Are stewardship and valuation usefulness compatible or alternative objectives of financial accounting?

Transcription

1 SFB 649 Dscusson Paper Are stewardshp and valuaton usefulness compatble or alternatve objectves of fnancal accountng? Joachm Gassen* * Humboldt-Unverstät zu Berln, Germany SFB E C O N O M I C R I S K B E R L I N Ths research was supported by the Deutsche Forschungsgemenschaft through the SFB 649 "Economc Rsk". ISSN SFB 649, Humboldt-Unverstät zu Berln Spandauer Straße 1, D Berln

2 Are stewardshp and valuaton usefulness compatble or alternatve objectves of fnancal accountng? Joachm Gassen Wrtschaftswssenschaftlche Fakultät C.A.S.E - Center for Appled Statstcs and Economcs Humboldt-Unverstät zu Berln Berln, Germany Phone: +49(0) E-mal: [email protected] Keywords: decson usefulness, valuaton usefulness, stewardshp, conservatsm JEL Classfcatons: D82, G14, G34, M41 Ths verson, March 2008 Frst verson, May 2007 I thank the collaboratve research center SFB 649 of the German research foundaton (DFG) at Humboldt Unversty, Berln for provdng me wth data access va the Fnancal Economc Data Center (FEDC) and workshop partcpants from the Accountancy Sprng Camp at Tlburg Unversty, the 3rd annual conventon of the SFB 649 at Motzen, the Unversty of Naples, the sprng meetng of the Kommsson Rechnungswesen, and the VI Workshop on Emprcal Research n Fnancal Accountng n Madrd (Best Paper Award) for valuable comments. I also thank S. P. Kothar, Ryan LaFond, Laurence van Len Joan Luf Erk Peek, Krstna Schwedler, Thorsten Sellhorn, Holly Skafe, the dscussant of the Accountancy Sprng Camp, Sofe van der Meulen, and the dscussant from the VI Workshop on Emprcal Research n Fnancal Accountng, Chrstna Dargendou, for very helpful feedback.

3 Are stewardshp and valuaton usefulness compatble or alternatve objectves of fnancal accountng? Abstract: In ther jont framework projec the FASB and the IASB recently proposed droppng stewardshp as a separate objectve of fnancal accountng, because the Boards vew stewardshp and valuaton usefulness as compatble sub-objectves rankng under an overall objectve of decson usefulness. Ths paper puts ths conjecture to an emprcal test. As t s wdely agreed that asymmetrc tmely earnngs ncrease the contractual effcency of accountng nformaton, I frst test whether frms wth more asymmetrc tmely earnngs produce more valuaton-useful fnancal accountng nformaton. Second, I test whether frms wth more nfluental non-equty stakeholders provde more valuaton-useful fnancal accountng nformaton. As non-equty stakeholders n general face hgher transacton costs when dversfyng unsystematc rsk compared to equty stakeholders and as stewardshp-related rsks should be at least n part unsystematc, I expect the demand for stewardshp-related accountng nformaton to ncrease wth the nfluence of non-equty stakeholders. Usng a broad sample of U.S. frms and a set of frm-specfc metrcs for valuaton usefulness based on short-wndow captal market reactons to quarterly earnngs announcements, I document that the valuaton usefulness of fnancal accountng nformaton s consstently negatvely related to ts stewardshporentaton. I conclude from these analyses that valuaton usefulness and stewardshp are alternatve objectves of fnancal accountng. Keywords: decson usefulness, valuaton usefulness, stewardshp, conservatsm 2

4 1 Introducton The objectves of fnancal accountng are a crucal determnant of fnancal accountng standard settng and research, alke. Whle t appears undsputed that the overall purpose of fnancal accountng s to provde decson-useful nformaton to market partcpants, the usage of ths nformaton dffers across subjects. Startng from ths overall objectve of decson usefulness and n lne wth an extensve body of pror lterature (among others: Beaver/Demsk, 1979; Gjesdal, 1981; Km, 1995, Chrstensen et al., 2005), Chrstensen/Demsk (2003, pp ) dentfy two man sub-objectves of accountng: To provde valuaton-relevant nformaton and contractng-relevant nformaton. Hstorcally, standard setters dentfed the objectves of fnancal accountng n a smlar fashon. In SFAC No. 1, the Fnancal Accountng Standards Board (FASB) states that the overall objectve of fnancal reportng s to provde nformaton that s useful to present and potental nvestors and credtors and other users n makng ratonal nvestmen cred and smlar decsons (SFAC 1.34). The Board then narrows that focus nto, among others, two dfferent sub-objectves: nformaton to help [ ] users n assessng the amounts, tmng, and uncertanty of prospectve cash recepts (SFAC 1.37) and nformaton about how management of an enterprse has dscharged ts stewardshp responsblty to owners (stockholders) for the use of enterprse resources entrusted to t (SFAC 1.50). Ths paper refers to the overall objectve of SFAC 1.34 as decson usefulness and to the frst sub-objectve (SFAC 3

