The predictive ability earnings components and political uncertainty
evidence from Latin America
DOI:
https://doi.org/10.17524/repec.v15i3.2868Keywords:
Political Uncertainty, Predictive ability of earnings, Accruals, Cash flowsAbstract
Purpose: We examine whether the ability of current cash flow and accruals components to forecast future cash flows is affected in periods of political uncertainty.
Methodology: The national election year were considered proxies for political uncertainty, while the equation to forecast year-ahead cash flow was estimated by Sys-GMM and used to capture the predictive ability of earnings components according to periods of political uncertainty.
Results: the predictive ability of the current cash flow component was negatively influenced by periods of political uncertainty, whereas the ability of the accruals component was not affected by those periods. We conclude that political uncertainty negatively affects the predictive ability of the reported earnings components, but this effect was conclusive only for the current cash flow component.
Contributions: the main contribution of this study is the presentation of the reality of capital markets in emerging countries. Furthermore, it adds knowledge to the literature related to the political uncertainty hypothesis, shedding light on the impact of this event on the supply and availability of useful information in the capital markets of emerging countries. It is also relevant for agents who make forecasts about firms' future cash flows.
References
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Arellano, M., Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277-297. doi: https://doi.org/10.2307/2297968
Ashton, D., & Trinh, C. (2018). Evaluating the information content of earnings forecasts. Accounting and Business Research, 48(6), 674-699. doi: https://doi.org/10.1080/00014788.2017.1415800
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The quarterly journal of economics, 131(4), 1593-1636. doi: https://doi.org/10.1093/qje/qjw024
Ball, R, & Brown, P. (1968). An empirical evaluation of accounting numbers. Journal of Accounting Research, 6(2), 159-178. doi: https://doi.org/10.2307/2490232
Banco Mundial. (2018). Recuperado de https://data.worldbank.org/indicator
Barros, L. A. B. C., Bergmann, D. R., Castro, F. H., & Silveira, A. D. (2020). Endogeneity in panel data regressions: methodological guidance for corporate finance researchers. Revista Brasileira de Gestão de Negócios, 22, 437-461. doi: https://doi.org/10.7819/rbgn.v22i0.4059
Barth, M. E., Beaver, W. H., Hand, J. R. M., & Landsman, W. R. (1999). Accruals, cash flows, and equity values. Review of Accounting Studies, 4(3-4), 205-229. doi: https://doi.org/10.1023/A:1009630100586
Barth, M. E., Clinch, G., & Israeli, D. (2016). What do accruals tell us about future cash flows?. Review of Accounting Studies, 21(3), 768-807. doi: https://doi.org/10.1007/s11142-016-9360-4
Barth, M. E., Cram, D. P., & Nelson, K. K. (2001). Accruals and the Prediction of Future Cash Flows. The Accounting Review, 76(1), 27-58.
Beaver, W. (1968). The information content of annual earnings announcements. Journal of Accounting Research, Supplement, 67-92. doi: https://doi.org/10.2307/2490070
Beaver, W. H., Mcnichols, M. F., & Wang, Z. Z. (2018). The information content of earnings announcements: new insights from intertemporal and cross-sectional behavior. Review of Accounting Studies, 23(1), 95-135. doi: https://doi.org/10.1007/s11142-017-9417-z
Boina, T. M., & Macedo, M. A. S. (2018). Capacidade preditiva de accruals antes e após as IFRS no mercado acionário brasileiro. Revista Contabilidade & Finanças, 29(78), 375-389. doi: https://doi.org/10.1590/1808-057x201806300
Boutchkova, M., Doshi, H., Durnev, A., & Molchanov, A. (2012). Precarious politics and return volatility. The Review of Financial Studies, 25(4), 1111-1154. doi: https://doi.org/10.1093/rfs/hhr100
Brogaard, J., & Detzel, A. (2015). The asset-pricing implications of government economic policy uncertainty. Management Science, 61(1), 3-18. doi: http://dx.doi.org/10.1287/mnsc.2014.2044
Chen, Y., Chen, D., Wang, W., & Zheng, D. (2018). Political uncertainty and firms' information environment: Evidence from China. Journal of Accounting and Public Policy, 37(1), 39-64. doi: https://doi.org/10.1016/j.jaccpubpol.2018.01.005
Chen, F., Hope, O. K., Li, Q., & Wang, X. (2018). Flight to quality in international markets: investors’ demand for financial reporting quality during political uncertainty events. Contemporary Accounting Research, 35(1), 117-155. doi: https://doi.org/10.1111/1911-3846.12355
Choi, W., Han, S., Jung, S. H., & Kang, T. (2015). CEO's operating ability and the association between accruals and future cash flows. Journal of Business Finance & Accounting, 42(5-6), 619-634. doi: https://doi.org/10.1111/jbfa.12118
Dai, L., & Ngo, P. T. H. (2018). Political Uncertainty and Accounting Conservatism [Working Paper]. Recuperado de https://papers.ssrn.com/sol3/papers.cfm?abstractid=2196224
Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(s-1), 35–59.
Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of accounting and economics, 50(2), 344-401. doi: https://doi.org/10.1016/j.jacceco.2010.09.001
Dechow, P. M., Kothari, S. P., & Watts, R. L. (1998). The relation between earnings and cash flows. Journal of accounting and Economics, 25(2), 133-168. doi: https://doi.org/10.1016/S0165-4101(98)00020-2
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193–225.
Diamonte, R. L., Liew, J. M., Stevens, R. L. (1998). Political risk in emerging and developed markets. In Emerging Market Capital Flows. Springer, Boston, MA, Recuperado de https://books.google.com.br/books?hl=pt-BR&lr=&id=VzbrBwAAQBAJ&oi=fnd&pg=PA276&ots=LCHcis8oXR&sig=UjqyzrZzUoZYVIAM9CDwDhMCYIY#v=onepage&q&f=false
Economic Policy Uncertainty. Recuperado de http://www.policyuncertainty.com/
Farshadfar, S., Ng, C., & Brimble, M. (2008). The relative ability of earnings and cash flow data in forecasting future cash flows. Pacific Accounting Review, 20(3), 254-268. doi: http://dx.doi.org/10.1108/01140580810920236
Fundo Monetário Internacional. Recuperado de https://www.imf.org/external/index.htm
Gao, P., & Qui, Y. (2014). Political Uncertainty and Public Financing Costs: Evidence from U.S. Gubernatorial Elections and Municipal Bond Market. Australasian Finance and Banking Conference, Sydnei, Australia, Recuperado de https://papers.ssrn.com/sol3/papers.cfm?abstractid=1992200
Greene, W. H. (2012). Econometric analysis (7a Ed.). Boston: Pearson Education.
Hope, O., Thomas, W. B., & Vyas, D. (2016). Stakeholder demand for accounting quality and economic usefulness of accounting in US private firms. Journal of Accounting and Public Policy, 36(1), 1-13. doi: http://dx.doi.org/10.1016/j.jaccpubpol.2016.11.004
Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193–228. doi: https://doi.org/10.2307/2491047
Jordan, C. E., Waldron, M. A., & Clark, S. J. (2007). An analysis of the comparative predictive abilities of operating cash flows, earnings, and sales. Journal of Applied Business Research (JABR), 23(3). doi: https://doi.org/10.19030/jabr.v23i3.1390
Julio, B., & Yook, Y. (2016). Policy uncertainty, irreversibility, and cross-border flows of capital. Journal of International Economics, 103, 13-26. doi: https://doi.org/10.1111/j.1540-6261.2011.01707.x
Kim, M., & Kross, W. (2005). The ability of earnings to predict future operating cash flows has been increasing—not decreasing. Journal of Accounting research, 43(5), 753-780. doi: https://doi.org/10.1111/j.1475-679X.2005.00189.x
Leal, L. T. Y., Girao, L. F. D. A. P., Lucena, W. G. L., & Martins, V. G. (2017). Persistence, value relevance, and accruals quality in extreme earnings and cash flow situations. Revista de Administração Mackenzie, 18(3), 203-231. doi: http://dx.doi.org/10.1590/1678-69712017/administracao.v18n3p203-231
Lev, B. (1989). On the usefulness of earnings and earnings research: Lessons and directions from two decades of empirical research. Journal of accounting research, 153-192. doi: https://doi.org/10.2307/2491070
Lev, B., Li, S., & Sougiannis, T. (2010). The usefulness of accounting estimates for predicting cash flows and earnings. Review of Accounting Studies, 15(4), 779-807. doi: https://doi.org/10.1007/s11142-009-9107-6
Machado, M. A. V., Filho , Silva, A. C., & Callado, A. L. C. (2014). O processo de convergência às IFRS e a capacidade do lucro e do fluxo de caixa em predizer os fluxos de caixa futuro: evidências no mercado brasileiro. Revista de Contabilidade e Organizações, 8(21), 4-13. doi: https://doi.org/10.11606/rco.v8i21.55603
Mcnichols, M. F. (2002). Discussion of the Quality of Accruals and Earnings: The Role of Accrual Estimation Errors. The Accounting Review, 77(Supplement), 61-69.
