IDEAS home Printed from https://ideas.repec.org/p/ags/cudawp/127185.html
   My bibliography  Save this paper

The World Price of Earnings Opacity

Author

Listed:
  • Bhattacharya, Utpal
  • Daouk, Hazem
  • Welker, Michael

Abstract

We analyze the financial statements of 58,653 firm-years from 34 countries for the period 1985-1998 to construct a panel data set measuring three dimensions of reported accounting earnings for each country – earnings aggressiveness, loss avoidance, and earnings smoothing. We hypothesize that these three dimensions are associated with uninformative or opaque earnings, and so we combine these three measures to obtain an overall earnings opacity time-series measure per country. We then explore whether our three measures of earnings opacity affects two characteristics of an equity market in a country – the return the shareholders demand and how much they trade. While not all results are consistent for our three individual earnings opacity measures, our panel data tests document that, after controlling for other influences, an increase in overall earnings opacity in a country is linked to an economically significant increase in the cost of equity and an economically significant decrease in trading in the stock market of that country.

Suggested Citation

  • Bhattacharya, Utpal & Daouk, Hazem & Welker, Michael, 2003. "The World Price of Earnings Opacity," Working Papers 127185, Cornell University, Department of Applied Economics and Management.
    • Handle: RePEc:ags:cudawp:127185
    DOI: 10.22004/ag.econ.127185
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/127185/files/Cornell_Dyson_wp0304.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.127185?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
    2. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, April.
    3. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July.
    4. Utpal Bhattacharya & Hazem Daouk, 2002. "The World Price of Insider Trading," Journal of Finance, American Finance Association, vol. 57(1), pages 75-108, February.
    5. Shivakumar, Lakshmanan, 2000. "Do firms mislead investors by overstating earnings before seasoned equity offerings?," Journal of Accounting and Economics, Elsevier, vol. 29(3), pages 339-371, June.
    6. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    7. Degeorge, Francois & Patel, Jayendu & Zeckhauser, Richard, 1999. "Earnings Management to Exceed Thresholds," The Journal of Business, University of Chicago Press, vol. 72(1), pages 1-33, January.
    8. Hollis Ashbaugh & Morton Pincus, 2001. "Domestic Accounting Standards, International Accounting Standards, and the Predictability of Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 39(3), pages 417-434, December.
    9. Himmelberg, Charles P. & Hubbard, R. Glenn & Palia, Darius, 1999. "Understanding the determinants of managerial ownership and the link between ownership and performance," Journal of Financial Economics, Elsevier, vol. 53(3), pages 353-384, September.
    10. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," The Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
    11. Fudenberg, Drew & Tirole, Jean, 1995. "A Theory of Income and Dividend Smoothing Based on Incumbency Rents," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 75-93, February.
    12. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    13. Joos, P & Lang, M, 1994. "The Effects Of Accounting Diversity - Evidence From The European-Union," Journal of Accounting Research, Wiley Blackwell, vol. 32, pages 141-168.
    14. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    15. Teoh, Siew Hong & Welch, Ivo & Wong, T. J., 1998. "Earnings management and the underperformance of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 50(1), pages 63-99, October.
    16. Ball, Ray & Kothari, S. P. & Robin, Ashok, 2000. "The effect of international institutional factors on properties of accounting earnings," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 1-51, February.
    17. Bekaert, Geert & Harvey, Campbell R, 1995. "Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-444, June.
    18. Harvey, Campbell R, 1991. "The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-157, March.
    19. Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 3-37, December.
    20. Zhou, Xianming, 2001. "Understanding the determinants of managerial ownership and the link between ownership and performance: comment," Journal of Financial Economics, Elsevier, vol. 62(3), pages 559-571, December.
    21. Bhattacharya, Utpal & Spiegel, Matthew, 1991. "Insiders, Outsiders, and Market Breakdowns," The Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 255-282.
    22. Dumas, Bernard & Solnik, Bruno, 1995. "The World Price of Foreign Exchange Risk," Journal of Finance, American Finance Association, vol. 50(2), pages 445-479, June.
    23. Barth, ME & Elliott, JA & Finn, MW, 1999. "Market rewards associated with patterns of increasing earnings," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 387-413.
    24. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    25. Harris, Ts & Lang, M & Moller, Hp, 1994. "The Value Relevance Of German Accounting Measures - An Empirical-Analysis," Journal of Accounting Research, Wiley Blackwell, vol. 32(2), pages 187-209.
    26. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
    27. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    28. Rangan, Srinivasan, 1998. "Earnings management and the performance of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 50(1), pages 101-122, October.
    29. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    30. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
    31. Siew Hong Teoh & T. J. Wong, 2002. "Why New Issues and High-Accrual Firms Underperform: The Role of Analysts' Credulity," The Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 869-900.