5 1.37) as valuaton usefulness and the second sub-objectve (SFAC 1.50) as stewardshp or, used synonymously, contractng usefulness. 1 In ther current jont project on developng a common conceptual framework of fnancal reportng, the FASB and the Internatonal Accountng Standards Board (IASB) 2 dentfy only one objectve of fnancal accountng: decson usefulness. They further state that decson-useful nformaton should help present and potental nvestors and credtors and others to assess the amounts, tmng, and uncertanty of the entty s future cash nflows and outflows (the entty s future cash flows) (DP IASB/FASB, OB3). Thereby the Boards appear to be mplctly narrowng the focus of decson usefulness on valuaton usefulness. In addton they suggest subsumng the dfferent subobjectves of fnancal accountng under ther understandng of decson usefulness, as they no longer vew stewardshp and valuaton usefulness as alternatve sub-objectves: Users of fnancal reports who wsh to assess how well management has dscharged ts stewardshp responsbltes are generally nterested n makng resource allocaton decsons, whch nclude, but are not lmted to, whether to buy, sell, or hold the entty s securtes or whether to lend money to the entty. Decsons about whether to replace or reappont managemen how to remunerate managemen and how to vote on shareholder proposals about management s polces and other matters are also potental consderatons n makng resource allocaton decsons n the broad sense n whch that term s used n the framework. Thus, the objectve of fnancal reportng stated n paragraph OB2 encompasses provdng nformaton useful n assessng management s stewardshp (DP IASB/FASB, OB28). Ths suggeston has already been the topc of heavy debate. Two of the IASB members ssued alternatve vews on the dscusson paper. In the comment letters nvted by the dscusson paper a majorty of 86 % of respondents voted aganst the suggeston to 1 2 In lne wth the U.S. standard setter, the processor of the IASB, the Internatonal Accountng Standards Commttee (IASC), n ts Framework also dentfed the overall objectve of decson usefulness and the derved sub-objectves of valuaton and contractng usefulness (FK.12-21). I refer to the FASB and the IASB as the Boards from now on. 4

6 drop the stewardshp sub objectve (DP IASB/FASB, BC32-41 and AV1.1-7; ASB PN 293; IASB ON 20 FEB 2007, Par ). Buldng on ths motvaton, ths paper nvestgates whether valuaton usefulness and stewardshp are compatble or alternatve objectves of fnancal accountng. I offer some theoretcal arguments dscussng why or why not stewardshp and valuaton usefulness could be alternatve objectves n the background secton. I expect frms to balance ther accountng choces predomnantly dependng on the demand for contractng-related and valuaton-related nformaton by stakeholders. Also, I argue that the demands for these dfferent types of nformaton should dffer systematcally wth the non-accountng-related governance and nformatonal nfrastructure of the frm. Notwthstandng ths theoretcal reasonng, the queston whether valuaton usefulness and stewardshp consttute compatble or alternatve objectves of fnancal accountng ultmately consttutes an emprcal queston. Ths paper addresses ths emprcal queston. Dong so requres emprcally traceable defntons of valuaton usefulness and stewardshp. I detal the reasons for my varable choce n the second secton of the paper. Snce I am focusng on actual valuaton-related decsons nduced by fnancal accountng nformaton, short-wndow captal market reactons to quarterly earnngs announcements are used as a proxy for valuaton usefulness. Both undrectonal measures (abnormal turnover and change n bd-ask spread) whch are closely related to the noton of nformaton content poneered by Beaver (1968) and drectonal measures of the short-wndow response of returns to earnngs changes and earnngs surprses, smlar to the concept of valuaton relevance as lad out by Lo/Lys (2000), are appled n ths paper. It appears crucal to dfferentate between valuaton and value relevance. 5

7 Whle the former ams at capturng the actual accountng related valuaton decsons, the latter targets the algnment between accountng and market nformaton per se, wthout addressng the queston whether accountng nformaton s (potentally) useful to market partcpants n valuaton-related decsons or whether t merely consttutes an echo of nformaton from more tmely sources whch were already mpounded nto prces. The lterature has not agreed upon a defnton for stewardshp ye let alone developed an emprcal proxy for the fulfllment of the stewardshp role by fnancal accountng (O Connell, 2007). Acknowledgng ths, I conceptually defne stewardshp as provdng nformaton that s useful n assessng management s actons. I decde to use the asymmetrc tmelness of earnngs, well known as condtonal conservatsm, as a supply-sde proxy for the stewardshp-orentaton of fnancal accountng nformaton because an extensve body of research documents both theoretcally and emprcally that condtonal conservatsm s a supply-sde answer to the demand for contractual effcent accountng nformaton (e.g. Chen et al., 2007; see Watts (2003a,b) for an overvew of the related lterature). Usng condtonal conservatsm as a proxy for the supply of stewardshp-orented fnancal accountng nformaton s not wthout draw-backs, as the concept of asymmetrc tmelness has been questoned by recent lterature (e.g. Detrch et al., 2007; Gvoly et al., 2007; see Ryan, 2006, for a recent overvew). Therefore and to ncrease the nternal robustness of my fndngs, I apply an addtonal set of demand-ste motvated metrcs as alternatve proxes for the degree of fnancal accountng s stewardshp-orentaton. As lad out n the next secton, management not adherng to explct or mplct contracts because of hdden acton problems caused by low stewardshp-orentaton of fnancal 6

8 accountng nformaton mposes at least partly unsystematc rsk to stakeholders. As dversfyng ths unsystematc rsk component wll be more costly to stakeholders facng hgher transacton costs, the demand for stewardshp wll be hgher for stakeholders facng hgher levels of transacton costs. Also, stakeholders facng hgher transactons costs wll generally fnd t harder to renegotate ther contracts. If demand and supply are n equlbrum, ths justfes the use of proxy varables for the relatve mportance of hghtransactons-costs stakeholders (credtors, supplers, lessors, employees) as proxes for the stewardshp-orentaton of fnancal accountng nformaton. Usng the ntersecton of daly CRSP wth quarterly Compustat and IBES data, I estmate my frm-specfc constructs for a large panel sample of 119,861 quarterly observatons of U.S. frms coverng the tme-span of Ths yelds a crosssectonal sample of 3,245 frm-level observatons that are used for the man tests. In order to assess the valdty of the frm-level metrcs, ndustres are ranked accordng to the frm-level metrcs and out-of sample valdty checks are performed based on these ndustry rankngs for an even broader sample of up to 311,907 frm-quarter observatons. The man research queston s beng assessed by two separate tests. Frs the mpact of valuaton usefulness on the asymmetrc tmelness of earnngs s explored usng an nteracted verson of the standard reverse regresson approach ntroduced by Basu (1997). I fnd that frms wth more valuaton-useful fnancal accountng nformaton have less asymmetrc tmely earnngs. As a second test for the connecton between stewardshp and valuaton usefulness, a determnaton model for valuaton usefulness ncorporatng other determnants that pror lterature has found to be connected to the valuaton usefulness of earnngs, s estmated. Thereby I reach two conclusons. Frst: 7

