An analysis of intertemporal and cross-sectional determinants of earnings response coefficients

Collins, Daniel W.; Kothari, S.P.

doi:10.1016/0165-4101(89)90004-9

Cited by 1,517 publications

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“…Consistent with prior research, the annual regression relating stock returns to the level and change in earnings provides positive coefficient estimates (both significant at the 0.001 significance level). In line with the results documented in Collins and Kothari [1989], we find that the coefficient estimate for the interaction between earnings and the market-to-book ratio is positive. We also find that earnings informativeness is decreasing in leverage.…”

Section: Resultssupporting

confidence: 79%

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Venture Capital Financing and the Informativeness of Earnings

Cohen

Langberg

2009

Asia-Pacific Journal of Accounting & Economics

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Are there long-term costs to obtaining venture capital financing? We explore the hypothesis that venture capital backed firms do not efficiently transform to the corporate structure of public firms and have difficulties publicly communicating with arm's length investors. Our results are three fold. First, we find that, on average, reported accounting earnings are less informative for venture capital backed firms.Second, the informativeness of reported earnings is a decreasing function of venture capitalists' ownership of firm equity and a decreasing function of venture capitalists' board representation. Third, stock prices of venture capital backed firms reflect future earnings to a lesser extent relative to non-venture capital backed firms. Our findings support the hypothesis that venture capitalists manage the flow of public information to capital markets and preserve short term interests arising from specific investment and ownership horizons. This evidence suggests that the benefits of receiving venture capital financing are not without costs. We explore the hypothesis that venture capital backed firms do not efficiently transform to the corporate structure of public firms and have difficulties publicly communicating with arm's length investors. Our results are three fold. First, we find that, on average, reported accounting earnings are less informative for venture capital backed firms.Second, the informativeness of reported earnings is a decreasing function of venture capitalists' ownership of firm equity and a decreasing function of venture capitalists' board representation. Third, stock prices of venture capital backed firms reflect future earnings to a lesser extent relative to non-venture capital backed firms. Our findings support the hypothesis that venture capitalists manage the flow of public information to capital markets and preserve short term interests arising from specific investment and ownership horizons. This evidence suggests that the benefits of receiving venture capital financing are not without costs.JEL Classification: M41, G14, G32

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Section: Resultssupporting

confidence: 79%

“…Collins and Kothari [1989] find that the book-to-market ratio is negatively associated with earnings informativeness; we include this variable in our regressions to control for the effect of investments opportunities on earnings informativeness.…”

Section: Empirical Analysismentioning

confidence: 99%

Venture Capital Financing and the Informativeness of Earnings

Cohen

Langberg

2009

Asia-Pacific Journal of Accounting & Economics

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“…R&D intensity relates to timeliness and forecastability, because greater R&D intensity is associated with more variable earnings (Kothari, Laguerre, and Leone (2002)) and with higher growth. We control for Beta, as a proxy for the firm's discount rate, because the coefficient on earnings is related to the rate at which earnings are discounted (Collins and Kothari, 1989).…”

mentioning

confidence: 99%

Capitalization of R&D and the Informativeness of Stock Prices

Oswald

Zarowin

2007

European Accounting Review

158

119

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This paper presents both a new approach to studying the consequences of accounting choice and a unique sample to examine the effects of accounting choice in the R&D context. We investigate the effect of firms' decision to capitalize R&D expenditures on the amount of information about future earnings reflected in current stock returns, as captured by the association between currentyear returns and future earnings (FERC). We use a sample of U.K. firms, which includes both R&D capitalizers and expensers. An important feature of our tests is our use of a two equation system to control for the endogeneity of the accounting choice (i.e., self selection). Proponents of capitalization claim that it enables management to better communicate information about the success of projects and their probable future benefits. Consistent with this, we find that capitalization is associated with higher FERC than expensing.2

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“…This parameter helps to explain the relation between earnings and firm valuation (Kormendi & Lipe, 1987;Ohlson, 1995). Persistent earnings have been acknowledged as being valuable for earnings forecasts (Frankel & Litov, 2009) and stock return predictions (Collins & Kothari, 1989).…”

Section: The Role Of Earnings Persistence In Firm Valuation and Time mentioning

confidence: 99%

The Role of Earnings Persistence in Valuation Accuracy and the Time Horizon

Pimentel

Aguiar

2016

Rev. adm. empres.

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Based on the assumption that earnings persistence has implications for both financial analysis and compensation contracts, the aim of this paper is to investigate the role of earnings persistence assuming that (i) more persistent earnings are likely to be a better input to valuation models and (ii) more persistent earnings are likely to serve as a proxy for long-term market and managerial orientation. The analysis is based on Brazilian listed firms from 1995 to 2013, and while we document strong support for the relevance of earnings persistence in financial analysis and valuation, we fail to document a significant relationship between earnings persistence and long-term value orientation. These results are sensitive to different specifications, and additional results suggest that firms' idiosyncratic risk (total risk) is relevant to explain the focus on short-term outcomes (short-termism) across firms. The main contribution of this paper is to offer empirical evidence for the relevance of accounting numbers in both valuation and contractual theories in an emergent market.

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An analysis of intertemporal and cross-sectional determinants of earnings response coefficients

Cited by 1,517 publications

References 32 publications

Venture Capital Financing and the Informativeness of Earnings

Venture Capital Financing and the Informativeness of Earnings

Capitalization of R&D and the Informativeness of Stock Prices

The Role of Earnings Persistence in Valuation Accuracy and the Time Horizon

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