Financial
Accounting
Research
Summary of the Seminars
Given in 2021/2022 | Summary by LouisT
,Contents
Chapter 1. Nichols and Wahlen (2004) and Dechow (1994) ................................................................. 5
1.1 Nichols and Wahlen (2004) .................................................................................................... 5
1.2 Dechow (1994) ........................................................................................................................ 6
Chapter 2. Conservatism and Goodwill Impairments ......................................................................... 12
2.1 Banker, et al (2017)............................................................................................................... 12
2.2 Glaum et al. (2018) ............................................................................................................... 16
Chapter 3. Properties of Accounting information over time .............................................................. 20
3.1 He and Shan (2016) ............................................................................................................... 21
3.3 Curtis et al. (2020)................................................................................................................. 26
Chapter 4. Bamber et al. (2010) and Jung et al. (2018) ....................................................................... 29
4.1 Bamber et al. (2010) ............................................................................................................. 30
4.1.1 Introduction .................................................................................................................. 30
4.1.2 Theory and Hypotheses ................................................................................................ 31
4.1.3 Research design ............................................................................................................ 32
4.1.4 Results ........................................................................................................................... 33
4.1.5 Conclusions ................................................................................................................... 33
4.2 Jung et al. (2018) ................................................................................................................... 33
4.2.1 Hypotheses.................................................................................................................... 34
4.2.2 Research Design ............................................................................................................ 34
4.2.3 Results ........................................................................................................................... 34
4.2.4 Variation in Strategic Dissemination............................................................................ 36
4.2.5 Conclusions ................................................................................................................... 36
Chapter 5. Nichols and Wahlen (2004) and Dechow (1994) ............................................................... 37
5.1 McVay.................................................................................................................................... 38
5.1.1 Hypotheses.................................................................................................................... 39
5.1.2 Data Method ................................................................................................................. 39
5.1.3 Results ........................................................................................................................... 39
5.1.4 Conclusions ................................................................................................................... 40
5.2 Amiram et al. (2015) ............................................................................................................. 40
5.2.1 Benford’s Law. .............................................................................................................. 40
5.2.2 Conclusion ..................................................................................................................... 41
Chapter 6. Counterfactual Analysis ...................................................................................................... 42
6.1 Mittelback-Hormanseder (2021) .......................................................................................... 43
6.1.1 Mixed Results ................................................................................................................ 43
6.1.2 Research Design ............................................................................................................ 44
3
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, 6.1.3 Results ........................................................................................................................... 45
6.1.4 Summarize .................................................................................................................... 46
6.2 Paper 2: The effect of mandatory CSR disclosure on firm profitability and social
externalities: evidence from China. ................................................................................................. 46
4
A summary by LouisT on Stuvia.nl | Thank you for your purchase! | Version 2.0 (Final)
,Chapter 1. Nichols and Wahlen (2004) and Dechow (1994)
1. The first question is about why we should expect a positive relationship between earnings
and returns.
2. The second question is about we must find out why persistence is important.
Understanding the persistence concept. You will have to be able to explain this.
3. The third question goes one step further by the post-earnings announcement drift. How do
we measure this empirically?
4. Why do we care about these things from the perspective of stakeholders
5. The fifth question, which is the next paper, looks at the principles of accrual accounting. We
look at the adjustments in the financial statement. Accruals are used to mitigate timing and
matching problems. So what is a timing and matching problem?.
6. The last two questions, will take these problems and look at how these are measured
empirically.
1.1 Nichols and Wahlen (2004)
1. Nichols and Wahlen (2004) discuss, and provide empirical evidence on, the relation between
accounting net income (“earnings”) and changes in stock prices(“stock returns”). In simple words,
explain the intuition behind why we should expect to observe a positive relation between earnings
performance and stock returns.
Yes, they tend to move together. However, this is not always the case as many other factors can
influence this effect.
Nichols and Wahlen test the fundamental question of whether earnings reflect information that the
capital markets believe is relevant and reliable. We look at the accounting numbers, which leads to
how the investors use this information for their decisions. We saw positive numbers, there’s this
optic but do not see this for negative. We see that most already happened before the
announcement.
Earnings should relate to changes in stock price because earnings are informative about the future
dividends/cashflows/earnings the company is expected to generate and this future performance
affects the share price.
5
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, 2. As Nichols and Wahlen (2004) also discuss and find, the relation between earnings and returns
should be stronger for companies with more persistent earnings. Explain what they mean with
earnings “persistence”.
Earnings persistence: The likelihood that a firm’s earnings level of this period will recur in future
periods. We expect that a surprise is related to the returns and this is stronger when earnings are
persistent, which is the likelihood that the firm’s earnings level of this period will recur in future
periods.