9 Asymmetrc tmelness has a dampenng effect on valuaton usefulness after controllng for other factors that nfluence the valuaton usefulness of fnancal accountng nformaton. Second: When stewardshp-orentaton s assessed by the relatve mportance of hgh-transacton-costs stakeholders, I also fnd that hgher levels of demand for stewardshp lead to lower levels of valuaton usefulness. As a sde resul I fnd that frms operatng n poorer nformaton envronments, as ndcated by lower analyst followng and a hgher frequency of zero-return tradng days, have more valuaton-useful fnancal accountng nformaton. Based on these results, whch are backed by a set of robustness checks whch are detaled n the thrd secton, and stressng the mportance of the lmtatons whch are presented n the concluson, I cautously conclude that valuaton usefulness and stewardshp are alternatve objectves of fnancal accountng. Ths paper makes several contrbutons to nterrelated streams n the accountng lterature. Drectly related to ts research queston, ths paper contrbutes emprcal nsghts to the theoretcal dscusson about the objectves of fnancal accountng (e. g. Beaver/Demsk, 1979; Gjesdal, 1981; Lang, 2000; Lamber 2001; Lang, 2001; Arya et al., 2004; Chrstensen/Demsk, 2004; Chrstensen et al., 2005). Whle these authors put emphass on accountng nformaton servng a contractng and a valuaton role and provde theoretcal models descrbng ths dual objectve, ths paper provdes emprcal evdence generally consstent wth ther reasonng. Whle a recent paper (O Connell, 2007) explctly calls for emprcal research n ths area, the nterrelatedness of stewardshp and valuaton usefulness has rarely been nvestgated emprcally n the pror lterature wth one noteworthy excepton. In a recent paper (Bushman et al., 2006) the 8

10 authors nvestgate the lnkage between valuaton earnngs coeffcents, derved from a value relevance regresson, and compensaton earnngs coeffcents, derved from a regresson of changes n management s cash compensaton on earnngs changes. They fnd these two coeffcents to be postvely correlated and nterpret ths evdence as beng consstent wth stewardshp and valuaton usefulness beng compatble objectves of fnancal accountng. In dong so, they assume that value relevance captures valuatonusefulness of fnancal accountng, whle ths paper argues that valuaton usefulness s conceptually more approprately captured by short-wndow captal market reactons to accountng announcements. In another related paper (LaFond/Watts, 2008), the authors fnd that frms wth hgh levels of nformaton asymmetry, measured by the probablty of nformed trade, have hgher levels of condtonal conservatsm. LaFond and Watts nterpret ths fndng as ndcatng that condtonal conservatsm s a ratonal equlbrum response to hgh levels of nformaton asymmetres between company n- and outsders. The results of ths paper complment the fndngs of LaFond and Watts n showng that condtonal conservatsm s becomng more pronounced as the valuaton usefulness of fnancal accountng nformaton declnes. I nterpret ths fndng as ndcatng tha when nformaton asymmetry s hgh, fnancal accountng nformaton s becomng less sutable to provde hard-to-verfy nformaton and thus, s talored by ts prepares towards ts stewardshp role. Besdes of ts man contrbuton, ths paper s provdng addtonal nsghts nto the determnants of the nformaton content of fnancal accountng nformaton (e.g. Beaver, 1968; Lpe, 1990; Landsman/Maydew, 2002; Francs et al., 2002a; DeFond et al., 2007), as t adds to ths lterature by nvestgatng frm-specfc determnants of the 9

11 nformaton content of fnancal accountng nformaton. Also, t provdes new nsghts on the determnants and consequences of conservatve accountng (e.g. Peek et al., 2006; Ball et al., 2008), and on the nfluence of the nformaton envronment on the nformaton-ncorporatng prcng process (e.g. Francs et al., 2002b; Chen et al., 2006; Frankel et al., 2006). Fnally, ths paper contrbutes to the dscusson of alternatve metrcs of earnngs attrbutes, accountng objectves and ther nter-relatedness (e.g. Lo/Lys, 2000; Schpper/Vncen 2003, Francs et al., 2004). Ths paper contnues as follows: The second secton provdes some theoretcal background to the research queston and dscusses the development of the metrcs for valuaton usefulness and stewardshp. The thrd secton presents the test desgn, the data, and the results. The fourth secton concludes. 2 Background 2.1 Theory Development Ths paper nvestgates whether valuaton usefulness and stewardshp are compatble or alternatve objectves of fnancal accountng. I defne the two subobjectves to be alternatves n theory f and only f the followng two condtons are met: (a) there s a demand for the fulfllment of both sub-objectves, and (b) both subobjectves obeyed separately would gve rse to dfferent accountng choces. Agency theory rooted analyses predct that an effcent nformaton system used n a contractual settng mght have dfferent attrbutes than an nformaton system used n a valuaton settng (e.g. Gjesdal, 1981; Chrstensen et al., 2005). Buldng on that and assumng that nformaton s only prvately avalable to the manager ex ante accountng dsclosure, three possble settngs mght be nterestng. Frs the ncentves between 10

