The prior literature on analyst forecasts has focused almost exclusively on firms that just meet or beat the mean or median consensus analyst forecast, without much regard to alternative benchmarks within the forecast distribution. Anecdotal evidence suggests that there is institutional significance to the lowest (minimum) and highest (maximum) analyst earnings forecast. We rigorously explore whether these two new benchmarks actually have incremental significance and, if so, whether there are differences in how managers and investors perceive the importance of these three benchmarks (i.e., minimum, mean, and maximum). Consistent with the theory of investor ambiguity aversion, which predicts an asymmetric market response to good and bad news, our results support the notion that of the three benchmarks we explore, firms act most aggressively to exceed the minimum forecast, followed by the mean, and then finally the maximum. This order is consistently supported by the following evidence: the existence of higher incentives to beat the benchmark; the likelihood of earnings management to beat the benchmark; accrual reversal after firms just barely achieve each benchmark; accrual mispricing around each benchmark; and, finally, a faster incorporation into the stock price of the bad news that a firm misses the minimum than of the good news that a firm meets or beats the maximum. These findings fill a void in academic research on these two new benchmarks and offer a consistent explanation as to why the popular press and managers frequently highlight and discuss beating these benchmarks as a separate and notable achievement. This paper was accepted by Brian Bushee, accounting. Funding: Q. Xin gratefully acknowledges the financial support from the “Shenzhen Peacock Plan” start-up research [Grant GA11409004] and the Shenzhen Key Research Base of Humanities and Social Sciences [Grant KP191001]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4609 .

In November 2024, the FASB issued an Invitation-to-Comment (2024-ITC100) on a proposal to standardize non-GAAP financial metrics commonly reported in earnings releases. While predicting the impact of standardization in the United States is difficult, this paper explores the quality of non-GAAP earnings in a regulatory regime that has already standardized non-GAAP earnings. In contrast to the discretionary nature of non-GAAP earnings in the United States, the China Securities Regulatory Committee (CSRC) issues strict guidelines on the type of items excluded from non-GAAP earnings. In contrast to findings in studies on U.S. firms, our results generally indicate that Chinese non-GAAP exclusions are of higher quality and understood by investors. However, we find that Chinese non-GAAP exclusions are lower quality when equity market pressures increase. Our results show that non-state-owned firms, high institutional ownership firms, and high analyst coverage firms in China (firms that mimic U.S. firm characteristics) tend to report lower-quality non-GAAP exclusions. Thus, standardization in the U.S. may have a limited impact on curbing manipulation through non-GAAP earnings and negatively impact the manager’s ability to communicate private information to investors. Our results provide insights into the potential outcomes of standardizing non-GAAP earnings and highlight the distinct properties of non-GAAP earnings that are useful when valuing Chinese firms.

Egypt witnessed radical and unexpected changes in the political, social and cultural environment that came as a result of the Arab Spring. Since the revolution caused a paradigm shift in so many socio-economic aspects, it is plausible that it also caused dramatic changes in the relationships of board, ownership, and environmental, social, and governance (ESG) practices in different ways. Accordingly, understanding the corporate governance of the largest Arab state in the MENA region following the Arab Spring is a huge benefit. Using the 2011 Egyptian revolution as the exogenous shock, this study empirically examines the effects of board diversity and ownership structure on the ESG disclosure index in the Egyptian Stock Exchange (EGX) listed firms for the pre-revolution (2007–2011) and post-revolution (2012–2014) periods. Using 160 observations for the pre-revolution and 99 observations for the post-revolution periods, we document a significant positive effect of board national diversity on the ESG index in the pre-revolution period. This effect disappears in the post-revolution period. In contrast, we find that board gender diversity shows no significant effect in determining the ESG index in both pre- and post-revolution periods. We additionally find that ownership variables have a positive impact on ESG disclosure in the pre-revolution period. However, this impact is not carried forward to the post-revolution period. Further analysis on moderating effects suggests that the presence of female board members and state ownership can diminish the effective role of foreign board members towards ESG disclosure. These findings can provide policymakers, regulators, investors, and other stakeholders with a broader perspective of corporate board diversity and ownership when aiming to ensure an optimal level of ESG disclosure from listed companies in Egypt or other emerging markets.

