Advertisement

Journal of International Business Studies

, Volume 50, Issue 1, pp 48–82 | Cite as

Country-level institutions and management earnings forecasts

  • Wenjing Li
  • Jeff Ng
  • Albert TsangEmail author
  • Oktay Urcan
Article

Abstract

Using a comprehensive sample hand-collected from the original texts of management earnings forecasts from 27 countries, we provide descriptive evidence on the country-level institutional determinants and economic consequences of forecast characteristics. Using principal component factors constructed from a number of country-level institutional variables, we find that forecast disaggregation, frequency, precision, and attribution vary significantly with the business and accounting environment of a country. We further document that better quality management forecasts are generally associated with stronger stock market reactions and higher investment efficiency. Together, our findings suggest that country-level institutions play a vital role in voluntary disclosure characteristics.

Keywords

voluntary disclosure management forecasts investment efficiency 

Résumé

À l’aide d’un large échantillon prélevé manuellement à partir des textes originaux sur les prévisions de revenus managériaux de 27 pays, nous fournissons des données descriptives sur les déterminants institutionnels au niveau national et les conséquences économiques des caractéristiques de prévision. En utilisant les principaux facteurs construits à partir d’un certain nombre de variables institutionnelles nationales, nous constatons que la désagrégation, la fréquence, la précision et l’attribution des prévisions varient considérablement selon l’environnement managérial et comptable d’un pays. Nous prouvons, en outre, qu’une meilleure qualité des prévisions de gestion est généralement associée à des réactions plus fortes des marchés boursiers et à une plus grande efficacité des investissements. Parallèlement, nos conclusions suggèrent que les institutions nationales jouent un rôle vital sur les caractéristiques de la divulgation volontaire d’informations.

Resumen

Usando una muestra completa recolectada manualmente de textos originales de los pronósticos de ganancias de gestión en 27 países, damos evidencia descriptiva a nivel nacional sobre los determinantes institucionales y las consecuencias económicas de las características del pronóstico. Usando los factores componentes principales construidos a partir de una serie de variables institucionales a nivel país, encontramos que la desagregación, la frecuencia, la precisión, y la atribución del pronóstico varía significativamente con el entorno empresarial y contable de un país. Además, documentamos que los pronósticos de gestión de calidad son generalmente asociados con reacciones más fuertes del mercado de valores y mayor eficiencia de inversión. Juntos, nuestros resultados sugieren que las instituciones a nivel nacional de un país juegan un papel vital en las características de divulgación voluntaria.

Resumo

Usando uma amostra abrangente coletada manualmente de textos originais sobre previsões de ganhos gerenciais de 27 países, fornecemos evidências descritivas sobre determinantes institucionais em nível de país e consequências econômicas das características da previsão. Utilizando fatores de componentes principais construídos a partir de diversas variáveis institucionais no nível do país, descobrimos que a desagregação, a frequência, a precisão e a atribuição de previsões variam significativamente com o ambiente comercial e contábil de um país. Além disso, documentamos que melhores previsões de gestão da qualidade estão geralmente associadas a fortes reações do mercado de ações e maior eficiência do investimento. Em conjunto, nossos resultados sugerem que as instituições em nível de país desempenham um papel vital nas características da divulgação voluntária.

摘要

我们使用从27个国家的管理收益预测的原始文本中手工收集的综合样本,提供了有关国家层面的制度决定因素和预测特征的经济后果的描述性证据。我们利用一些国家层面的制度变量所构建的主成分因子,发现预测的分解,频率,精确度和归因随国家的商业和会计环境的变化而显著变化。我们进一步显示,较好的质量管理预测通常与较强的股市反应和较高的投资效率相关。综合来说,我们的研究结果表明,国家层面的制度在自愿披露特征方面发挥着至关重要的作用。

Notes

ACKNOWLEDGEMENTS

The authors gratefully acknowledge the insightful comments of Gary Biddle (Editor) and two anonymous reviewers. We also acknowledge the helpful comments of seminar participants at the 2014 Global Issues in Accounting Conference, hosted by the University of Chicago Booth School of Business and the University of North Carolina Kenan-Flagler School of Business; the 9th Annual Conference of Asia–Pacific Financial Markets; the 2015 Financial Accounting and Reporting Section Midyear Meeting; the 2015 European Accounting Association Annual Congress; the 2015 American Accounting Association Annual Meeting; the 2015 Auckland Finance Meeting; and 1st Capital Market-Based Accounting Research Conference in Münster. We also gratefully acknowledge the financial support of the National Natural Science Foundation of China (Approval Nos. 71772078) and GDHVPS (2016).