12 manager and stakeholders mght be algned ex ante. Second, the ncentves between manager and stakeholders mght be mss-algned ex ante but mght be algnable by the use of accountng nformaton. Thrd, the ncentves between manager and stakeholders mght be mss-algned ex ante and mght be not algnable by the use of accountng nformaton. In the frst settng there exsts no demand for contractng-useful accountng nformaton (assumpton (a) from above s volated). In the second settng there s demand for contractng-useful accountng nformaton (assumpton (a) s fulflled). In the thrd settng, accountng sgnals are unverfable, accountng s cheap talk and thus, ratonal stakeholders would not have any demand for accountng nformaton (agan, assumpton (a) s volated). Focusng on the presumable most realstc second scenaro, the queston becomes whether assumpton (b) holds under ths condton. In ths scenaro, accountng nformaton s used as an nput varable to the ncentve constrant of the manager. As pror research generally shows (for an overvew see Lamber 2001), n ths settng accountng nformaton performs the better the more drectly t s lnked to management s actons. Valuaton-useful accountng nformaton, n turn, would predomnantly be based on management s actons outcomes. Ths would ndcate that n ths settng, demand would be hgh for a contractng-useful accountng system and market partcpants would be wllng to sacrfce valuaton usefulness for contractng usefulness. It has been argued that n that stuaton, contractng-useful nformaton s the best avalable nformaton for valuaton purposes as well, as only verfable nformaton can be valuaton useful (Watts, 2003a). Ths argument appears plausble from a sngle frm perspectve, n a sense that for each sngle frm there exsts an accountng system whch balances contractual and 11

13 valuaton purposes of accountng so that t reaches effcent equlbrum levels of both. Appled on the cross-secton however, some frms have less ncentve mss-algnment ex ante and thus mght end up wth an accountng system whch weghts the valuaton role more domnantly (e.g. by dsclosng prvate forward-lookng nformaton of the management as knowngly msreportng by management s of no concern), whle other frms wth more severe ex ante mss-algnment of ncentves mght focus on the contractng role of accountng. Another reason for potental cross-sectonal dfferences n the weghtng of valuaton and the contractng usefulness mght be dfferences n the non-accountng nformatonal nfrastructure. Ths nfrastructure conssts of non-accountng (voluntary) dsclosures by the management and of thrd party dsclosures about the frm. Assumng that voluntary dsclosures are credble n a sense that they do not consttute cheap talk, they consttute a dfferent means for the management to communcate prvate nformaton to stakeholders. It appears justfed to expect that draftng contracts based on voluntary dsclosures s more costly as managers cannot be forced to voluntarly dsclose. As such, voluntary dsclosure can manly be vewed as an alternatve valuaton-relevant accountng dsclosure whenever ncentves between stakeholders and managers are suffcently algned. Thrd party dsclosures n addton can generate valuaton-useful dsclosures but canno by defnton, gve away prvate nformaton of the management. Nevertheless they can help mtgatng costly nformaton processes of stakeholders on a tmely bass and thus can crowd out the valuaton usefulness of accountng nformaton to some extent. In general I expect that the better the non-accountng nformatonal envronment of a gven frm, the lower the demand for valuaton-useful accountng 12

14 nformaton. Ths decrease n demand should lead c.p. to accountng choces whch gve more weght to contractng-useful accountng nformaton. Summng up, f valuaton usefulness and stewardshp are alternatve objectves of fnancal accountng, I expect that frm-specfc determnants n the non-accountngrelated governance structure and the nformatonal envronment shape the demand for and fnally the supply of contractng and valuaton useful nformaton. Frms whch use ther accountng to algn the ncentves between managers and stakeholders lack the possblty to provde valuaton-relevant nformaton. Therefore I expect a negatve correlaton between valuaton usefulness and stewardshp. In addton, the demand for and supply of valuaton-useful accountng nformaton should declne for frms from rch nonaccountng nformaton envronments. 2.2 Measures for Valuaton Usefulness and Stewardshp Ths secton dscusses the measures for valuaton usefulness and stewardshp used n ths paper. Snce the goal of ths project s to queston the proposed new framework approach, I try to defne the appled constructs closely n lne wth what I nfer to be the standard setters defntons. In the dscusson paper contanng the draft of the frst two chapters of the new framework, the Boards defne decson-useful nformaton as follows: nformaton that s useful to present and potental nvestors and credtors and others n makng nvestmen cred and smlar resource allocaton decsons (IASB/FASB DP, OB2). Ths defnton can wthout substantal loss be shortened to: nformaton that s useful n makng resource allocaton decsons. Ths broad defnton appears to be of lttle help from an economc stand-pon as, for an economs every decson s a resource allocaton decson, and a pece of nformaton s defned as news f t s of some 13