The greater the persistence of earnings (or a specific gain or expense), the greater its effect should be
on the valuation of the company.
3. Nichols and Wahlen (2004) also examine a phenomenon called “post-earnings announcement
drift” (PEAD). Explain how they empirically identify that this phenomenon exists in their data.
Drift means that after the announcement, we still see a stock market reaction we did not expect to
see. This means that we can predict earnings based on this accounting information after being made
public. This shouldn’t happen when markets are efficient because it should be reflected in the stock
price. So the market (on average) doesn’t understand the information completely.
This is identified through a positive relationship between the earnings surprise (ES) at time t and the
future stock returns (CAR) at time t+1.
4. Explain why you believe it is important to have empirical insights on the relation between
earnings and returns, as well as PEAD, from the perspective of stakeholders such as accounting
standard setters or stock market regulators.
This evidence indicates that the stock market is not fully efficient concerning public information and
investors need more time to digest the earnings news. The quicker and more complete, the market
reacts to accounting information, the better the objective of financial reporting has been achieved
(recall the IASB conceptual framework). This means they want to improve the IFRS standards as this
means we disclose more effective information by providing better standards. W
There should be relevant information that has predictive value.
1.2 Dechow (1994)
Investors prefer cash over earnings. They are more interested in what comes in. Previously we said
earnings matter while investors are more interested in cash. Accruals take care of the matching and
timing problems of cashflows. Accruals are estimated, while cash comes in. Managers do not affect
this cash flow, while they do when manipulating accruals.
From Nicholas And Wahlen, we saw that the stock market reaction to accounting is an underreaction
with explaining returns. So cash and earnings are not moving the same, earnings perform better, but
why is that?
The market typically focuses on estimated accrual-based earnings or revenues, instead of cashflows.
The stock market typically focuses on estimates of accrual-based earnings or revenues, instead of
cashflows. This also suggests that investors perceive performance measured based on accruals to be
a useful summary measure of performance.
This paper answers why this is with a careful explanation of what accounting accruals do, combined
with empirical evidence. SO they investigate in what circumstances, accruals improve earnings ability
to measure firm performance as reflected in the stock market.
6
A summary by LouisT on Stuvia.nl | Thank you for your purchase! | Version 2.0 (Final)
Accounting
Research
Summary of the Seminars
Given in 2021/2022 | Summary by LouisT
,Contents
Chapter 1. Nichols and Wahlen (2004) and Dechow (1994) ................................................................. 5
1.1 Nichols and Wahlen (2004) .................................................................................................... 5
1.2 Dechow (1994) ........................................................................................................................ 6
Chapter 2. Conservatism and Goodwill Impairments ......................................................................... 12
2.1 Banker, et al (2017)............................................................................................................... 12
2.2 Glaum et al. (2018) ............................................................................................................... 16
Chapter 3. Properties of Accounting information over time .............................................................. 20
3.1 He and Shan (2016) ............................................................................................................... 21
3.3 Curtis et al. (2020)................................................................................................................. 26
Chapter 4. Bamber et al. (2010) and Jung et al. (2018) ....................................................................... 29
4.1 Bamber et al. (2010) ............................................................................................................. 30
4.1.1 Introduction .................................................................................................................. 30
4.1.2 Theory and Hypotheses ................................................................................................ 31
4.1.3 Research design ............................................................................................................ 32
4.1.4 Results ........................................................................................................................... 33
4.1.5 Conclusions ................................................................................................................... 33
4.2 Jung et al. (2018) ................................................................................................................... 33
4.2.1 Hypotheses.................................................................................................................... 34
4.2.2 Research Design ............................................................................................................ 34
4.2.3 Results ........................................................................................................................... 34
4.2.4 Variation in Strategic Dissemination............................................................................ 36
4.2.5 Conclusions ................................................................................................................... 36
Chapter 5. Nichols and Wahlen (2004) and Dechow (1994) ............................................................... 37
5.1 McVay.................................................................................................................................... 38
5.1.1 Hypotheses.................................................................................................................... 39
5.1.2 Data Method ................................................................................................................. 39
5.1.3 Results ........................................................................................................................... 39
5.1.4 Conclusions ................................................................................................................... 40
5.2 Amiram et al. (2015) ............................................................................................................. 40
5.2.1 Benford’s Law. .............................................................................................................. 40
5.2.2 Conclusion ..................................................................................................................... 41
Chapter 6. Counterfactual Analysis ...................................................................................................... 42
6.1 Mittelback-Hormanseder (2021) .......................................................................................... 43
6.1.1 Mixed Results ................................................................................................................ 43
6.1.2 Research Design ............................................................................................................ 44
3
A summary by LouisT on Stuvia.nl | Thank you for your purchase! | Version 2.0 (Final)
, 6.1.3 Results ........................................................................................................................... 45
6.1.4 Summarize .................................................................................................................... 46
6.2 Paper 2: The effect of mandatory CSR disclosure on firm profitability and social
externalities: evidence from China. ................................................................................................. 46
4
A summary by LouisT on Stuvia.nl | Thank you for your purchase! | Version 2.0 (Final)
,Chapter 1. Nichols and Wahlen (2004) and Dechow (1994)
1. The first question is about why we should expect a positive relationship between earnings
and returns.
