The relation between accounting earnings and stock returns: A study of firms receiving a modified audit report.

Persistent Link:
http://hdl.handle.net/10150/186879
Title:
The relation between accounting earnings and stock returns: A study of firms receiving a modified audit report.
Author:
Sergeant, Anne Marie Alley.
Issue Date:
1994
Publisher:
The University of Arizona.
Rights:
Copyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author.
Abstract:
This study investigates whether the receipt of a modified audit report is associated with a reduction in the perceived (by investors) quality of the firm's earnings as reflected in its earnings response coefficient (ERC). The accounting numbers of a firm receiving a modification to its audit report are likely to contain relatively higher measurement error and, hence, be more noisy. Furthermore, there is likely to be greater uncertainty regarding the production, investment, and financing (PIF) activities of these firms. Both of these factors--noise in accounting earnings and uncertainty in PIF activities--are expected to be negatively related to the market's responsiveness to earnings. Therefore, firms receiving modified audit reports are expected to exhibit reduced ERCs. Furthermore, firms receiving a going concern modified audit report are expected to have more noisy accounting numbers and higher uncertainty regarding future PIF activities than firms receiving a material uncertainty modified audit report without a going concern uncertainty. Accordingly, firms in the former category are expected to exhibit a greater decline in their ERCs than firms in the latter group. For similar reasons, the firms facing a material uncertainty modified audit report will exhibit a sharper decline in their ERCs than firms receiving a consistency modified audit report. A sample of 677 firms receiving first-time modifications is examined over a six year period, the three years prior to a first-time modification through the two years following this modification. Descriptive evidence is provided that examines market performance, accounting performance, leverage position, and accrual management. This evidence suggests that firms receiving modifications are performing more poorly, are more leveraged than similar firms. Moreover, these firms appear to be engaging in earnings management at the time of the modification. The regression results indicate that following a modification, a firm's ERC is lower, implying increased noise in accounting information. Modifications for going concern uncertainties are associated with the largest decline in ERC, followed by material uncertainty modifications. No significant decline in ERC was observed for consistency modifications.
Type:
text; Dissertation-Reproduction (electronic)
Keywords:
Accounting.
Degree Name:
Ph.D.
Degree Level:
doctoral
Degree Program:
Business Administration; Graduate College
Degree Grantor:
University of Arizona
Committee Chair:
Dhaliwal, Dan S.

Full metadata record

DC FieldValue Language
dc.language.isoenen_US
dc.titleThe relation between accounting earnings and stock returns: A study of firms receiving a modified audit report.en_US
dc.creatorSergeant, Anne Marie Alley.en_US
dc.contributor.authorSergeant, Anne Marie Alley.en_US
dc.date.issued1994en_US
dc.publisherThe University of Arizona.en_US
dc.rightsCopyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author.en_US
dc.description.abstractThis study investigates whether the receipt of a modified audit report is associated with a reduction in the perceived (by investors) quality of the firm's earnings as reflected in its earnings response coefficient (ERC). The accounting numbers of a firm receiving a modification to its audit report are likely to contain relatively higher measurement error and, hence, be more noisy. Furthermore, there is likely to be greater uncertainty regarding the production, investment, and financing (PIF) activities of these firms. Both of these factors--noise in accounting earnings and uncertainty in PIF activities--are expected to be negatively related to the market's responsiveness to earnings. Therefore, firms receiving modified audit reports are expected to exhibit reduced ERCs. Furthermore, firms receiving a going concern modified audit report are expected to have more noisy accounting numbers and higher uncertainty regarding future PIF activities than firms receiving a material uncertainty modified audit report without a going concern uncertainty. Accordingly, firms in the former category are expected to exhibit a greater decline in their ERCs than firms in the latter group. For similar reasons, the firms facing a material uncertainty modified audit report will exhibit a sharper decline in their ERCs than firms receiving a consistency modified audit report. A sample of 677 firms receiving first-time modifications is examined over a six year period, the three years prior to a first-time modification through the two years following this modification. Descriptive evidence is provided that examines market performance, accounting performance, leverage position, and accrual management. This evidence suggests that firms receiving modifications are performing more poorly, are more leveraged than similar firms. Moreover, these firms appear to be engaging in earnings management at the time of the modification. The regression results indicate that following a modification, a firm's ERC is lower, implying increased noise in accounting information. Modifications for going concern uncertainties are associated with the largest decline in ERC, followed by material uncertainty modifications. No significant decline in ERC was observed for consistency modifications.en_US
dc.typetexten_US
dc.typeDissertation-Reproduction (electronic)en_US
dc.subjectAccounting.en_US
thesis.degree.namePh.D.en_US
thesis.degree.leveldoctoralen_US
thesis.degree.disciplineBusiness Administrationen_US
thesis.degree.disciplineGraduate Collegeen_US
thesis.degree.grantorUniversity of Arizonaen_US
dc.contributor.chairDhaliwal, Dan S.en_US
dc.contributor.committeememberTrombley, Mark A.en_US
dc.contributor.committeememberSchatzberg, Jeffreyen_US
dc.contributor.committeememberDyl, Edward A.en_US
dc.identifier.proquest9507010en_US
dc.identifier.oclc700948312en_US
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