15 value to the recpent (Hrshlefer, 1973). Applyng ths reasonng, the orgnal defnton could be condensed even more to smply, nformaton., makng the adjectve decsonuseful redundant. In order for the defnton to be emprcally traceable, however, t must be narrower. The Boards provde such a defnton: fnancal reportng should provde nformaton to help present and potental nvestors and credtors and others to assess the amounts, tmng, and uncertanty of the entty s future cash nflows and outflows (DP IASB/FASB, OB3). As asset prcng s based on expected future returns (ultmately determned by cash flows) and ther covarance wth systematc rsk factors, ths defnton can be seen as to be very closely related to the term valuaton-relevant nformaton as lad out by, e.g., Chrstensen/Demsk (2003, pp ). Thus, I come to the concluson that effectvely the Boards have narrowed the defnton of decson usefulness to the defnton of valuaton usefulness. Nevertheless, I stll refer to ths noton as valuaton usefulness only, because conceptually decson usefulness has a broader focus than valuaton usefulness. Followng tha ths paper defnes valuaton usefulness as the ablty of fnancal accountng nformaton to provde nformaton that s relevant for decson makng n the valuaton process. In ts draft of the frst chapter of the new conceptual framework, the Boards descrbe stewardshp as follows: Management of an entty s accountable to owners (shareholders) for the custody and safekeepng of the entty s economc resources and for ther effcent and proftable use (DP IASB/FASB, OB 27). In that sense they defne the stewardshp role of fnancal accountng as provdng nformaton that s useful n assessng how well management has dscharged ts stewardshp responsbltes (DP IASB/FASB, OB 27). Ths focuses on nformaton about management actons such as 14

16 operatonal, fnancng, and nvestment decsons, as well as on management communcatons to stakeholders. In ths sense, the term stewardshp s closely related to the Chrstensen/Demsk (2003, pp ) noton of the contractng role of accountng. That s why I defne stewardshp as provdng nformaton that s useful for the evaluaton of management s actons. It s mportant to note that the defntons of valuaton usefulness and stewardshp used n ths paper naturally overlap: Informaton about management s falure to stck to a current nvestment plan, for example, mght well be decson-useful to some/all stakeholders for estmatng future cash flows from nvestng actvtes. But they are also not theoretcally conjunct. Imagne a stuaton where fnancal accountng fulflls ts stewardshp role perfectly. In that case, contracts could be wrtten n a way so that management s actons would perfectly algn wth nvestors preferences; accountng would not report any devatons by the management from the optmal path, and because of that would not yeld any surprses; the value of the frm would follow a random walk; and accountng would not be decson-useful for valuaton purposes. In pror lterature the term valuaton usefulness has often been lnked to the concept of the value relevance of fnancal accountng nformaton (e.g., Bushman et al., 2006; Barth et al., 2001). Value relevance s normally defned as the strength of the lnk between accountng nformaton (predomnantly measured by earnngs (changes) and/or book value of earnngs) and the value of the accordng frm (predomnantly measured by the prce or return of ts equty shares). Undoubtfully, value relevance s an mportant attrbute of fnancal accountng. It appears questonable however, whether n can be lnked to the valuaton usefulness of fnancal accountng nformaton (Holthausen/Watts, 15

17 2001). Asset prces are nfluenced by fnancal accountng as well as by other nonfnancal-accountng nformaton. To the extent that fnancal accountng nformaton just confrms non-fnancal-accountng nformaton whch was avalable to the market before, t can hardly be valuaton useful by tself. To the extreme: f fnancal accountng s defned to mmc asset prce returns, t becomes absolutely value-relevant from an emprcal measurement perspectve, whle beng a pure echo of prevous sgnals and thus provdng no valuaton-useful nformaton. 3 Whle playng a confrmatory role mght well be a very mportant objectve of fnancal accountng from the contractual standpon valuaton usefulness mples that market partcpants learn somethng from fnancal accountng what they not already know. When operatonalzng the defnton of valuaton usefulness, I also refran from assumng prors about the valuaton models market partcpants are usng. Instead, ths paper nvestgates emprcal manfestatons of valuaton-related decsons that can be traced back to the arrval of accountng nformaton wth a comparably hgh probablty. Consequently, t nvestgates the equty marke as conceptually, the value of equty should be more closely related to frm fundamentals than the value of debt nstruments or the values of other stakeholders clams, whch are less dependent on the economc performance of the reportng entty. In addton, the equty market has undsputable advantages wth respect to data avalablty. However, there are some lmtatons to focusng solely on the equty market. Frs n choosng not to nvestgate valuaton- 3 To the extent that confrmng fnancal accountng nformaton reduces uncertanty about the future states of the world, t s stll decson useful. However, (a) n equlbrum wth perfect fnancal accountng nformaton no such uncertanty would exst because market partcpants would penalze managers for ex-ante mss-nformng ex pos ncentvzng them to truthfully dsclose ex ante and (b) the concept of value relevance does not separate between new nformaton, confrmng nformaton and pure echoes. 16

18 related decsons on all relevant stakeholder markets, (e.g., the deb labor, goods, or supplers markets) nternal valdty becomes a concern. Second, one can measure only actual decsons, not the general ablty of fnancal accountng nformaton to affect decsons. In order to dentfy valuaton-related decsons caused by the arrval of new accountng nformaton, ths paper focuses on short-wndow captal market reactons to quarterly earnngs announcements. It uses a short-wndow research desgn n order to ensure that the observed valuaton-related decsons are by a hgh probablty caused by new accountng nformaton. Ths concept s related to the nformaton content concept n the emprcal accountng lterature (among many others, Beaver, 1968; Landsman/Maydew, 2002). Whle the tradtonal nformaton content lterature focuses on undrectonal market reactons to the announcement of nformaton (Lo/Lys, 2000), ths paper also focuses on drectonal reacton to earnngs-related nformaton. So, t studes short-wndow earnngs-returns coeffcents (based on earnngs changes and on analyst forecast errors) along wth abnormal turnover and changes n bd-ask spreads around quarterly earnngs announcement dates. The thrd secton of ths paper wll gve addtonal detals concernng the emprcal operatonalzaton of these four metrcs. Developng an operatonal metrc for stewardshp s far from trval. As I defne fnancal accountng s fulfllment of the stewardshp role as to provde nformaton that s useful n evaluatng management s actons, an ndcator varable s needed that captures the exstence of ths type of nformaton. Followng the reasonng presented above, such an ndcator varable could be constructed by observng contracts n whch fnancal accountng data s used to assess management s actons. Gven that I am not aware of a 17