Minton, B. A., Schrand, C. M., & Walther, B. R. (2002). The role of volatility in forecasting. Review of Accounting Studies, 7(2-3), 195-215. doi: https://doi.org/10.1023/A:1020226118973
Monfared, S., & Pavlov, A. (2019). Political Risk Affects Real Estate Markets. The Journal of Real Estate Finance and Economics, 58(1), 1-20. doi: https://doi.org/10.1007/s11146-017-9619-y
Moreira, J. C. C. (2018). Efeitos dos aspectos institucionais na anomalia dos accruals, Tese de doutorado, Faculdade de Economia, Administração e Contabilidade, Universidade de São Paulo.
Passos, L., & Coelho, A. (2019). Conservadorismo condicional em função de demanda e sinalização informacional no mercado brasileiro. Revista Universo Contábil, 15(1), 131-150. doi: https://doi.org/10.4270/ruc.2019107
Pastor, L., & Veronesi, P. (2012). Uncertainty about government policy and stock prices. The Journal of Finance, 67(4), 1219-1264. doi: https://doi.org/10.1111/j.1540-6261.2012.01746.x
Paulo, E., Martins, E., & Pontes Girão, L. F. D. A. (2014). Accounting information quality in Latin-and North-American public firms. In Accounting in Latin America (pp. 1-39). Emerald Group Publishing Limited. doi: https://doi.org/10.1108/S1479-356320140000014001
Pincus, M., Rajgopal, S., & Venkatachalam, M. (2007). The accrual anomaly: International evidence. The Accounting Review, 82(1), 169-203.
Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of accounting and economics, 42(3), 335-370. doi: https://doi.org/10.1016/j.jacceco.2006.01.002
Windmeijer, F. (2005). A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of econometrics, 126(1), 25-51. doi: https://doi.org/10.1016/j.jeconom.2004.02.005
Wolk, H. I., Dodd, J. L., & Tearney, M. J. (2004). Accounting Theory: Conceptual Issues in a Political and Economic Environment (6th ed.). Thomson.
Xu, N., Chen, Q., Xu, Y., & Chan, K. C. (2016). Political uncertainty and cash holdings: Evidence from China. Journal of Corporate Finance, 40, 276-295. doi: https://doi.org/10.1016/j.jcorpfin.2016.08.007
Yung, K., & Root, A. (2019). Policy uncertainty and earnings management: International evidence. Journal of Business Research, 100, 255-267. doi: https://doi.org/10.1016/j.jbusres.2019.03.058
Arellano, M., Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277-297. doi: https://doi.org/10.2307/2297968
Ashton, D., & Trinh, C. (2018). Evaluating the information content of earnings forecasts. Accounting and Business Research, 48(6), 674-699. doi: https://doi.org/10.1080/00014788.2017.1415800
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The quarterly journal of economics, 131(4), 1593-1636. doi: https://doi.org/10.1093/qje/qjw024
Ball, R, & Brown, P. (1968). An empirical evaluation of accounting numbers. Journal of Accounting Research, 6(2), 159-178. doi: https://doi.org/10.2307/2490232
Banco Mundial. (2018). Recuperado de https://data.worldbank.org/indicator
Barros, L. A. B. C., Bergmann, D. R., Castro, F. H., & Silveira, A. D. (2020). Endogeneity in panel data regressions: methodological guidance for corporate finance researchers. Revista Brasileira de Gestão de Negócios, 22, 437-461. doi: https://doi.org/10.7819/rbgn.v22i0.4059
Barth, M. E., Beaver, W. H., Hand, J. R. M., & Landsman, W. R. (1999). Accruals, cash flows, and equity values. Review of Accounting Studies, 4(3-4), 205-229. doi: https://doi.org/10.1023/A:1009630100586
Barth, M. E., Clinch, G., & Israeli, D. (2016). What do accruals tell us about future cash flows?. Review of Accounting Studies, 21(3), 768-807. doi: https://doi.org/10.1007/s11142-016-9360-4
Barth, M. E., Cram, D. P., & Nelson, K. K. (2001). Accruals and the Prediction of Future Cash Flows. The Accounting Review, 76(1), 27-58.
