William Kross

An Empirical-Investigation Of The Effect Of Quarterly Earnings Announcement Timing On Stock Returns

This research examines both the association between quarterly announcement timing (early or late) and the type of news (good or bad) reported, and the relationship between stock returns and timing around the earnings announcement date. Recent research on announcement timing (Givoly and Palmon [1982], Patell and Wolfson [1982], Kross [1981], and Whittred [1980]) has provided evidence that delayed announcements of annual earnings more often convey bad news (i.e., lower than expected earnings) than do early announcements. However, we know of no study which has reported evidence of the same phenomenon for quarterly earnings. Furthermore, there is a limited amount of evidence regarding the reaction of market participants to announcement timing. While three studies (Givoly and Palmon [1982], Kross [1982], and Chambers and Penman [1984]) find that early (late) announcements are associated with higher (lower) abnormal returns or high (low) stock return variability, relative to late (early) announcments, only Kross [1982] controlled for the sign of the earnings forecast error and none controlled for the magnitude of the earnings forecast error. It is well accepted that stock returns are associated with the sign of the earnings forecast error (EFE). Since announcement timing is also

The impact of the 1989 change in bank capital standards on loan loss provisions and loan write-offs

Abstract We investigate whether banks with low capital ratios use accounting accruals for capital ratio management. We focus on a time where we expect a change in bank managers behavior regarding certain accruals. In 1989 regulatory changes created (removed) incentives to depress loan loss provisions (write-offs) after (before) 1989. Our results show that banks with low capital ratios reduced their loan loss provisions and increased write-offs during the 1990–1992 period compared to the 1985–1988 period. Banks with high capital ratios exhibited no difference in loss provisions, but did significantly increase loan write-offs during 1990–92.

A test of risk clientele effects via an examination of trading volume response to earnings announcements

Abstract This research investigates whether volume reactions to a public announcement are related to changes in the risk of securities (i.e., investors undertake portfolio rebalancing when the risk of their portfolio becomes misaligned with their respective risk preferences). Our results document that an average (40 percent) change in beta is associated with a 0.10 percent increase in the number of shares traded in a ten-day period around the earnings announcement. Although risk clientele effects are less important than information effects, they are empirically significant.

Earnings and announcement time lags

Abstract This research is addressed to the issue of whether films that generate lower (higher) than expected earnings figures release those figures to the public later (earlier) than expected. Earnings expectations were gathered from the Value Line Investment Service and expectations of a firms earnings announcement date were generated via each of five simple models. The results indicate that lower (higher) actual earnings relative to forecasted earnings are most likely to be released to the public later (earlier) than expected. Thus, investors might have the opportunity to act on the anticipation of bad news before its actual announcement to the public.

The Market Pricing of Special Items that are Included Versus Excluded From 'Street' Earnings

We re-investigate the market pricing of special items, with particular emphasis on how managers “frame” them via their inclusion or exclusion from “street” earnings. When managers include the special items in “street” earnings (i.e., “street” = GAAP), the market overprices them, believing the special items to be more persistent than they actually are. As a result, there is a negative relationship between the special items and future stock returns in the following year. However, when managers exclude special items from “street” earnings (i.e., “street” ≠ GAAP), the market recognizes their transitory characteristic and the relationship between special items and returns is insignificant in the following year. We also demonstrate that the decision to include (exclude) special items with (from) “street” earnings is associated with whether inclusion or exclusion of special items a) increases earnings numbers, b) smoothes the earnings series, or c) helps managers to meet earnings benchmarks.

Fair Value Gains and Losses in Derivatives and CEO Compensation

This study examines the sensitivity of CEO compensation to fair value gains and losses in derivatives for firms in the U.S. oil and gas industry. Our evidence indicates that firms use derivatives for both hedging and non-hedging purposes and that the derivative gains have a substantial impact on firms’ overall earnings. We find that CEOs are rewarded for hedge derivative gains, more so in firms facing high financial contracting costs. However, we find that non-hedge derivative gains are also rewarded. Furthermore, the CEO compensation is more sensitive to non-hedge derivative gains than it is to non-hedge derivative losses. This is surprising because non-hedge derivatives often relate to speculation or inefficient hedging. Overall, our results suggest that the board does not fully distinguish between the nature of derivative activities and rewards all gains in a similar fashion. The presence of accounting financial expert on the compensation committee, however, does improve efficient contracting.

Bond Analysts' Forecasts on Cash Flows and Earnings

We examine the propensity and properties of bond analysts’ forecasts on cash flows and earnings. We find that the probability to issue cash flow, relative to earnings, forecasts is greater for bond analysts than for equity analysts, consistent with the notion that cash flow, relative to earnings, information is more important to bond investors than for stock investors. In addition, bond analysts’ cash flow (earnings) forecasts are more (less) accurate than equity analysts’ cash flow (earnings) forecasts. Finally, we show that bond investors’ reaction to bond analysts’ cash flow forecast revision is greater than that to bond analysts’ earnings forecast and that bond market reacts only to bond analysts’ forecast revisions but not to equity analysts’ forecast revisions. This manifests bond investors’ stronger demand for reliable information on future cash flows than for earnings. Overall, this study enhances our understanding of bond analysts’ informational role through their forecasting activities.