Surprisingly, prior research finds that the attention paid by active institutional investors to individual stocks has no real effects on disclosure and liquidity decisions by management. In contrast, after categorizing these same active institutional investors as either dedicated or transient, we find that the attention of dedicated active investors does significantly impact the firm’s information environment, market quality, and, ultimately, their cost of capital and real investment. And as would be expected, attention from dedicated institutional investors increases voluntary disclosure by managers and coverage by analysts, whereas attention from transient institutional investors does not. Finally, we also find that dedicated institutional investor attention improves stock liquidity and price efficiency, which ultimately results in a lower cost of capital and more real investment. Transient institutional investor attention worsens equity market quality but has few real effects.

This article investigates whether different levels of investor protection affect the equity market’s valuation of non-controlling interests (NCIs) in a consolidated corporate entity. Using a set of publicly listed European firms, our findings suggest a positive (negative) association of NCIs with parent companies’ share prices in countries with low (high) levels of investor protection. We interpret the findings as evidence that when non-controlling investors are not well-protected, parent companies have an opportunity to extract rents from non-controlling owners, leading to a positive valuation of NCIs’ equity. However, in countries where non-controlling investors are well-protected, parent companies are not able to extract rents but still must monitor and govern the related subsidiary; thus, NCIs become a net cost, and the relation inverts. JEL Classification: M41, M48

ABSTRACT Non-GAAP earnings provide managers the flexibility to exclude GAAP items to either produce a more informative performance measure or provide them the ability to opportunistically exclude recurring expenses from non-GAAP earnings. Prior literature examines the use of this form of disclosure at the firm level, although it is ultimately management's decision. We extend prior non-GAAP literature by examining whether the use and quality of non-GAAP earnings is influenced by CEO personality traits, namely, CEO narcissism. We find that narcissistic CEOs are more likely to exclude expenses from non-GAAP earnings and that the magnitude of exclusions is greater. We also find that those non-GAAP exclusions are more persistent and, thus, lower-quality. Our results shed light on the disclosure practice of non-GAAP earnings and show how narcissistic CEOs are more likely to take advantage of the discretion in financial reporting disclosures in order to benefit the firm and themselves.

ABSTRACT Implied equity duration was originally developed to analyze the sensitivity of equity prices to discount rate changes. We demonstrate that implied equity duration is also useful for analyzing the sensitivity of equity prices to pandemic shutdowns. Pandemic shutdowns primarily impact short‐term cash flows, thus they have a greater impact on low‐duration equities. We show that implied equity duration has a strong positive relation to U.S. equity returns and analyst forecast revisions during the onset of the 2020 COVID‐19 shutdown. Our analysis also demonstrates that the underperformance of “value” stocks during this period is a rational response to their lower durations.

Drawing on resource-based theory, we analyze the relationship between having LGBT executives in a firm’s leadership positions and its value and financial performance. The existence of LGBT executives is considered to be associated with employee and customer goodwill towards LGBT-friendly policies and practices and to lead to human capital and reputational benefits. Our findings suggest that there is a positive effect of the presence of LBGT executives on a firm’s value, both directly and indirectly, through its effect on the firm’s financial performance. We interpret this as suggesting that besides the direct effect of the existence of LGBT executives on a firm’s value, an indirect effect also exists, mediated through financial performance, presumably through the effect that this has on employee and customer goodwill towards LGBT-friendly policies and practices. As far as we are aware, our study is the first to examine the impacts of the presence of LGBT executives, as well as distinguish between its direct and indirect effects on firm value.