Beaver, W. (1968). The information content of annual earnings announcements. Journal of Accounting Research, Supplement, 67-92. doi: https://doi.org/10.2307/2490070
Beaver, W. H., Mcnichols, M. F., & Wang, Z. Z. (2018). The information content of earnings announcements: new insights from intertemporal and cross-sectional behavior. Review of Accounting Studies, 23(1), 95-135. doi: https://doi.org/10.1007/s11142-017-9417-z
Boina, T. M., & Macedo, M. A. S. (2018). Capacidade preditiva de accruals antes e após as IFRS no mercado acionário brasileiro. Revista Contabilidade & Finanças, 29(78), 375-389. doi: https://doi.org/10.1590/1808-057x201806300
Boutchkova, M., Doshi, H., Durnev, A., & Molchanov, A. (2012). Precarious politics and return volatility. The Review of Financial Studies, 25(4), 1111-1154. doi: https://doi.org/10.1093/rfs/hhr100
Brogaard, J., & Detzel, A. (2015). The asset-pricing implications of government economic policy uncertainty. Management Science, 61(1), 3-18. doi: http://dx.doi.org/10.1287/mnsc.2014.2044
Chen, Y., Chen, D., Wang, W., & Zheng, D. (2018). Political uncertainty and firms' information environment: Evidence from China. Journal of Accounting and Public Policy, 37(1), 39-64. doi: https://doi.org/10.1016/j.jaccpubpol.2018.01.005
Chen, F., Hope, O. K., Li, Q., & Wang, X. (2018). Flight to quality in international markets: investors’ demand for financial reporting quality during political uncertainty events. Contemporary Accounting Research, 35(1), 117-155. doi: https://doi.org/10.1111/1911-3846.12355
Choi, W., Han, S., Jung, S. H., & Kang, T. (2015). CEO's operating ability and the association between accruals and future cash flows. Journal of Business Finance & Accounting, 42(5-6), 619-634. doi: https://doi.org/10.1111/jbfa.12118
Dai, L., & Ngo, P. T. H. (2018). Political Uncertainty and Accounting Conservatism [Working Paper]. Recuperado de https://papers.ssrn.com/sol3/papers.cfm?abstractid=2196224
Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(s-1), 35–59.
Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of accounting and economics, 50(2), 344-401. doi: https://doi.org/10.1016/j.jacceco.2010.09.001
Dechow, P. M., Kothari, S. P., & Watts, R. L. (1998). The relation between earnings and cash flows. Journal of accounting and Economics, 25(2), 133-168. doi: https://doi.org/10.1016/S0165-4101(98)00020-2
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193–225.
Diamonte, R. L., Liew, J. M., Stevens, R. L. (1998). Political risk in emerging and developed markets. In Emerging Market Capital Flows. Springer, Boston, MA, Recuperado de https://books.google.com.br/books?hl=pt-BR&lr=&id=VzbrBwAAQBAJ&oi=fnd&pg=PA276&ots=LCHcis8oXR&sig=UjqyzrZzUoZYVIAM9CDwDhMCYIY#v=onepage&q&f=false
Economic Policy Uncertainty. Recuperado de http://www.policyuncertainty.com/
Farshadfar, S., Ng, C., & Brimble, M. (2008). The relative ability of earnings and cash flow data in forecasting future cash flows. Pacific Accounting Review, 20(3), 254-268. doi: http://dx.doi.org/10.1108/01140580810920236
Fundo Monetário Internacional. Recuperado de https://www.imf.org/external/index.htm
Gao, P., & Qui, Y. (2014). Political Uncertainty and Public Financing Costs: Evidence from U.S. Gubernatorial Elections and Municipal Bond Market. Australasian Finance and Banking Conference, Sydnei, Australia, Recuperado de https://papers.ssrn.com/sol3/papers.cfm?abstractid=1992200
Greene, W. H. (2012). Econometric analysis (7a Ed.). Boston: Pearson Education.
