IDEAS home Printed from https://ideas.repec.org/a/wly/coacre/v17y2000i1p107-134.html
   My bibliography  Save this article

Positive and Negative Earnings Surprises, Regulatory Climate, and Stock Returns

Author

Listed:
  • EMEKA T. NWAEZE

Abstract

This study focuses on electric utilities in the United States to consider two related issues. First, the study tests for asymmetric price reactions to positive and negative earnings surprises (ES). Second, the study associates policy differences across jurisdictions with variations in the cash flow effects of positive and negative ES and then uses the framework to consider variations in price responses across regulatory climates. In the same context, the study investigates the effects of a utility's abnormal profits on the asymmetry of price reactions to positve and negative ES. The empirical predictions are motivated by the disparity between the principles and practices that underlie cost recovery for the utilities and the uneven effects of the cost†recovery practies on the cash flows associated with positve and negative ES. The results show that the sign of ES and the climate in which a utility operates are related to the size of price reactions to ES. Furthermore, a utility's abnormal profit status has significant effects on the size of price reactions to ES. Only a modest price response asymmetry is indicated for manufacturing firms.

Suggested Citation

  • Emeka T. Nwaeze, 2000. "Positive and Negative Earnings Surprises, Regulatory Climate, and Stock Returns," Contemporary Accounting Research, John Wiley & Sons, vol. 17(1), pages 107-134, March.
    • Handle: RePEc:wly:coacre:v:17:y:2000:i:1:p:107-134
    DOI: 10.1111/j.1911-3846.2000.tb00913.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1911-3846.2000.tb00913.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1911-3846.2000.tb00913.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Atiase, Rk, 1985. "Predisclosure Information, Firm Capitalization, And Security Price Behavior Around Earnings Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 23(1), pages 21-36.
    2. Paul L. Joskow, 1973. "Pricing Decisions of Regulated Firms: A Behavioral Approach," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 118-140, Spring.
    3. Willard T. Carleton, 1974. "Rate of Return, Rate Base and Regulatory Lag under Conditions of Changing Capital Costs," Land Economics, University of Wisconsin Press, vol. 50(2), pages 145-151.
    4. Teets, W, 1992. "The Association Between Stock-Market Responses To Earnings Announcements And Regulation Of Electric Utilities," Journal of Accounting Research, Wiley Blackwell, vol. 30(2), pages 274-285.
    5. Bernard, Vl & Thomas, Jk, 1989. "Post-Earnings-Announcement Drift - Delayed Price Response Or Risk Premium," Journal of Accounting Research, Wiley Blackwell, vol. 27, pages 1-36.
    6. R. Mark Isaac, 1982. "Fuel Cost Adjustment Mechanisms and the Regulated Utility Facing Uncertain Fuel Prices," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 158-169, Spring.
    7. Bernard, Vl, 1987. "Cross-Sectional Dependence And Problems In Inference In Market-Based Accounting Research," Journal of Accounting Research, Wiley Blackwell, vol. 25(1), pages 1-48.
    8. Penno, M, 1996. "Unobservable precision choices in financial reporting," Journal of Accounting Research, Wiley Blackwell, vol. 34(1), pages 141-149.
    9. Ohlson, Ja, 1983. "Price-Earnings Ratios And Earnings Capitalization Under Uncertainty," Journal of Accounting Research, Wiley Blackwell, vol. 21(1), pages 141-154.
    10. Rao, Ramesh & Moyer, R Charles, 1994. "Regulatory Climate and Electrical Utility Capital Structure Decisions," The Financial Review, Eastern Finance Association, vol. 29(1), pages 97-124, February.
    11. Beaver, William & Lambert, Richard & Morse, Dale, 1980. "The information content of security prices," Journal of Accounting and Economics, Elsevier, vol. 2(1), pages 3-28, March.
    12. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
    13. Kormendi, Roger & Lipe, Robert, 1987. "Earnings Innovations, Earnings Persistence, and Stock Returns," The Journal of Business, University of Chicago Press, vol. 60(3), pages 323-345, July.
    14. Miller, Merton H & Rock, Kevin, 1985. "Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
    15. Baron, David P. & De Bondt, Raymond R., 1981. "On the design of regulatory price adjustment mechanisms," Journal of Economic Theory, Elsevier, vol. 24(1), pages 70-94, February.
    16. Baron, David P & De Bondt, Raymond R, 1979. "Fuel Adjustment Mechanisms and Economic Efficiency," Journal of Industrial Economics, Wiley Blackwell, vol. 27(3), pages 243-261, March.
    17. Norton, Seth W, 1985. "Regulation and Systematic Risk: The Case of Electric Utilities," Journal of Law and Economics, University of Chicago Press, vol. 28(3), pages 671-686, October.
    18. Philbrick, Dr & Ricks, We, 1991. "Using Value Line And Ibes Analyst Forecasts In Accounting Research," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 397-417.
    19. Olsen, C, 1985. "Valuation Implications Of Sfas No 33 Data For Electric Utility Investors," Journal of Accounting Research, Wiley Blackwell, vol. 23, pages 28-47.
    20. Robert L. Hagerman & Brian T. Ratchford, 1978. "Some Determinants of Allowed Rates of Return on Equity to Electric Utilities," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 46-55, Spring.
    21. Collins, Daniel W. & Kothari, S. P., 1989. "An analysis of intertemporal and cross-sectional determinants of earnings response coefficients," Journal of Accounting and Economics, Elsevier, vol. 11(2-3), pages 143-181, July.