References

  1. Aguilera, R. V., Desender, K. A., Lamy, M. L., & Lee, J. H. 2017. The governance impact of a changing investor landscape. Journal of International Business Studies, 48(2): 195–221.Google Scholar
  2. Ali, A., & Hwang, L. 2000. Country-specific factors related to financial reporting and the value relevance of accounting data. Journal of Accounting Research, 38(1): 1–21.Google Scholar
  3. Aobdia, D., & Shroff, N. 2017. Regulatory oversight and auditor market share. Journal of Accounting and Economics, 63(2–3): 262–287.Google Scholar
  4. Badertscher, B., Shroff, N., & White, H. D. 2013. Externalities of public firm presence: Evidence from private firms’ investment decisions. Journal of Financial Economics, 109: 682–706.Google Scholar
  5. Baginski, S., & Hassell, J. 1990. The market interpretation of management earnings forecasts as a predictor of subsequent financial analyst forecast revision. The Accounting Review, 65: 175–190.Google Scholar
  6. Baginski, S., Hassell, J., & Kimbrough, M. 2002. The effect of legal environment on voluntary disclosure: Evidence from management earnings forecasts issued in the U.S. and Canadian markets. The Accounting Review, 77: 25–50.Google Scholar
  7. Baik, B., Kang, J., Kim, J., & Lee, J. 2013. The liability of foreignness in international equity investments: Evidence from the U.S. stock market. Journal of International Business Studies, 44(4): 391–411.Google Scholar
  8. Ball, R. 2001. Infrastructure requirements of an economically efficient system of public financial reporting and disclosure. Brookings–Wharton papers on financial services (pp. 127–183).Google Scholar
  9. Ball, R., Jayaraman, S., & Shivakumar, L. 2012. Audited financial reporting and voluntary disclosure as complements: A test of the confirmation hypothesis. Journal of Accounting and Economics, 53: 136–166.Google Scholar
  10. Ball, R., Kothari, S. P., & Robin, A. 2000. The effect of international institutional factors on properties of accounting earnings. Journal of Accounting and Economics, 29(1): 1–51.Google Scholar
  11. Barth, M. E., Landsman, W. R., Lang, M., & William, C. 2012. Are IFRS-based and US GAAP-based accounting amounts comparable? Journal of Accounting and Economics, 54(1): 68–93.Google Scholar
  12. Barton, J., Hansen, T., & Pownall, G. 2010. Which performance measures do investors around the world value the most and why? The Accounting Review, 85: 753–789.Google Scholar
  13. Beyer, A., Cohen, D. A., Lys, T. Z., & Walther, B. R. 2010. The financial reporting environment: Review of the recent literature. Journal of Accounting and Economics, 50: 296–343.Google Scholar
  14. Bhattacharya, U., Daouk, H., & Welker, M. 2003. The world price of earnings opacity. The Accounting Review, 78(3): 641–678.Google Scholar
  15. Biddle, G., & Hilary, G. 2006. Accounting quality and firm-level capital investment. The Accounting Review, 81: 963–982.Google Scholar
  16. Biddle, G., Hilary, G., & Verdi, R. S. 2009. How does accounting information quality relate to investment efficiency? Journal of Accounting and Economics, 48: 112–131.Google Scholar
  17. Boulton, T. J., Smart, S. B., & Zutter, C. J. 2017. Conservatism and international IPO underpricing. Journal of International Business Studies, 48(6): 763–785.Google Scholar
  18. Brannen, M. Y., Piekkari, R., & Tietze, S. 2014. The multifaceted role of language in international business: Unpacking the forms, functions and features of a critical challenge to MNC theory and performance. Journal of International Business Studies, 45: 495–507.Google Scholar
  19. Brochet, F., Miller, G. S., Naranjo, P., & Yu, G. 2016a. Managers’ cultural background and disclosure attributes. Working paper, Boston University. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2848405.
  20. Brochet, F., Naranjo, P. L., & Yu, G. 2016b. The capital market consequences of language barriers in the conference calls of non-U.S. firms. The Accounting Review, 91(4): 1023–1049.Google Scholar