Hope, O., Thomas, W. B., & Vyas, D. (2016). Stakeholder demand for accounting quality and economic usefulness of accounting in US private firms. Journal of Accounting and Public Policy, 36(1), 1-13. doi: http://dx.doi.org/10.1016/j.jaccpubpol.2016.11.004
Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193–228. doi: https://doi.org/10.2307/2491047
Jordan, C. E., Waldron, M. A., & Clark, S. J. (2007). An analysis of the comparative predictive abilities of operating cash flows, earnings, and sales. Journal of Applied Business Research (JABR), 23(3). doi: https://doi.org/10.19030/jabr.v23i3.1390
Julio, B., & Yook, Y. (2016). Policy uncertainty, irreversibility, and cross-border flows of capital. Journal of International Economics, 103, 13-26. doi: https://doi.org/10.1111/j.1540-6261.2011.01707.x
Kim, M., & Kross, W. (2005). The ability of earnings to predict future operating cash flows has been increasing—not decreasing. Journal of Accounting research, 43(5), 753-780. doi: https://doi.org/10.1111/j.1475-679X.2005.00189.x
Leal, L. T. Y., Girao, L. F. D. A. P., Lucena, W. G. L., & Martins, V. G. (2017). Persistence, value relevance, and accruals quality in extreme earnings and cash flow situations. Revista de Administração Mackenzie, 18(3), 203-231. doi: http://dx.doi.org/10.1590/1678-69712017/administracao.v18n3p203-231
Lev, B. (1989). On the usefulness of earnings and earnings research: Lessons and directions from two decades of empirical research. Journal of accounting research, 153-192. doi: https://doi.org/10.2307/2491070
Lev, B., Li, S., & Sougiannis, T. (2010). The usefulness of accounting estimates for predicting cash flows and earnings. Review of Accounting Studies, 15(4), 779-807. doi: https://doi.org/10.1007/s11142-009-9107-6
Machado, M. A. V., Filho , Silva, A. C., & Callado, A. L. C. (2014). O processo de convergência às IFRS e a capacidade do lucro e do fluxo de caixa em predizer os fluxos de caixa futuro: evidências no mercado brasileiro. Revista de Contabilidade e Organizações, 8(21), 4-13. doi: https://doi.org/10.11606/rco.v8i21.55603
Mcnichols, M. F. (2002). Discussion of the Quality of Accruals and Earnings: The Role of Accrual Estimation Errors. The Accounting Review, 77(Supplement), 61-69.
Minton, B. A., Schrand, C. M., & Walther, B. R. (2002). The role of volatility in forecasting. Review of Accounting Studies, 7(2-3), 195-215. doi: https://doi.org/10.1023/A:1020226118973
Monfared, S., & Pavlov, A. (2019). Political Risk Affects Real Estate Markets. The Journal of Real Estate Finance and Economics, 58(1), 1-20. doi: https://doi.org/10.1007/s11146-017-9619-y
Moreira, J. C. C. (2018). Efeitos dos aspectos institucionais na anomalia dos accruals, Tese de doutorado, Faculdade de Economia, Administração e Contabilidade, Universidade de São Paulo.
Passos, L., & Coelho, A. (2019). Conservadorismo condicional em função de demanda e sinalização informacional no mercado brasileiro. Revista Universo Contábil, 15(1), 131-150. doi: https://doi.org/10.4270/ruc.2019107
Pastor, L., & Veronesi, P. (2012). Uncertainty about government policy and stock prices. The Journal of Finance, 67(4), 1219-1264. doi: https://doi.org/10.1111/j.1540-6261.2012.01746.x
Paulo, E., Martins, E., & Pontes Girão, L. F. D. A. (2014). Accounting information quality in Latin-and North-American public firms. In Accounting in Latin America (pp. 1-39). Emerald Group Publishing Limited. doi: https://doi.org/10.1108/S1479-356320140000014001
Pincus, M., Rajgopal, S., & Venkatachalam, M. (2007). The accrual anomaly: International evidence. The Accounting Review, 82(1), 169-203.
Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of accounting and economics, 42(3), 335-370. doi: https://doi.org/10.1016/j.jacceco.2006.01.002
Windmeijer, F. (2005). A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of econometrics, 126(1), 25-51. doi: https://doi.org/10.1016/j.jeconom.2004.02.005
Wolk, H. I., Dodd, J. L., & Tearney, M. J. (2004). Accounting Theory: Conceptual Issues in a Political and Economic Environment (6th ed.). Thomson.
Xu, N., Chen, Q., Xu, Y., & Chan, K. C. (2016). Political uncertainty and cash holdings: Evidence from China. Journal of Corporate Finance, 40, 276-295. doi: https://doi.org/10.1016/j.jcorpfin.2016.08.007
Yung, K., & Root, A. (2019). Policy uncertainty and earnings management: International evidence. Journal of Business Research, 100, 255-267. doi: https://doi.org/10.1016/j.jbusres.2019.03.058
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2021-09-30
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Passos, L. C., & Cavalcante, P. R. (2021). The predictive ability earnings components and political uncertainty: evidence from Latin America. Journal of Education and Research in Accounting (REPeC), 15(3). https://doi.org/10.17524/repec.v15i3.2868
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