    32. Givoly, Dan & Hayn, Carla, 2000. "The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative?," Journal of Accounting and Economics, Elsevier, vol. 29(3), pages 287-320, June.
    33. Jones, Jj, 1991. "Earnings Management During Import Relief Investigations," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 193-228.
    34. Ball, Ray & Kothari, S. P. & Robin, Ashok, 2000. "Corrigendum to "The effect of international institutional factors on properties of accounting earnings"; [Journal of Accounting and Economics 29 (2000) 1-51]," Journal of Accounting and Economics, Elsevier, vol. 30(2), pages 241-241, October.
    35. Bushman, Robert M. & Smith, Abbie J., 2001. "Financial accounting information and corporate governance," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 237-333, December.
    36. Jacoby, Gady & Fowler, David J. & Gottesman, Aron A., 2000. "The capital asset pricing model and the liquidity effect: A theoretical approach," Journal of Financial Markets, Elsevier, vol. 3(1), pages 69-81, February.
    37. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
    38. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
    39. Alford, A & Jones, J & Leftwich, R & Zmijewski, M, 1993. "The Relative Informativeness Of Accounting Disclosures In Different Countries," Journal of Accounting Research, Wiley Blackwell, vol. 31, pages 183-223.
    40. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
    41. Ali, A & Hwang, LS, 2000. "Country-specific factors related to financial reporting and the value relevance of accounting data," Journal of Accounting Research, Wiley Blackwell, vol. 38(1), pages 1-21.
    42. Ferson, Wayne E & Harvey, Campbell R, 1993. "The Risk and Predictability of International Equity Returns," The Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 527-566.
    43. Peter Blair Henry, 2000. "Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices," Journal of Finance, American Finance Association, vol. 55(2), pages 529-564, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Daouk, Hazem & Lee, Charles M.C. & Ng, David, 2006. "Capital market governance: How do security laws affect market performance?," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 560-593, June.
    2. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    3. Utpal Bhattacharya & Hazem Daouk, 2002. "The World Price of Insider Trading," Journal of Finance, American Finance Association, vol. 57(1), pages 75-108, February.
    4. Bushman, Robert M. & Smith, Abbie J., 2001. "Financial accounting information and corporate governance," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 237-333, December.
    5. Luzi Hail & Christian Leuz, 2006. "International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?," Journal of Accounting Research, Wiley Blackwell, vol. 44(3), pages 485-531, June.
    6. Hooper, Vince & Sim, Ah Boon & Uppal, Asfandyar, 2009. "Governance and stock market performance," Economic Systems, Elsevier, vol. 33(2), pages 93-116, June.
    7. Lombardo, Davide & Pagano, Marco, 1999. "Legal Determinants of the Return on Equity," CEPR Discussion Papers 2275, C.E.P.R. Discussion Papers.
    8. Macías, Marta & Muiño, Flora, 2011. "Examining dual accounting systems in Europe," The International Journal of Accounting, Elsevier, vol. 46(1), pages 51-78, March.
    9. Bushman, Robert M. & Piotroski, Joseph D., 2006. "Financial reporting incentives for conservative accounting: The influence of legal and political institutions," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 107-148, October.
    10. Mark L. Defond & Mingyi Hung, 2004. "Investor Protection and Corporate Governance: Evidence from Worldwide CEO Turnover," Journal of Accounting Research, Wiley Blackwell, vol. 42(2), pages 269-312, May.
    11. Vander Bauwhede, Heidi & Willekens, Marleen & Gaeremynck, Ann, 2003. "Audit firm size, public ownership, and firms' discretionary accruals management," The International Journal of Accounting, Elsevier, vol. 38(1), pages 1-22.
    12. DeFond, Mark L., 2010. "Earnings quality research: Advances, challenges and future research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 402-409, December.
    13. Asokan Anandarajan & Bill Francis & Iftekhar Hasan & Kose John, 2011. "Value relevance of banks: global evidence," Review of Quantitative Finance and Accounting, Springer, vol. 36(1), pages 33-55, January.
    14. Karampinis, Nikolaos I. & Hevas, Dimosthenis L., 2011. "Mandating IFRS in an Unfavorable Environment: The Greek Experience," The International Journal of Accounting, Elsevier, vol. 46(3), pages 304-332, September.
    15. Iatridis, George, 2010. "International Financial Reporting Standards and the quality of financial statement information," International Review of Financial Analysis, Elsevier, vol. 19(3), pages 193-204, June.
    16. Yu, Fang (Frank), 2008. "Analyst coverage and earnings management," Journal of Financial Economics, Elsevier, vol. 88(2), pages 245-271, May.
    17. Hunter, Delroy M., 2006. "The evolution of stock market integration in the post-liberalization period - A look at Latin America," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 795-826, August.
    18. In‐Mu Haw & Bingbing Hu & Lee‐Seok Hwang & Woody Wu, 2004. "Ultimate Ownership, Income Management, and Legal and Extra‐Legal Institutions," Journal of Accounting Research, Wiley Blackwell, vol. 42(2), pages 423-462, May.
    19. Adler, Michael & Qi, Rong, 2003. "Mexico's integration into the North American capital market," Emerging Markets Review, Elsevier, vol. 4(2), pages 91-120, June.
    20. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2007. "Liquidity and Expected Returns: Lessons from Emerging Markets," The Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 1783-1831, November.

    More about this item

    Keywords

    Demand and Price Analysis;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:cudawp:127185. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/dacorus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.