    22. David Sappington, 1980. "Strategic Firm Behavior under a Dynamic Regulatory Adjustment Process," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 360-372, Spring.
    23. 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.
    24. Basu, S., 1995. "Conservatism and the Asymmetric Timeliness of Earning," Papers 73, Rochester, Business - Ph.D.,.
    25. Sherman,Roger, 1989. "The Regulation of Monopoly," Cambridge Books, Cambridge University Press, number 9780521368629, January.
    26. Sefcik, Se & Thompson, R, 1986. "An Approach To Statistical-Inference In Cross-Sectional Models With Security Abnormal Returns As Dependent Variable," Journal of Accounting Research, Wiley Blackwell, vol. 24(2), pages 316-334.
    27. Clarke, Roger G, 1980. "The Effect of Fuel Adjustment Clauses on the Systematic Risk and Market Values of Electric Utilities," Journal of Finance, American Finance Association, vol. 35(2), pages 347-358, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Truong, Cameron & Corrado, Charles & Chen, Yangyang, 2012. "The options market response to accounting earnings announcements," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 423-450.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Emeka T. Nwaeze, 1998. "Regulation and the Valuation Relevance of Book Value and Earnings: Evidence from the United States," Contemporary Accounting Research, John Wiley & Sons, vol. 15(4), pages 547-573, December.
    2. Emeka T. Nwaeze, 1998. "Public Utility Regulation in the US and Asymmetric Return Responses to Positive and Negative Abnormal Earnings," Multinational Finance Journal, Multinational Finance Journal, vol. 2(4), pages 269-293, December.
    3. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    4. Kothari, S. P. & Zimmerman, Jerold L., 1995. "Price and return models," Journal of Accounting and Economics, Elsevier, vol. 20(2), pages 155-192, September.
    5. Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 3-37, December.
    6. Matthias Meyer & Utz Schäffer & Markus Gmür, 2008. "Transfer und Austausch von Wissen in der Accounting-Forschung: Eine Zitations- und Kozitationsanalyse englischsprachiger Accounting-Journals 1990–2004," Schmalenbach Journal of Business Research, Springer, vol. 60(2), pages 153-181, March.
    7. Daniel W. Collins & William K. Salatka, 1993. "Noisy Accounting Earnings Signals and Earnings Response Coefficients: The Case of Foreign Currency Accounting," Contemporary Accounting Research, John Wiley & Sons, vol. 10(1), pages 119-159, September.
    8. James A. Ohlson, 1990. "A Synthesis of security valuation theory and the role of dividends, cash flows, and earnings," Contemporary Accounting Research, John Wiley & Sons, vol. 6(2), pages 648-676, March.
    9. Fargher, Neil & Wee, Marvin, 2019. "The impact of Ball and Brown (1968) on generations of research," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 55-72.
    10. Yezegel, Ari, 2015. "Why do analysts revise their stock recommendations after earnings announcements?," Journal of Accounting and Economics, Elsevier, vol. 59(2), pages 163-181.
    11. A. Rashad Abdel†Khalik, 1990. "Specification problems with information content of earnings: revisions and rationality of expectations and self†selection bias," Contemporary Accounting Research, John Wiley & Sons, vol. 7(1), pages 142-172, September.
    12. S. P. Kothari & Charles Wasley, 2019. "Commemorating the 50‐Year Anniversary of Ball and Brown (1968): The Evolution of Capital Market Research over the Past 50 Years," Journal of Accounting Research, Wiley Blackwell, vol. 57(5), pages 1117-1159, December.
    13. Brown, Lawrence D., 1996. "Influential accounting articles, individuals, Ph.D. granting institutions and faculties: A citational analysis," Accounting, Organizations and Society, Elsevier, vol. 21(7-8), pages 723-754.
    14. Shiyou Li & Emeka Nwaeze & Jennifer Yin, 2016. "Earnings management in the electric utility industry: profit incentives," Review of Quantitative Finance and Accounting, Springer, vol. 46(3), pages 633-660, April.
    15. Hannu, Schadewitz, 1997. "Financial and nonfinancial information in interim reports: Determinants and implications," MPRA Paper 44292, University Library of Munich, Germany.
    16. Roni Michaely & Stefano Rossi & Michael Weber & Michael Weber, 2017. "The Information Content of Dividends: Safer Profits, Not Higher Profits," CESifo Working Paper Series 6751, CESifo.
    17. Paul A. Griffin, 1993. "Discussion of “Noisy Accounting Earnings Signals and Earnings Response Coefficients: The Case of Foreign Currency Accountingâ€," Contemporary Accounting Research, John Wiley & Sons, vol. 10(1), pages 167-178, September.
    18. Lipe, Robert C. & Bryant, Lisa & Widener, Sally K., 1998. "Do nonlinearity, firm-specific coefficients, and losses represent distinct factors in the relation between stock returns and accounting earnings?," Journal of Accounting and Economics, Elsevier, vol. 25(2), pages 195-214, May.
    19. Core, John E. & Schrand, Catherine M., 1999. "The effect of accounting-based debt covenants on equity valuation1," Journal of Accounting and Economics, Elsevier, vol. 27(1), pages 1-34, February.
    20. Jang Youn Cho, 1994. "Determinants Of Earnings‐Price Ratios: A Reexamination," Review of Financial Economics, John Wiley & Sons, vol. 3(2), pages 105-120, March.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:coacre:v:17:y:2000:i:1:p:107-134. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1111/(ISSN)1911-3846 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.