19 suffcently large source of archval data about such contractual decsons, 4 I see two possble substtute concepts. Frs as argued n the prevous secton, t can be assumed that markets, n general, balance the demand for and supply of stewardshp-related fnancal accountng nformaton. Under that assumpton, frms wth stakeholders havng a hgh demand for the stewardshp role of accountng would provde more contractnguseful fnancal accountng nformaton. Followng ths reasonng, the demand for stewardshp could be used as a proxy for the supply of stewardshp. It can be expected that dfferent stakeholder groups of a gven entty dffer systematcally n ther demand for stewardshp-related accountng nformaton. Stewardshp affects expected returns by nfluencng the probablty that management s honorng mplct or explct accountngrelated contracts. The propensty of management to exproprate wealth from the stakeholders depends on the governance nfrastructure and on mplct cultural standards and rules, whch dffer at the frm, ndustry, and country levels. From ths follows that stewardshp-related valuaton mpacts can be assumed to be predomnantly a source of unsystematc rsk. Thus, stakeholders should be able to dversfy away substantal parts of stewardshp-related rsks. As dversfyng s more costly for asset classes facng hgher transacton costs, ths would mean that nvestors facng lower transacton costs n the contractual relatonshp wth the respectve entty would have less demand for stewardshp-related nformaton. Ths reasonng could be operatonalzed so that the demand for stewardshp-related nformaton can be expected to ncrease wth the proporton of debt fnancng (lendng by supplers, employee nvolvement n the value 4 Obvous contractual decsons lnked to accountng nformaton would be, e.g., management compensaton contracts, debt covenants, and some collectve labor agreements. It mght be an nterestng avenue for future research to use data n these (and probably other) contracts to assess whether frms havng relatvely more of these contracts produce less valuaton-useful earnngs. 18

20 creaton process, lease-based fnancng) as debt holders (supplers, employees, lessors), n general, face hgher transacton costs than equty holders (Benston/Smth, 1976). Nevertheless, ths reasonng reles on demand for and supply of stewardshprelated nformaton to be n equlbrum. If there s an mbalance between demand and supply nduced by market frctons, ths demand-drven concept s nvald. Thus, ths approach n appled as a secondary tes only. For the man analyses, I rely on the only measure of supply of stewardshp-related accountng nformaton that I am aware of: condtonal conservatsm, also referred to as earnngs conservatsm, news dependent conservatsm, or asymmetrc tmelness. A substantal body of lterature theoretcally and emprcally supports the noton that asymmetrc tmelness consttutes a supply-sde response to the demand for contractng-related accountng nformaton (e.g. Chen et al, 2007; Zhang, 2007). As stewardshp-related accountng nformaton requres a greater degree of hardness (verfablty) for a gven sgnal whenever management and stakeholder ncentves are a pror algned, mandatng a hgher degree of verfcaton for gans than for losses consttutes a ratonal rule for stewardshp-related nformaton. Thus, ths paper uses the asymmetrc tmelness metrc snce t s a theoretcally and emprcally well founded measure for the stewardshp orentaton of fnancal accountng nformaton. 3 Emprcal Analyses 3.1 Data and Sample Selecton Defnng sutable frm-level measures of valuaton usefulness and stewardshp requres repeated observatons over tme for each frm. The problem wth nvestgatng frm attrbutes on tme-seres data s twofold. (1) As accountng data s of low frequency, the low numbers of tme-seres observatons avalable for statstcal analyses lead to a 19

21 relatvely low power of the resultng statstcs. (2) Increasng the tme-span n order to ncrease the number of observatons per frm, and thus the power of the resultng statstcs, gves rse to serous nternal valdty concerns: Estmatng frm-specfc attrbutes over a perod of tme mples that these frm attrbutes are constant over ths tme perod, whch mght not be the case (Gvoly et al., 2007). I choose my sample n order to mnmze these concerns. Frst of all, I lmt the ntal tme perod to the 16 years between 1990 and Whle t can stll be argued that frms changed substantally durng ths perod, ths comparably short but current tme perod should be warranted, gven that sample sze would decrease and external valdty concerns would ncrease substantally f a tme-span from a perod n the past wth supposedly fewer structural changes would be used. Second, I focus on the U.S. market and use quarterly accountng data for the analyses. As the U.S. market s the largest equty market n the world, and quarterly accountng data s the hghest frequency of accountng data avalable, ths desgn choce maxmzes the number of frm-specfc observatons wthn the tme-span avalable to the analyses. The analyses requre quarterly earnngs per share data and earnngs announcement dates from Compustat; daly prce, volume and returns data from CRSP; and quarterly earnngs per share forecast data from IBES to calculate the frm-level attrbutes and to conduct the tests. In order to maxmze the number of frms n the cross-sectonal sample, I requre only ten non-consecutve frm-specfc nput observatons for the calculaton of each of the frm-specfc attrbutes. 5 In order for the frm to become part of the crosssectonal sample, I requre that all frm-level attrbutes are calculable for t. Applyng these requrements yelds a cross-sectonal sample of 3,245 frms. In order to calculate 5 I vary the mnmum amount of observatons to up to 30, fndng qualtatvely unchanged results. 20

