing models. The empirical results in this article clearly show that when the assumptions underlying binary-dependent-variable techniques are violated, parameter estimates may be misleading. This can be true even when the goodness-of-fit statistics are not substantially affected.

Valuation with Market Multiples: How to Avoid Pitfalls When Identifying and Using Comparable Companies

An important part of the market multiple valuation process is selecting companies for comparison that are really comparable to the company being valued. The goal of assessing comparability is to align the relevant value drivers - especially risk and growth - of the comparable companies with those of the company being valued. In this paper, the authors examine the relevant value drivers for commonly used market multiples such as EBIT and EBITDA. They show that, in addition to risk and growth, analysts doing market multiple valuations need to take account of differences in variables such as cost structure, working capital, and capital expenditure requirements when assessing comparability. The authors also show that the degree to which different value drivers are important for assessing the comparability of companies differs across commonly used market multiples. In other words, some multiples are more sensitive than others to changes in certain value drivers. For example, when using a multiple like EBITDA in which certain expenditures (such as capital investments, working capital investments, and some expenses) are not deducted in the calculation of the denominator, assessing comparability based on such expenditures is more important than when using a multiple like free cash flow that deducts that expenditure in calculating the denominator. Or to cite another example, since EBIT and EBITDA make no attempt to reflect income taxes, using income tax cost structures to assess comparability is more important for enterprise value multiples based on these measures than for enterprise value multiples based on “after‐tax” measures of income such as unlevered earnings or free cash flow. In addition, not all multiples control for differences in cost structure, such as cost of goods sold or SGA and as a result, such value drivers also must be considered when assessing comparability.

Pitfalls in Levering and Unlevering Beta and Cost of Capital Estimates in DCF Valuations

The “levering” and “unlevering” of estimates of beta and various costs of capital are routine steps in estimating the discount rates used in DCF valuations. But as the authors demonstrate by reviewing the existing research on the subject, the levering and unlevering formulas that are most commonly used in practice are not appropriate for valuing many companies. They also illustrate the shortcomings of - and substantial valuation errors that can result from - the common practices of assuming that the betas of securities like debt and preferred stock are equal to zero and ignoring the effects of equity‐linked securities such as employee stock options, warrants, and convertible debt. The authors offer alternative levering formulas that are more appropriate for valuing most companies than - and as readily implemented as - the formulas commonly used today. They also provide a relatively easy way to estimate betas for debt and preferred stock that can be used in the levering and unlevering formulas. The authors discuss how properly to account for equity‐linked securities such as employee stock options, warrants, and convertible debt while demonstrating the potential importance of ignoring such equity‐linked securities in the levering and unlevering formulas. Finally, the authors show why it is appropriate to standardize the treatment of contractual obligations such as leases across comparable companies in order to get consistent estimates of the unlevered cost of capital.