  21. Brown, P., Preiato, J., & Tarca, A. 2014. Measuring country differences in enforcement of accounting standards: An audit and enforcement proxy. Journal of Business Finance and Accounting, 41(1–2): 1–52.Google Scholar
  22. Bushman, R., & Piotroski, J. 2006. Financial reporting incentives for conservative accounting: The influence of legal and political institutions. Journal of Accounting and Economics, 42: 107–148.Google Scholar
  23. Bushman, R., Piotroski, J., & Smith, A. 2004. What determines corporate transparency? Journal of Accounting Research, 42: 207–252.Google Scholar
  24. Cannizzaro, A. P., & Weiner, R. J. 2018. State ownership and transparency in foreign direct investment. Journal of International Business Studies, 49(2): 172–195.Google Scholar
  25. Cao, Y., Myers, L. A., Tsang, A., & Yang, Y. G. 2017. Management forecasts and the cost of equity capital: International evidence. Review of Accounting Studies, 22(2): 791–838.Google Scholar
  26. Chen, L., Dong, Y., Ng, J., & Tsang, A. 2017. Cross-listings and voluntary disclosure: International evidence. Working paper, George Mason University.Google Scholar
  27. Chen, L., Ng, J., & Tsang, A. 2015. The effect of mandatory IFRS adoption on international cross-listings. The Accounting Review, 90(4): 1395–1435.Google Scholar
  28. Christensen, H. B., Hail, L., & Leuz, C. 2013. Mandatory IFRS reporting and changes in enforcement. Journal of Accounting and Economics, 56(2/3): 147–177.Google Scholar
  29. Coller, M., & Yohn, T. 1997. Management forecasts and information asymmetry: An examination of bid-ask spreads. Journal of Accounting Research, 35: 181–191.Google Scholar
  30. Cumming, D., Filatotchev, I., Knill, A., Reeb, D. M., & Senbet, L. 2017. Law, finance, and the international mobility of corporate governance. Journal of International Business Studies, 48(2): 123–147.Google Scholar
  31. De George, E. T., Li, X., & Shivakumar, L. 2016. A review of the IFRS adoption literature. Review of Accounting Studies, 21: 898–1004.Google Scholar
  32. DeFond, M., Hu, X., Hung, M., & Li, S. 2011. The impact of mandatory IFRS adoption on foreign mutual fund ownership: The role of comparability. Journal of Accounting and Economics, 51(3): 240–258.Google Scholar
  33. DeFond, M., Hung, M., & Trezevant, R. 2007. Investor protection and the information content of annual earnings announcements: International evidence. Journal of Accounting and Economics, 43: 37–67.Google Scholar
  34. Dhaliwal, D. S., Khurana, I. K., & Pereira, R. 2011. Firm disclosure policy and the choice between private and public debt. Contemporary Accounting Research, 28(1): 293–330.Google Scholar
  35. Dhaliwal, D., Li, O. Z., Tsang, A., & Yang, Y. G. 2014. Corporate social responsibility disclosure and the cost of equity capital: The roles of stakeholder orientation and financial transparency. Journal of Accounting and Public Policy, 33: 328–355.Google Scholar
  36. Dhaliwal, D., Radhakrishnan, S., Tsang, A., & Yang, Y. G. 2012. Nonfinancial disclosure and analyst forecasts accuracy: International evidence on corporate social responsibility disclosure. The Accounting Review, 87(3): 723–759.Google Scholar
  37. Dong, L., Lui, G., & Wong-on-Wing, B. 2017. Unintended consequences of forecast disaggregation: A multi-period perspective. Contemporary Accounting Research, 34(3): 1580–1595.Google Scholar
  38. Durnev, A., & Mangen, C. 2009. Corporate Investments: Learning from restatements. Journal of Accounting Research, 47(3): 679–720.Google Scholar
  39. Dutta, S., & Gigler, F. 2002. The effect of earnings forecasts on earnings management. Journal of Accounting Research, 44(3): 631–655.Google Scholar
  40. Ellis, J. A., Moeller, S. B., Schlingemann, F. P., & Stulz, R. M. 2017. Portable country governance and cross-border acquisitions. Journal of International Business Studies, 48(2): 148–173.Google Scholar
  41. Ertimur, Y., Livnat, J., & Martikainen, M. 2003. Differential market reactions to revenue and expense surprises. Review of Accounting Studies, 8: 185–211.Google Scholar