22 the frm-specfc attrbutes for these 3,245 frms, a panel sample of 119,861 observatons s used. Detals of the composton of the panel sample across tme and ndustres can be nferred from Appendx 2. For the sake of clarty, I refer to the cross-sectonal sample of 3,245 frms as the cross-sectonal sample and to the panel sample of 119,861 frm-year observatons as the panel sample throughout the paper. In addton out-of-sample analyses are conducted throughout the paper, where ndustry group rankngs of the frm-specfc attrbutes are used to verfy ther external valdty. For each of these analyses, the unque maxmum number of frm-year observatons avalable s used, meanng that frms wth nsuffcent data to calculate the frm-specfc attrbutes are ncluded n the sample. The maxmum number of frm-year observatons for that sample s 311,907. I refer to ths sample as the full sample throughout the paper. 3.2 Calculaton of the Valuaton Usefulness Metrcs Table 1 detals the constructon of the frm-level valuaton usefulness metrcs. Varable defntons are gven n Appendx 1. To estmate the average abnormal share turnover around the quarterly earnngs announcement date, frst the average turnover of the three-day wndow surroundng the quarterly earnngs announcement date s calculated. Then an average frm-quarter specfc share turnover s constructed by calculatng the mean of the two wndows startng fve and endng 30 days before and after the quarterly earnngs announcement date. The abnormal quarterly earnngs announcement turnover of frm (ATOVER ) s the dfference between the average turnover of the earnngs announcement perod and the average turnover of the two 21

23 surroundng perods. 6 As can be nferred from Panel A of Table 1 and n lne wth expectatons and pror lterature (e.g. Landsman/Maydew, 2002), ATOVER s sgnfcantly postve for both the mean and the medan, ndcatng tha on average, share turnover s hgher for quarterly earnngs announcement perods than t s for nonreportng perods. To calculate the change n bd-ask spreads around quarterly earnngs announcement dates, the average bd-ask spread of the four-day perod begnnng two days after the quarterly earnngs announcement date and the average bd-ask-spread of the four-day perod endng two days pror to the quarterly earnngs announcement date are calculated. In lne wth pror lterature (Km/Verreccha, 1994; Brooks, 1996; Krnskey/Lee, 1996; Gajewsk, 1999), as nvestors need tme to ncorporate earnngs nformaton and as new nformaton asymmetry mght be growng quckly, I use short perods excludng the actual event dates to calculate the measure of bd-ask spread change nduced by quarterly earnngs announcements (ΔBAS ). Panel A of Table 1 verfes that the average frm experences a sgnfcant decrease n ts bd-ask spread around ts quarterly earnngs announcement perods. Nevertheless, wth the standard devaton of ΔBAS beng qute hgh, consderable varance across frms exsts wth a substantal body of frms experencng an ncrease n ΔBAS around ther earnngs announcement dates. Ths result s n lne wth pror results and wth the theoretcal predctons by Km/Verreccha (1994). 6 Where applcable throughout the analyses, all dependent and ndependent varables are wnsorzed by ther top and bottom percentles. Deletng the wnsorzed observatons does not qualtatvely nfluence the results. 22

24 The next metrc of the valuaton usefulness of accountng data s based on the short-wndow earnngs response coeffcent (ERC ), whch s estmated as the coeffcent α 1, of model (1) (1) CAR = α 0, + α1, ΔNI + ε, where CAR s the cumulatve abnormal return of the three-day wndow around the quarterly earnngs announcement date, and ΔNI s the change n prce-deflated earnngs per share from the same quarter of the last year (detaled defntons are gven n Appendx 1). 7 Model (1) s estmated as a frm-specfc tme-seres model separately for each frm that has 10 or more non-consecutve observatons avalable. As can be seen n Panel A, the average of ERC across the frms of the cross-sectonal sample s sgnfcantly postve for both the medan and the mean, ndcatng that market partcpants react to an ncrease (decrease) n earnngs by adjustng ther wllngness to pay accordngly, causng a postve (negatve) abnormal return. The fnal valuaton usefulness measure reles on earnngs forecast data from IBES. The short-wndow response coeffcent of the earnngs forecast error (FCERC ) s estmated as the coeffcent α 1, of model (2) (2) CAR = α 0, + α1, FCEt, + ε, where CAR s the cumulatve abnormal return of the three-day wndow around the quarterly earnngs announcement date, and FCE s the forecast error from the last mean IBES earnngs forecast before the quarterly earnngs announcement date (detaled defntons are gven n Appendx 1). Model (2) s estmated as a frm-specfc tme-seres 7 The robustness of model (1) s tested by replacng ΔNI wth the change of NI from the pror quarter and by the dfference of NI and a forecast of NI based on a AR(4) model on the frm s tme-seres of NI fndng qualtatvely the same results. 23

25 model separately for each frm that has 10 or more non-consecutve observatons avalable. Smlar to ERC, but even more consstently so, Panel A reports FCERC to be sgnfcantly postve, lendng addtonal support to the overall valuaton usefulness of fnancal accountng data. The four frm-specfc attrbutes capture dfferent aspects of valuaton usefulness. Whle the frst metrc (ATOVER) supposedly captures all market transactons nduced by the arrval of new accountng nformaton, the second metrc (ΔBAS) focuses on the effect accountng data dsclosure has on nformaton asymmetry. Imagne a stuaton where the arrval of new accountng data n combnaton wth the nformatonal prors of market partcpants causes hgher levels of nformaton dsperson. Ths dsperson wll, c.p., lead to hgher ATOVER, ndcatng hgher levels of market actvty and hgher ΔBAS, whch ndcates hgher levels of nformaton asymmetry (Km/Verrechha, 1994). Both ATOVER and ΔBAS speak dstnctvely to decsons nduced by the arrval of new accountng nformaton: Market actvtes are drect results of the decsons of market partcpants, whle an ncrease n nformaton asymmetry makes the valuaton process more costly. Compared wth the former two undrectonal metrcs, the latter two (ERC and FCERC ) are more drectly lnked to the predomnant accountng summary measure of economc performance: earnngs. Whle they fal to measure decsons nduced by other accountng nformaton, accountng-based valuaton models justfy the assumpton that current earnngs are a central nput factor n estmatng future cash flows. The standard setters see the fundamental role of accountng as helpng nvestors and credtors to decde upon ther expected values of future cash flows, and I post that the earnngs- 24

