Teri Lombardi Yohn

Management Forecasts and Information Asymmetry: An Examination of Bid-Ask Spreads

This paper investigates whether the decision to issue a management earnings forecast is related to information asymmetry in the market for the firm s stock and whether the forecasts reduce the asymmetry. Theoretical models hold that a portion of the bid-ask spread arises because of asymmetric information and that specialists widen spreads when they perceive greater information asymmetry. We find that forecasting firms have wider bid-ask spreads than a matched sample of non-forecasting firms prior to the forecast release. This difference disappears after the release of the management forecast. Forecasting firms also experience a gradual increase in spreads over the twelve months leading up to the forecast. The spread is reduced to below the pre- forecast level after the forecast is released.

An Analysis of the Underlying Causes Attributed to Restatements

The dramatic increase in the number of restatements filed over the past years has been attributed to numerous causes, including the complexity of the accounting standards, internal control reviews, changes in materiality thresholds, the overly conservative nature of auditors, earnings management, increased transaction complexity, and the second guessing of management judgments, by a variety of interested parties. However, empirical evidence on the underlying causes of restatements has been lacking. This study provides such evidence by directly addressing the questions of: (1) to what causes are restatements attributed, (2) to what characteristics of the accounting standards are restatements attributed, and (3) has the materiality threshold for restatements has fallen over the years? Relying on the restating companies’ disclosures about restatements, we find that companies most often attribute restatements to basic internal company errors unrelated to any specific characteristic of the accounting standards. We also find that, for those restatements attributed to some characteristic of the accounting standards, the primary contributing factor is the lack of clarity in applying the standards and/or the proliferation of the literature due to the lack of clarity in the original standard. These findings should be of interest to standard setters and regulators in addressing the proliferation of restatements and to academics in using restatements as proxies for constructs of interest in research.

Information friction and investor home bias: A perspective on the effect of global IFRS adoption on the extent of equity home bias

This paper provides a perspective on the effect of IFRS adoption on the tendency of investors to under-invest in foreign equities. We consider explanations for the home equity bias described in prior research and discuss research relevant to the informational consequences of global adoption of IFRS. Specifically, we evaluate whether IFRS adoption reduces information processing costs or decreases investor uncertainty about either the quality of financial reporting or the distribution of future cash flows. We predict that the effect of any reduction in information processing costs from the adoption of IFRS is likely to be small relative to the effects of other determinants of home bias such as the strength of investor protection mechanisms in foreign countries, behavioral biases toward familiar equities, and informational advantages related to geographical proximity. We conclude that global IFRS adoption is unlikely to reduce home bias and propose avenues for future research.

Understanding the Relation between Accruals and Volatility: A Real Options-Based Investment Approach

Accruals are fundamental to accounting; however, there is little theory to guide researchers in understanding the factors that shape a firm’s level of accruals. We consider accruals in their role as a form of investment to examine whether extant theories of investment under uncertainty can shed light on a firm’s level of working capital accruals. The theory suggests that uncertainty plays an important role in firms’ investment behavior because firms are more cautious about investment when uncertainty is higher. Consistent with theory, we document a significant negative relation between working capital accruals and uncertainty. We find that this negative relation is more pronounced for firms with longer operating cycles and less pronounced for firms in financial distress, and that working capital accruals are more sensitive to uncertainty than long-term investment. Collectively, our findings suggest that theories of investment under uncertainty can enrich our understanding of the factors that shape a firm’s level of accruals.Accruals are fundamental to financial reporting and are the underlying innovation of accounting. Despite this, accounting research has provided little understanding of how economic forces affect a firm׳s level of accruals and limited guidance for forming expectations of accruals based on ex ante firm characteristics. We consider accruals as a form of investment and examine whether theoretical predictions from a real options-based investment framework provide insight into the relation between accruals and the ex ante expected volatility faced by the firm. Specifically, the theory predicts that higher volatility dampens investment because firms prefer to ‘wait and see’ instead of investing immediately. Consistent with this theory, we document a robust negative relation between year-ahead net working capital accruals and expected volatility. We also predict and find that the negative association between year-ahead net working capital accruals and expected volatility is less pronounced for distressed firms and more pronounced for firms with a longer operating cycle, and that current asset accruals are more sensitive to volatility than current liability accruals. Finally, we find that the residuals from an investment-based expected accrual model outperform those from the widely-used performance-adjusted modified Jones model in identifying companies that just meet or beat analysts’ earnings forecasts. Collectively, our findings suggest that the investment perspective of accruals, and in particular the real options-based investment framework, provide useful insights for forming expectations of accruals.

Private versus Public Corporate Ownership: Implications for Future Profitability

We investigate the association between public versus private ownership and future long-term changes in profitability. Managers have long debated the implications of public and private corporate ownership; however, little empirical research has provided insight into the issue. We find robust evidence that public firms are associated with significantly lower future long-term changes in operating profitability compared to private firms matched on current profitability, size, growth and industry. We also find that the differential future long-term changes in profitability of public and private firms manifests in both future changes in profit margins and changes in asset turnovers. Additionally, we find evidence consistent with an association between short-termism, competition, and agency costs and the lower future long-term changes in profitability for public versus private firms. The results provide insight for managers and investors into the differential future changes in profitability of public versus private firms and into the factors that drive the differential profitability.