Prior research shows that the development of national accounting systems follows different patterns in different countries over the world. This was recently supported by the staggered manner in which countries adopt IFRS. Extant evidence shows that IFRS adoption decisions at the country level are determined by institutional and economic factors. In this context, cultural factors have not been considered. This paper examines the relationship between five cultural dimensions and countries’ decisions to adopt International Financial Reporting Standards (IFRS) around the world during the period 2003-2014. We find that countries with higher levels of uncertainty avoidance are more likely to adopt IFRS. Additionally, they are more likely to commit to early adoption largely on a mandatory rather than voluntary basis. On the other hand, countries with higher values of masculinity are more likely to adopt IFRS early, but the extent (whether voluntary or mandatory adoption) of adoption is not significantly related to masculinity. Finally, we show that countries with higher power distance (long-term orientation) are more (less) likely to adopt IFRS on a mandatory basis. The results are in line with Gray’s theory of cultural influence and suggest that differences in national culture had a significant role in countries’ reaction to the introduction of IFRS as a set of unified accounting standards targeting the harmonization of accounting standards adopted across different jurisdictions.

The media commonly gauges a firm’s performance by comparing its performance to others within the same industry. We provide evidence that investors and analysts positively value improvements to the firm’s relative performance ranking (RPR) within its industry. Consistently, RPR is positively associated with the firm’s earnings persistence, which suggests that RPR provides information about the firm’s ability to capture profits within the industry. We also find that managers use non-GAAP exclusions from earnings to improve the appearance of the firm’s RPR and that not all the information found in the firm’s performance ranking is priced by investors at the time of the earnings announcement. This evidence suggests that investors and analysts use the entire distribution of earnings to evaluate a firm’s performance, allowing us to identify an alternative benchmark not previously explored.

This paper examines the direct effect of internal control quality (ICQ) on cost of equity capital and whether the former has a moderating effect on the association between voluntary disclosure and cost of equity capital in an emerging market (Egypt). ICQ is measured using a survey of external auditors. A content analysis approach is used to proxy for the level of voluntary disclosure in annual. Finally, the Capital Asset Pricing Model (CAPM) framework is used to estimate cost of equity capital. Based on a sample of 256 firm-year observations over the period of 2007-2010, we find that ICQ is negatively and significantly associated with cost of equity capital indicating that better controls reduce cost of capital. In addition, ICQ moderates the association between voluntary disclosure and cost of equity capital since this association is only negative and significant for companies characterized by high ICQ. Our study contributes to the internal control literature by focusing on an emergent unregulated market with respect to internal control disclosure and documents that ICQ plays an important role in reducing cost of equity capital (either directly or indirectly) by increasing the value relevance of voluntary disclosure among investors on the Egyptian stock exchange.

Prior literature documents a positive (negative) relation between past (future) stock returns and both external financing and capital expenditures. In this study, we examine whether managers’ financing and capital expenditure decisions are associated with firm-level investor favoritism (neglect) and, therefore, whether managers exploit investor mispricing by issuing more (less) capital and investing more (less) in capital expenditures when firm-level investor sentiment is high (low), which leads to more negative future stock returns. We employ both a stock’s extreme return momentum and extreme trading volume to capture firm-level investor favoritism (neglect), which reflects firm-level investor overpricing (underpricing) due to investor sentiment. We find that both external financing and capital expenditure decisions are positively (negatively) associated with favoritism (neglect) and that the previously documented negative association between future stock returns and external financing is more pronounced in periods of favoritism. However, we find no association between future stock returns and capital expenditures after controlling for external financing. These findings suggest that managers’ financing and capital expenditure decisions are associated with firm-level investor favoritism/neglect, and that managers exploit investor mispricing in making financing decisions, resulting in lower future stock returns.

The valuation of STEM (science, technology, engineering, and math) firms has recently gained attention in the literature. Research has shown that, for valuation of STEM firms, accounting items such as sales growth and R&D expenditures matter more than bottom-line earnings. We examine whether, around the time of the IPO, STEM managers apply discretion over the accounting items most weighted by investors for their valuation. We find that investors tend to weigh sales growth and R&D more heavily than earnings in valuing STEM firms and that managers respond by managing those items rather than bottom-line earnings as in prior research. We find that future stock returns of STEM firms are negatively associated with sales management and not with abnormal accruals as for non-STEM firms. Our results illuminate the differential behavior of STEM managers and highlight the importance of a departure from the traditional IPO earnings management paradigm, which assumes that firms mainly manage their earnings.

