Vicki Wei Tang

Earnings Volatility and Earnings Predictability

Survey evidence indicates widely held managerial beliefs that earnings volatility is negatively related to earnings predictability. In addition, existing research suggests that earnings volatility is determined by economic and accounting factors, and both of these factors reduce earnings predictability. We find that the consideration of earnings volatility brings substantial improvements in the prediction of both short- and long-term earnings. Conditioning on volatility information also allows one to identify systematic errors in analyst forecasts, which implies that analysts do not fully understand the implications of earnings volatility for earnings predictability.

Wisdom of Crowds: Cross-sectional Variation in the Informativeness of Third-Party-Generated Product Information on Twitter

This paper examines whether third‐party‐generated product information on Twitter, once aggregated at the firm level, is predictive of firm‐level sales, and if so, what factors determine the cross‐sectional variation in the predictive power. First, the predictive power of Twitter comments increases with the extent to which they fairly represent the broad customer response to products and brands. The predictive power is greater for firms whose major customers are consumers rather than businesses. Second, the word‐of‐mouth effect of Twitter comments is greater when advertising is limited. Third, a detailed analysis of the identity of the tweet handles provides the additional insights that the predictive power of the volume of Twitter comments is dominated by “the wisdom of crowds,” whereas the predictive power of the valence of Twitter comments is largely attributable to expert comments. Furthermore, Twitter comments not only reflect upcoming sales, but also capture an unexpected component of sales growth.

Matching and the Properties of Accounting Earnings over the Last 40 Years

This paper presents a theory and empirical evidence that investigate the effects of poor matching on the properties of accounting earnings. The key intuition of this theory is that poor matching manifests as noise in the economic relation between revenues and expenses. As a result, poor matching decreases the correlation between contemporaneous revenues and expenses and increases the correlation between non-contemporaneous revenues and expenses. With regards to earnings effects, poor matching increases earnings volatility, decreases earnings persistence, and induces a negative autocorrelation in earnings changes. Since poor matching resolves over time, we expect that all of these effects are less pronounced over longer-horizon definitions of earnings. The empirical tests concentrate on documenting the effects of matching and the associated properties of earnings in a sample of the 1,000 largest U.S. firms over the last 40 years. We find a clear and economically substantial trend of declining contemporaneous correlation between revenues and expenses, while the correlation between revenues and non-contemporaneous expenses is increasing. We also find strong evidence of increased volatility of earnings, declining persistence of earnings, and increased negative autocorrelation in earnings changes. As expected, these trends are less pronounced for longer-horizon definitions of earnings. Based on this evidence we conclude that accounting matching has become worse over time and that this trend has produced a pronounced effect on the properties of the resulting earnings. This evidence also suggests that the FASBs stated goal of moving away from matching and towards more fair-value accounting is likely to continue and deepen the identified trends in the properties of earnings.

Lost in Transition: Generalized Trust and CEO Succession

This study examines whether cultural elements, such as generalized trust, impede the proper working of the market place. Results suggest that generalized trust influences the size of the in-groups from which a firm’s CEO is chosen and the length of the succession process. The effect of generalized trust on CEO succession is causal. Furthermore, the negative impact of a family CEO on firm performance is more prevalent when generalized trust is low. In summary, lack of generalized trust impedes the proper working of the managerial labor market, which leads to inefficient economic outcomes at the firm level.

Earnings Management and Future Corporate Investment

This paper examines whether earnings management through accounting manipulation has an impact on subsequent corporate investments. Using a measure of earnings management based on the work of Kothari, Leone, and Wasley (2005), I find that investment level in firms with the most aggressive accounting practices is higher and is less sensitive to internal cash flows, whereas investment in firms with the least aggressive accounting practices is more sensitive to internal cash flows. Furthermore, earnings management induces investment inefficiency in the future. The findings suggest that financial reporting has an impact on real investment patterns and efficiency. This paper also provides cross-sectional evidence that corporate investments respond to the market assessment even when it differs from the managerial own assessment of the fundamentals.