Do Companies Attempt to Strategically Hide Restatements? An Examination of Companies’ Regulatory Filing Choices

This study explores the factors associated with companies’ regulatory filing choices surrounding the restatement of previously filed financial statements. Companies have three regulatory filing alternatives of decreasing transparency: file an 8-K report, file an amended report, or restate the previous financial statements in subsequent regulatory filings. We examine whether the transparency of the regulatory filing decision is associated with the materiality of the restatement and/or company-specific strategic factors. We document that the decision to file 8-K reports is increasing with the materiality factors rather than with companies attempting to strategically hide restatements. The SEC’s rule change that clarified companies’ duties to report restatements in 8-K reports increased the use of 8-Ks, although it did not affect the importance of the various factors in that decision. The amended filing decision, a less transparent choice for which the SEC provides little to no guidance, is more complex: strategic factors are significantly associated with the amended filing decision both prior to and subsequent to the 8-K rule change. In addition, after the SEC rule change, companies are less likely to file amended reports but when an 8-K is filed, the company is more likely to also file an amended report. Our results suggest that the SEC guidance regarding the 8-K restatement filing requirements appears to have led to the intended consequences for 8-K filings, and that the SEC should perhaps consider providing additional guidance on the amended filing requirements.

The Speed of the Market Reaction to Pre-Open versus Post-Close Earnings Announcements

The vast majority of U.S. public firms announce earnings in the post-close (between the closing bell and midnight, or PC) or the pre-open (between midnight and the opening bell, or PO). Prior literature generally treats PC and PO announcements as equivalent when measuring the market reaction to the announcement. In this study, we provide a model of investor processing of earnings announcements and hypothesize that PO announcements have a slower market reaction to the earnings news than PC announcements. This differential speed of the market reaction is because PC announcements offer investors more time to process and trade on the earnings news before regular trading begins. We find strong empirical evidence that, although the earnings news and cumulative market reaction does not differ between PC and PO announcements, PO announcements incorporate earnings news more slowly in the days after the announcement than PC announcements.

Changes in the I/B/E/S Database and Their Effect on the Observed Properties of Analyst Forecasts

I/B/E/S is a common source of analyst earnings forecast data, and the reliability of these data is important for practice and academic research. Examining a common sample period, we compare annual earnings forecasts across two versions of the I/B/E/S detail file, one made available in 2009 and the other made available in 2015. We find substantial differences in the contents of these two versions of the detail file, as well as significant differences in the attributes of the earnings forecasts available in each version. Specifically, the earnings forecasts in the more recent version are more accurate and less biased, and they identify substantially different firms as meeting or just beating analysts’ expectations than those in the older version. To highlight the potential impact of these differences, we show that the economic magnitude of the effects of analyst experience and brokerage size on earnings forecast accuracy change by over 30 percent when we use the more recent version instead of the older version. Additional analyses suggest that the differences across versions of the detail file are ongoing. In contrast, we find that different versions of the summary file exhibit only minor differences over time. We also find significant differences in the properties of consensus earnings forecasts calculated from the individual earnings forecasts available in the detail file and consensus earnings estimates from the summary file. Finally, we provide guidance to researchers using I/B/E/S for analyst earnings forecast data.

Lost in the Details: Market Consequences of Disaggregating Items with Homogeneous Characteristics

While prior research generally concludes that there are significant benefits to increased earnings disaggregation within earnings announcements, we document adverse market consequences associated with the disaggregation of line items with similar characteristics. Specifically, we find significantly greater excess volume that is unproductive in terms of changing prices or providing information content (‘unproductive volume’) at the time of the earnings announcement for firms with greater operating earnings disaggregation. Our results highlight an important distinction for managers or regulators considering whether to increase disaggregation: while increasing the disaggregation of dissimilar items may be associated with favorable market outcomes (as documented in prior research), increasing the disaggregation of similar items can lead to unfavorable market outcomes. In short, more disaggregation is not always better.

Financial Statement-Based Forecasts and Analyst Forecasts of Profitability: The Effect of Mandatory IFRS Adoption

This study examines whether the improvement in analyst forecast accuracy around mandatory IFRS adoption is associated with the improvement in the accuracy of financial statement-based forecasts. We find significant out-of-sample improvement in financial statement-based forecast accuracy around mandatory IFRS adoption and significant improvement in analyst forecast accuracy only in countries that made concurrent improvements to financial reporting enforcement. We show that the improvement in analyst forecast accuracy is associated with the improvement in financial statement-based forecast accuracy around IFRS adoption. We also show that analyst forecasts, particularly for firms whose analysts forecast under favorable conditions (i.e., analysts who are less busy with more experience and resources), have a greater association with financial statement-based forecasts, after mandatory IFRS adoption in countries with concurrent changes in enforcement.