  42. Florou, A., & Pope, P. F. 2012. Mandatory IFRS adoption and institutional investment decisions. The Accounting Review, 87(6): 1993–2025.Google Scholar
  43. Francis, J. R., Khurana, I. K., & Pereira, R. 2005. Disclosure incentives and effects on cost of capital around the world. The Accounting Review, 80(4): 1125–1162.Google Scholar
  44. Frankel, R., McNichols, M., & Wilson, P. 1995. Discretionary disclosure and external financing. The Accounting Review, 70: 135–150.Google Scholar
  45. Frost, C. A., Gordon, E. A., & Hayes, A. F. 2006. Stock exchange disclosure and market development: An analysis of 50 international exchanges. Journal of Accounting Research, 44(3): 437–483.Google Scholar
  46. Goodman, T. H., Neamtiu, M., Shroff, N., & White, H. D. 2014. Management forecast quality and capital investment decisions. The Accounting Review, 89(1): 331–365.Google Scholar
  47. Gu, F., & Li, J. Q. 2007. The credibility of voluntary disclosure and insider stock transactions. Journal of Accounting Research, 45: 771–810.Google Scholar
  48. Hansen, T. B., Kiletkov, M. K., & Wintoki, M. B. 2015. Investor protection and the role of firm-level financial transparency in attracting foreign investment. The Financial Review, 50: 393–434.Google Scholar
  49. Healy, P., & Palepu, K. 2001. Information asymmetry, corporate disclosure, and capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31: 405–440.Google Scholar
  50. Hirst, E., Koonce, L., & Venkataraman, S. 2007. How disaggregation enhances the credibility of management earnings forecasts. Journal of Accounting Research, 45: 811–837.Google Scholar
  51. Hirst, E., Koonce, L., & Venkataraman, S. 2008. Management earnings forecasts: A review and framework. Accounting Horizons, 22(3): 315–338.Google Scholar
  52. Hofstede, G. 1984. Culture’s consequences: International differences in work-related values. Beverly Hills: Sage.Google Scholar
  53. Hofstede, G., Hofstede, G. J., & Minkow, M. 2010. Cultures and organizations: Software of the mind (3rd ed.). New York: McGraw-Hill.Google Scholar
  54. Huang, J. 2018. Foreign earnings management of US multinational companies: The role of decision rights. Journal of International Business Studies, 49(5): 552–574.Google Scholar
  55. Hung, M. 2001. Accounting standards and value relevance of financial statements: An international analysis. Journal of Accounting and Economics, 30, 401–420.Google Scholar
  56. Hung, M., Kim, Y., & Li, S. 2018. Political connections and voluntary disclosure: Evidence from around the world. Journal of International Business Studies, 49(1): 1–31.Google Scholar
  57. Hung, M., Li, X., & Wang, S. 2015. Post-earnings-announcement drift in global markets: Evidence from an information shock. Review of Financial Studies, 28(4): 1242–1283.Google Scholar
  58. Isidro, H., Nanda, D., & Wysocki, P. 2016. Financial reporting differences around the world: What matters? Working paper, University of Miami.Google Scholar
  59. Jeanjean, T., Stolowy, H., & Erkens, M. 2010. Really “Lost in translation”? The economic consequences of issuing an annual report in English. Working paper, HEC Paris. http://hal.archives-ouvertes.fr/docs/00/47/95/11/PDF/p73.pdf.
  60. Kasznik, R., & Lev, B. 1995. To warn or not to warn: Management disclosures in the face of an earnings surprise. The Accounting Review, 70: 113–134.Google Scholar
  61. Kato, K., Skinner, D., & Kunimura, M. 2009. Management forecasts in Japan: An empirical study of forecasts that are effectively mandated. The Accounting Review, 84: 1575–1606.Google Scholar
  62. Kaufmann, D., Kraay, A., & Mastruzzi, M. 2010. The worldwide governance indicators: Methodology and analytical issues. Working paper, World Bank. http://info.worldbank.org/governance/wgi/pdf/wgi.pdf.
  63. King, R., Pownall, G., & Waymire, G. 1990. Expectations adjustment via timely management forecasts: Review, synthesis, and suggestions for future research. Journal of Accounting Literature, 9(1): 113–144.Google Scholar
