The Effect of Delayed Quarterly Earnings Announcements on Abnormal Returns by Considering the Moderating Role of Earnings Manipulation

Document Type : Research Paper

Authors

1 University of Isfahan

2 Accounting Department, Faculty of Administrative Sciences and Economics, University of Isfahan, Iran

10.22099/jaa.2023.47213.2323

Abstract

Introduction
 
Accounting earnings is an appropriate measure for performance evaluation, stock valuation, forecasting and evaluation of expected returns, as well as predicting the company's future performance. Therefore, the announcement of earnings is one of the criteria used to evaluate the reaction of investors to the announced earnings. Like the announcement of earnings, the timing of the earnings announcement also affects the price and returns. Through the timing of the earnings announcement, companies have the possibility to influence the investors' reaction to the reported information, and the market's reaction to the earnings announcement is affected by the time of issuance of the reports. The results of the previous literature show that market reaction to the earnings announcement is influenced by the time of declaring news and reports. The results of these studies show that the announcement of delayed earnings results in negative market reaction, and investors discount this information. This issue can be caused by the reduction of information content of earnings or the possibility of earnings manipulation by managers. Considering the effect of the timing of earnings announcement on the market reaction and also the existence of various motivations for earnings manipulation, it seems necessary to investigate the effect of the timing of the earnings announcement on stock returns and the effect of earnings manipulation on this relationship. Therefore, the purpose of this study is to investigate the effect of the delay in announcing quarterly earnings on abnormal stock returns by considering the moderating role of earnings manipulation. 
 
Hypothesis
 
According to the literature, the research hypotheses include:
1.  The delay of quarterly earnings announcement has a negative effect on abnormal returns at the time of earnings announcement.
 
Earnings manipulation exacerbates the negative impact of late quarterly earnings announcements on abnormal returns at the time of earnings announcements.
 
 
 
Methods
 
In this study, to calculate the variables and test the hypotheses, required data has been collected from the annual and quarterly financial statements and its footnotes of listed companies in the Tehran Stock Exchange and the existing databases including “Rahavard Novin” and “Codal”. The sample of this study consists of 126 listed companies in Tehran Stock Exchange during 2012 to 2022. To test hypotheses OLS regression and panel data methods have been used.
 
 
Results
 
The result of the first hypothesis test showed that the delay of quarterly earnings announcement has a negative and significant effect on the abnormal return. Also, according to the second hypothesis, earnings manipulation based on the adjusted model of Beneish (1999) aggravates this negative effect. That is, the delayed earnings announcement in the investors' view can involve earnings manipulation and as a result, the negative reaction to the delay in quarterly earnings announcements will intensify. However, earnings manipulation based on the model of Kothari et al. (2005) did not have a significant effect on the negative market reaction to the delayed earnings announcement.
 
 
Discussion and Conclusion
 
According to the accounting literature, the delayed earnings announcement is accompanied by negative market reaction and investors discount this information.  Chen et al. (2021) believe that this negative reaction can be caused by a reduction in the information content of delayed earnings or the possibility of earnings manipulation by managers. Therefore, in this study, the effect of the delay of quarterly earnings announcement on abnormal stock returns by considering the moderating role of earnings manipulation was investigated.The results of the first hypothesis test showed that the coefficient of delayed earnings announcement at the 95% confidence level has a negative and significant effect on the accumulated abnormal return, which shows, the longer the quarterly earnings announcement is delayed, the lower the cumulative abnormal return in the earnings announcement window; then the first hypothesis is not rejected. In other words, the capital market reacts negatively to the delayed earnings announcement. In the second hypothesis, the effect of earnings manipulation on the negative relationship between the delayed earnings announcement and cumulative abnormal return was investigated. The results of the test of this hypothesis showed that earnings manipulation based on the model of Kothari et al. (2005) has no significant effect on the negative relationship between the delayed earnings announcement and abnormal returns, and the second hypothesis is rejected based on this criterion. This result is consistent with Chen et al. (2021). However, according to the earnings manipulation criterion based on the adjusted Beneish model (1999), the coefficient of the interactive variable RLaq × EMB is negative and significant at the 95% confidence level. Considering the negativity of the coefficient of the interactive variable and also the negative effect of the delayed earnings announcement on the accumulated abnormal return (first hypothesis), it can be said that the earnings manipulation based on the adjusted model of Beneish (1999), aggravates the negative effect of the delayed earnings announcement on the abnormal return, so the second hypothesis is not rejected. This shows that the delayed earnings announcement can contain information about the possibility of earnings manipulation, and investors react negatively to this announcement of earnings. 

Keywords

References

 
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History

  • Receive Date: 24 April 2023
  • Revise Date: 22 August 2023
  • Accept Date: 25 July 2023

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