We examine how investors value changes in the relative ranking of the firm within its industry based on performance (measured as ROE, ROA and Profit Margin). We find that short window equity returns are significantly related to changes in the firm’s performance ranking within the industry, especially when the firm’s ranking has been stable in the recent past. We also provide evidence that managers manipulate earnings to improve their performance ranking. Our results suggest that the firm’s industry ranking constitutes an additional and relevant benchmark for investors and managers that has not been explored by prior research. Our final analysis also suggests that investors focus on a firm’s industry ranking is warranted due to the information gleaned about firm’s competitive advantage and sustainability of future earnings. It appears that investors use the entire distribution of earnings to evaluate a firm’s performance and not just analyst expectations or the prior period’s performance.

We investigate why extreme positive earnings surprises occur and the consequences of these events. We posit that managers know before analysts when extremely good earnings news is developing, but can have incentives to allow the earnings news to surprise the market at the earnings announcement. In particular, managers can use an extreme positive earnings surprise to attract investor attention when they believe their stock is neglected and future performance is expected to be strong. Analysts, who must allocate scarce resources across many firms, can also be inattentive and miss signals that suggest good performance is going to be announced. Using various proxies for extreme positive earnings surprises, management expectations for future performance and desire for attention, and analyst neglect, we find evidence that an extreme positive earnings surprise is a predictable event. These findings are incremental to controlling for a firm's information environment, earnings volatility, and operating leverage. Finally, we show that extreme positive earnings surprises are a successful method for attracting attention, with significant increases in the number of institutional owners, the number of analysts, and trading volume during the subsequent three years. This paper was accepted by Mary Barth, accounting.

The literature in economics and finance document that asset bubbles can emerge and remain sustained for a variety of reasons. In this paper, we develop an analytical model to characterize two types of rational bubbles linked to accounting disclosures, drift bubbles and sensitivity bubbles. We conjecture that both types of bubbles are likely to do so when firms experience streaks of good news. We use our analytical model to generate a number of hypotheses that are expected to hold if drift and/or sensitivity bubbles arise when firms experience streaks of good news, which we proxy for using lengths of meet or beat streaks. In price level regressions, we provide evidence consistent with meet or beat streaks associated with both non-linear drift and non-linear sensitivity price bubbles, consistent with the predictions drawn from the model. We offer less compelling evidence consistent with the model predictions that the drift and sensitivity bubbles should accelerate as a firm continues a streak. We provide reasonable evidence consistent with the drift and sensitivity bubbles unwinding when a firm fails to continue a meet or beat streak. Finally, we find evidence that the industry-wide streak related bubble-like patterns are incremental to the firm-specific patterns we document.

Researchers have long been interested in whether the classification of various items on the balance sheet matters to investors. This paper provides evidence on whether reporting non-controlling interests (NCI) as equity or as non-equity matters in terms of value relevance. We use a sample of German firms that voluntary adopted International Financial Reporting Standards early. This adoption required them to change their reporting of NCI from the non-equity to the equity portion of the balance sheet. After conducting sensitivity tests for self-selection bias and controlling for weight of NCI, firm size and leverage, our results suggest that NCI are priced by the market in the same manner irrespectively of being reported as equity or non-equity. This finding reinforces the notion that equity markets are efficient in their processing of information, regardless of the classification by standard setters.

We provide evidence consistent with firm managers opportunistically defining non-GAAP earnings in order to meet or beat analyst expectations. This result is robust to controlling for other tools of benchmark beating (e.g., discretionary accruals, real earnings management, and expectation management). We also find that managers tend to exclude more expenses from non-GAAP earnings when it is costlier to use accrual earnings management due to balance sheet constraints, indicating that these tools are substitutes. Lastly, we find that investors discount positive earnings surprises when accompanied by exclusions from GAAP earnings, suggesting that the market partially understands the opportunistic nature of these exclusions. Our evidence is consistent with managers opportunistically defining non-GAAP earnings in a way that analysts fail to fully anticipate, resulting in an increased likelihood of exceeding analyst forecasts.