Researchers have proposed some estimation methods for implied cost of equity (ICE) based on equity valuation models, but they have generally failed to consider the probability of default, assuming that firms will never go out of business. To overcome this problem, I propose a new method for estimating the ICE that explicitly considers the probability of default. Contrary to the fact that the conventional ICE increased rapidly during the stock market crash in 2008, the expected default frequency-adjusted ICE decreased during this same period. An examination of the relationship between ICE and future stock returns reveals that the probability of default is strongly associated with future stock returns, whereas the relationship between expected default frequencyadjusted ICE and future stock returns is ambiguous.
This study demonstrates that, in two periods, the total profit of a firm in product market competition decreases with a leading indicator that emphasizes consumers. While previous studies in the management accounting literature have suggested that leading indicators are useful for predicting firms' future profits, few studies have theoretically investigated this topic. Therefore, we explore the usefulness of leading indicators to improve firms' long-term profit using a game theoretical approach. Consistent with empirical evidences, our model analysis demonstrates that a leading indicator improves firms' profits in the second period, while it harms first-period profit and total profit due to excessive supply in a specific economic environment.
This study investigates the existence of post-earnings announcement drift (PEAD) in the Japanese stock market in the 21st century. Drawing on rational inattention models, which suggest that investors’ limited processing capacities cause an underreaction to earnings announcements, this study determines whether the underreaction still exists in the modern Japanese stock market despite the development of technologies that assist investors in processing information. Furthermore, it examines whether the ownership structure, which reflects varying processing costs, affects the results. It reveals three key findings using a sample of 60,124 firm-year observations on the Japanese stock market from 2002 to 2020. First, PEAD decreases over the sample period. Second, it does not decrease in earnings announcements of firms with low foreign investor ownership or high individual investor ownership, indicating that underreaction persists when stocks are traded by investors who do not apply sophisticated technologies and continue to incur higher processing costs. Finally, this study attributes these changes in investors’ trading style to an increase in the price response to earnings announcements.
While prior research employs linear stock returns as a proxy for economic losses, this study uses piecewise-linear stock returns to separate positive and negative stock returns. It also examines the relationships between non-current asset impairments and changes in sales and cash flows from operations, which can be viewed as short-term indicators of economic impairments. Consistent with prior research, I find a negative relationship between non-current asset impairments and negative stock returns in five years before their recognition. Contrary to prior research, I also find such a relationship in the recognition years. The results indicate that th e relationships are stronger one or two years before their recognition than in the recognition years and three years before their recognition. These results suggest that the non-current asset impairment losses reported by Japanese firms are consistent with the Japanese accounting standard, although such losses are not necessarily reported in a timely manner. In addition, I find evidence suggesting that changes in sales and cash flows from operations in recognition years are short-term indicators of non-current asset impairments. Overall, incorporating piecewise-linear variables improves the empirical model of non-current asset impairment timeliness.
This study investigates the effect of product market competition on overreaction to intra-industry information transfers. Prior studies show that the stock market overreacts to information transfers resulting from the earnings announcements of early peer firms; however, few studies show how overreaction to information transfers occurs. This study reveals that investors overreact more to information transfers in higher product market competition. It also finds that in competitive environments, investors overreact to negative transfers more than they do to positive transfers. The results imply that investors do not fully understand the differential persistence between industry-wide and firm-specific news released by the industry, which is consistent with the functional fixation hypothesis. Additional analyses also reveal that overreaction to information transfers is less observed when firms are less competitive: the announcement firms are bellwether firms or firms in industries with high sales growth. The results are robust when an alternative measure of product market competition is used. This study has academic and practical implications, showing that product market competition can lead to stock market mispricing in the context of information transfers.