  64. Koning, M., Mertens, G., & Roosenboom, P. 2018. Drivers of institutional change around the world: The case of IFRS. Journal of International Business Studies, 49(3): 249–271.Google Scholar
  65. La Porta, R., Lopez-De-Silanes, F., & Shleifer, A. 2006. What works in securities laws? Journal of Finance, 61(1): 1–32.Google Scholar
  66. La Porta, R., Lopez-De-Silanes, F., Shleifer, A., & Vishny, R. W. 1998. Law and finance. Journal of Political Economy, 106(6): 1113–1155.Google Scholar
  67. Lamoreaux, P. T. 2016. Does PCAOB inspection access improve audit quality? An examination of foreign firms listed in the United States. Journal of Accounting and Economics, 61: 313–337.Google Scholar
  68. Landsman, W. R., Maydew, E. L., & Thornock, J. R. 2012. The information content of annual earnings announcements and mandatory adoption of IFRS. Journal of Accounting and Economics, 53(1): 34–54.Google Scholar
  69. Lang, M., Lins, K. V., & Maffett, M. 2012. Transparency, liquidity, and valuation: International evidence on when transparency matters most. Journal of Accounting Research, 50: 729–774.Google Scholar
  70. Lang, M., & Lundholm, R. 2000. Voluntary disclosure and equity offering: Reducing information asymmetry or hyping the stock? Contemporary Accounting Research, 17: 623–662.Google Scholar
  71. Lansford, B., Lev, B., & Tucker, J. W. 2013. Causes and consequences of disaggregating earnings guidance. Journal of Business, Finance and Accounting, 40: 26–54.Google Scholar
  72. Li, X., & Yang, H. I. 2016. Mandatory financial reporting and voluntary disclosure: The effect of mandatory IFRS adoption on management forecasts. The Accounting Review, 91(3): 933–953.Google Scholar
  73. Pownall, G., Wasley, C., & Waymire, G. 1993. The stock price effects of alternative types of management earnings forecasts. The Accounting Review, 68: 896–912.Google Scholar
  74. Rogers, J., & Van Buskirk, A. 2009. Shareholder litigation and changes in disclosure behavior. Journal of Accounting and Economics, 47: 136–156.Google Scholar
  75. Rogers, J. L., & Van Buskirk, A. 2013. Bundled forecasts in empirical accounting research. Journal of Accounting and Economics, 55(1): 43–65.Google Scholar
  76. Seo, H. 2017. Peer effects in corporate disclosure decisions. Working paper, National University of Singapore.Google Scholar
  77. Shroff, N., Sun, A. X., White, H. D., & Zhang, W. 2013. Voluntary disclosure and information asymmetry: Evidence from the 2005 securities offering reform. Journal of Accounting Research, 51(5): 1299–1345.Google Scholar
  78. Shroff, N., Verdi, R. S., & Yu, G. 2014. Information environment and the investment decisions of multinational corporations. The Accounting Review, 89(2): 759–790.Google Scholar
  79. Simnett, R., Vanstraelen, A., & Chua, W. F. 2009. Assurance on sustainability reports: An international comparison. The Accounting Review, 84(3): 937–967.Google Scholar
  80. Skinner, D. 1994. Why firms voluntarily disclose bad news. Journal of Accounting Research, 32: 38–60.Google Scholar
  81. Srinivasan, S., Wahid, A. S., & Yu, G. 2015. Admitting mistakes: Home country effect on the reliability of restatement reporting. The Accounting Review, 90(3): 1201–1240.Google Scholar
  82. Tsang, A., Xie, F., & Xin, X. 2014. Foreign institutional investors and voluntary disclosure around the world. Working paper, York University.Google Scholar
  83. Wang, C. 2014. Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52(4): 1767–1789.Google Scholar

Copyright information

© Academy of International Business 2018

Authors and Affiliations

  • Wenjing Li
    • 1
  • Jeff Ng
    • 2
  • Albert Tsang
    • 3
    Email author
  • Oktay Urcan
    • 4
  1. 1.Jinan UniversityGuangzhouPeople’s Republic of China
  2. 2.The Chinese University of Hong KongShatinHong Kong
  3. 3.York University and Hong Kong Baptist UniversityNorth YorkCanada
  4. 4.University of Illinois at Urbana-ChampaignChampaignUSA

Personalised recommendations