1 Investor Protection and the Information Content of Annual Earnings Announcements: International...
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Transcript of 1 Investor Protection and the Information Content of Annual Earnings Announcements: International...
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Investor Protection and the Information Content of
Annual Earnings Announcements:
International Evidence
Mark L. DeFond
Mingyi Hung
Robert Trezevant
University of Southern California
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Motivation
Investor Protection Institutions(Laws & Enforcement)
EarningsValue Relevance
•Long window studies.•Cannot tell us whether market uses earnings information
Prior research finds…
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MotivationWe examine Market Reaction to
Earnings Announcements (EAs)
•Tells whether earnings are USED
Try to identify Factors that affect Market
Reaction
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Purposes of Paper
1st Use Investor Protection Literature to identify Structural Factors that influence Information Content
2nd Test whether Structural Factors are Channels through which Investor Protection Institutions influence Information Content
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Information Content of Earnings
Announcements
Investor ProtectionInstitutions
Structural Factors inFinancial Reporting
Environment
Framework
OurHypotheses
Tests
PriorResearchFinds…
Tests of“Channel”
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Hypotheses development
Higher quality earnings likely to be more useful to investors
Hypothesis 1: Countries with higher earnings quality have
more informative annual earnings announcements
Measured derived from Leuz et al. (2003)
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Hypotheses Development
Stronger insider trading law enforcement • prices less likely to already impound the
information
Hypothesis 2:
Countries with stronger insider trading law enforcement have more informative annual earnings announcements
Measured as in Bhattacharya and Daouk (2002)
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Hypotheses Development More frequent financial reporting
• stock prices impound annual earnings information at an earlier point in time
Hypothesis 3:
Countries with more frequent interim earnings reporting have less informative annual earnings announcements
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Hypotheses Development Greater financial disclosure
• managers likely to disclose more information in earnings announcements (increase reaction)
• managers likely to disclose more information between announcements (decrease reaction)
Hypothesis 4: Greater financial disclosure in a country affects
informativeness of annual earnings announcements.
Measured with CIFAR index (Bushman et al., 2003, and many others)
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Data
53,197 earnings announcements 26 countries 1995 – 2002 Earnings and earnings announcement
dates -- I/B/E/S databases Daily stock returns – CRSP and
Datastream
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Table 2 – Panel B
AbnormalReturnVariance
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Average Abnormal Return Variance Bottom Three vs. Top Three Countries
Table 2, Panel B
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Italy South Africa Spain Netherlands U.S. U.K.
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Table 2 – Panel A
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Investor Protection ProxiesAntidirector Rights
Index based on company law or commercial code; sum of:
(1) Ability to vote by mail (2) Ability to control shares during S/H meeting (3) Possibility of cumulative voting for directors(4) Ease of calling an extra’y S/H meeting (5) Ease of minority investors to sue directors(LLSV 1997; Hung 2000)
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Investor Protection Proxies
Law Enforcement Institutions Mean of (each on scale of 1-10):
(1) Efficiency, integrity of judicial system
(2) Tradition of law and order
(3) Degree of government corruption
(LLSV 1998, Leuz et al. 2003)
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Hypotheses Test Dep Var = Abnormal Return Variance Ind Var = Structural Factors
+ Controls
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Channel Tests First, regress Abnormal Return Variance
on Investor Protection Variables
Second, regress Abnormal Return Variance on Structural Factors AND Investor Protection Variables
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Table 4, Panel BFirm Level Hypotheses Tests
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Table 4, Panel BFirm Level “Channel” Tests
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Supplementary Analyses
Four Supplementary Analyses
#1: Replace Abnormal Return Variance with Abnormal Trading Volume• Find Same result
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Supplementary Analysis #2Timing of Information Flow
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Supplementary Analysis #3Stock Market Efficiency
Tests assume stock markets reasonably efficient
Large firms, active analysts following
Prior research finds efficiency in a variety of countries (e.g., Bhattacharya et al., 2000; others)
International institutional investors do not do better than indexes (Cumby and Glen, 1990)
Additional analyses• Drop country with insignificant Abnormal Ret. Var.
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Supplementary Analysis #4 ERCs and Investor Protection
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Robustness Checks Excluding U.S. and Japanese firms
Three-day announcement window
Controlling for capital market development
Controlling for industry effects
Controlling for time-series correlation
Deleting influential observations
Alternative Investor Protection measures
Ranked regression
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Limitations
Cross-country research design• Small number of degrees of freedom• Omitted correlated variables
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Contributions
Literature on X-Country Value-Relevance
•Short-window methodologyallows us to identify Structural Factors
Literature on Investor Protection •Identify Channels through which Investor Protection influences Information Content of Earnings
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Contributions
Overall Implication:
Strong IP engenders Financial Reporting Environments that have•Higher quality earnings•Equal access to information•More frequent reportingThe net effect of which is to increase the content of annual earnings announcements.