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The Information Content of Losses: Shareholder Liquidation Option and Earnings Reversals

Author

Listed:
  • Samantha Sin

    (School of Economic and Financial Studies, Macquaric University. North Ryde. NSW 2109.)

  • Edward Watts

    (School of Economic and Financial Studies, Macquaric University. North Ryde. NSW 2109.)

Abstract

Using Australian data this paper investigates the information content of losses. We are motivated by the possibility that losses and profits have different associations with share returns because losses are not expected to be permanent. Consistent with the evidence in Hayn (1995), our findings show that share returns do have a lower association with losses. In particular, we extend Hayn (1995) and focus on losses made by financially healthy firms where we provide an explanation for the low ERC for these losses. We are able to find supporting evidence that the low ERC is due to shareholders' expectations of earnings reversals, thus providing further insight into the relationship between returns and losses.

Suggested Citation

  • Samantha Sin & Edward Watts, 2000. "The Information Content of Losses: Shareholder Liquidation Option and Earnings Reversals," Australian Journal of Management, Australian School of Business, vol. 25(3), pages 327-338, December.
    • Handle: RePEc:sae:ausman:v:25:y:2000:i:3:p:327-338
    DOI: 10.1177/031289620002500305
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    References listed on IDEAS

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    1. Ofek, Eli, 1993. "Capital structure and firm response to poor performance: An empirical analysis," Journal of Financial Economics, Elsevier, vol. 34(1), pages 3-30, August.
    2. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 1998. "Relative valuation roles of equity book value and net income as a function of financial health," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 1-34, February.
    3. Lev, B, 1989. "On The Usefulness Of Earnings And Earnings Research - Lessons And Directions From 2 Decades Of Empirical-Research," Journal of Accounting Research, Wiley Blackwell, vol. 27, pages 153-192.
    4. John, Kose & Lang, Larry H P & Netter, Jeffry, 1992. "The Voluntary Restructuring of Large Firms in Response to Performance Decline," Journal of Finance, American Finance Association, vol. 47(3), pages 891-917, July.
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    Cited by:

    1. Karen Benson & Peter M Clarkson & Tom Smith & Irene Tutticci, 2015. "A review of accounting research in the Asia Pacific region," Australian Journal of Management, Australian School of Business, vol. 40(1), pages 36-88, February.

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