2. The second question is about we must find out why persistence is important.
Understanding the persistence concept. You will have to be able to explain this.
3. The third question goes one step further by the post-earnings announcement drift. How do
we measure this empirically?
4. Why do we care about these things from the perspective of stakeholders
5. The fifth question, which is the next paper, looks at the principles of accrual accounting. We
look at the adjustments in the financial statement. Accruals are used to mitigate timing and
matching problems. So what is a timing and matching problem?.
6. The last two questions, will take these problems and look at how these are measured
empirically.
1.1 Nichols and Wahlen (2004)
1. Nichols and Wahlen (2004) discuss, and provide empirical evidence on, the relation between
accounting net income (“earnings”) and changes in stock prices(“stock returns”). In simple words,
explain the intuition behind why we should expect to observe a positive relation between earnings
performance and stock returns.
Yes, they tend to move together. However, this is not always the case as many other factors can
influence this effect.
Nichols and Wahlen test the fundamental question of whether earnings reflect information that the
capital markets believe is relevant and reliable. We look at the accounting numbers, which leads to
how the investors use this information for their decisions. We saw positive numbers, there’s this
optic but do not see this for negative. We see that most already happened before the
announcement.
Earnings should relate to changes in stock price because earnings are informative about the future
dividends/cashflows/earnings the company is expected to generate and this future performance
affects the share price.
5
A summary by LouisT on Stuvia.nl | Thank you for your purchase! | Version 2.0 (Final)
, 2. As Nichols and Wahlen (2004) also discuss and find, the relation between earnings and returns
should be stronger for companies with more persistent earnings. Explain what they mean with
earnings “persistence”.
Earnings persistence: The likelihood that a firm’s earnings level of this period will recur in future
periods. We expect that a surprise is related to the returns and this is stronger when earnings are
persistent, which is the likelihood that the firm’s earnings level of this period will recur in future
periods.
The greater the persistence of earnings (or a specific gain or expense), the greater its effect should be
on the valuation of the company.
3. Nichols and Wahlen (2004) also examine a phenomenon called “post-earnings announcement
drift” (PEAD). Explain how they empirically identify that this phenomenon exists in their data.
Drift means that after the announcement, we still see a stock market reaction we did not expect to
see. This means that we can predict earnings based on this accounting information after being made
public. This shouldn’t happen when markets are efficient because it should be reflected in the stock
price. So the market (on average) doesn’t understand the information completely.
This is identified through a positive relationship between the earnings surprise (ES) at time t and the
future stock returns (CAR) at time t+1.
4. Explain why you believe it is important to have empirical insights on the relation between
earnings and returns, as well as PEAD, from the perspective of stakeholders such as accounting
standard setters or stock market regulators.
This evidence indicates that the stock market is not fully efficient concerning public information and
investors need more time to digest the earnings news. The quicker and more complete, the market
reacts to accounting information, the better the objective of financial reporting has been achieved
(recall the IASB conceptual framework). This means they want to improve the IFRS standards as this
means we disclose more effective information by providing better standards. W
There should be relevant information that has predictive value.
1.2 Dechow (1994)
Investors prefer cash over earnings. They are more interested in what comes in. Previously we said
earnings matter while investors are more interested in cash. Accruals take care of the matching and
timing problems of cashflows. Accruals are estimated, while cash comes in. Managers do not affect
this cash flow, while they do when manipulating accruals.
From Nicholas And Wahlen, we saw that the stock market reaction to accounting is an underreaction
with explaining returns. So cash and earnings are not moving the same, earnings perform better, but
why is that?
The market typically focuses on estimated accrual-based earnings or revenues, instead of cashflows.
The stock market typically focuses on estimates of accrual-based earnings or revenues, instead of
cashflows. This also suggests that investors perceive performance measured based on accruals to be
a useful summary measure of performance.
This paper answers why this is with a careful explanation of what accounting accruals do, combined
with empirical evidence. SO they investigate in what circumstances, accruals improve earnings ability
to measure firm performance as reflected in the stock market.
6
A summary by LouisT on Stuvia.nl | Thank you for your purchase! | Version 2.0 (Final)