26 related metrcs of valuaton usefulness most closely relate to the concept of valuaton usefulness the standard settng bodes appear to have n mnd. Besdes separately estmatng the lnk between valuaton usefulness and stewardshp for each measure of valuaton usefulness, I construct a combned measure of valuaton usefulness (VUSCORE) that s based on decle ranks of the four metrcs (wth ΔBAS multpled by -1 to ensure proper rankng) and s scaled between zero and one. Panel B of Table 1 backs the theoretcal arguments presented above, as the correlaton across the dfferent metrcs of valuaton usefulness s generally low to moderate; and the correlaton of ΔBAS wth the other metrcs s the lowest. Panel C of Table 1 compares the average values of the combned valuaton usefulness metrc VUSCORE across ndustres. It shows sgnfcant dfferences across ndustres, wth frms from the Shop ndustry group exhbtng the hghest valuaton usefulness and frms from the Utltes ndustry group the lowest. As an asde, t s nterestng to note that frms from ndustres known for hgh levels of poltcal cost and regulaton (Money, Extractng Industres, and Utltes) and frms from ndustres wth hgh levels of ntangbles and ntellectual captal (Telecom and Chemcals) consttute the lower half of the ndustry rankng, ndcatng that these are the ndustres wth the least valuaton-useful accountng nformaton. 8 8 The ndustry rankng varable VUIND s used to test the external valdty of the VUSCORE metrc out of the panel-data sample. Tests for the full sample (not tabulated) show that the postve correlaton of ΔNI and FCE wth CAR ncreases consstently wth VUIND and that VUIND s postvely correlated to ATOVER and -ΔBAS. These results provde assurance for the general out-of-sample valdty of the VUSCORE metrc. 25

27 3.3 Calculaton of the Asymmetrc Tmelness Metrc As dscussed n secton 2, stewardshp s a not well defned concep whle ths paper assumes that fnancal accountng s fulfllng the stewardshp role when t provdes nformaton that s useful n evaluatng management s actons. Evaluatng management s actons s predomnantly done for contractng purposes. Followng a rch lne of lterature (Basu, 1997; Watts, 2003 a,b; and many others) that suggests conservatsm of accountng (here measured by the asymmetrc tmelness of earnngs) s the leadng ndcator of the contractual effcency of accountng data, I nterpret asymmetrc tmelness as ths paper s man ndcator for the level of fulfllment of the stewardshp role of accountng. In lne wth pror research usng quarterly data (Basu et al., 2001; Gvoly et al., 2007), asymmetrc tmelness s measured based on the followng pecewse reverse earnngs-on-returns regresson: (3) NI t, = β 0, + β1, NEGt, + β2, RETt, + β3, NEGt, * RETt, + ε t,, where NI s prce deflated earnngs per share, and RET s the buy-and-hold return for the quarter. NEG s one f RET s negatve and zero otherwse (detaled defntons are gven n Appendx 1). Model (3) s estmated as a tme-seres model for each frm that has more than 10 observatons avalable. To ensure that enough observatons wth negatve returns are avalable n order to produce meanngful estmates of β 3,, at least fve observatons wth negatve values for RET are requred. Most commonly, the level of condtonal conservatsm s assessed by analyzng the value of β 3, from model (3). If β 3, s sgnfcantly postve, frm s sad to exhbt condtonal conservatsm behavor on average, as β 3, s an ndcator for the asymmetrc tmelness of earnngs wth respect to bad versus good news. Ths paper compares the 26

28 level of asymmetrc tmelness across frms and so needs a metrc for relatve dfferences n asymmetrc tmelness. Followng a method suggested by Gassen et al. (2006), I calculate the metrc of asymmetrc tmelness used n ths paper based on the regresson coeffcents and on the geometrc noton of the knk n the resultng regresson lne. Applyng trgonometry yelds: CONS = arctan(β 3, + β 2, ) - arctan(β 2, ). Based on pror lterature, the sample s expected to exhbt asymmetrc tmely behavor on average, thus the mean and medan of CONS are expected to be sgnfcantly postve. Panel A of Table 2 verfes ths. Also n lne wth pror lterature (Francs et al., 2004; Gassen et al., 2006; Gvoly et al., 2007), a substantal number of frms havng CONS below zero are found, ndcatng an nverse asymmetrc tmely accountng behavor (faster recognton of gans than of losses). Ths result mandates some analyses to address nternal valdty concerns and to verfy the metrc for asymmetrc tmelness. In Panel B the panel sample s partonated by decles of the frm-level metrc of asymmetrc tmelness n 10 groups. If CONS s capturng asymmetrc tmelness n the orgnal sense for the panel sample, the asymmetrc tmelness s expected to ncrease systematcally across the 10 sub-samples. To test ths model (4) s estmated for each of the sub-samples. (4) NI + β RET = γ YEAR + δ FFINDUSTRY t j 1 2 t = 1990 j= 1, * NEG + ε 10 + β NEG + β RET where NI s prce-deflated earnngs per share, and RET s the buy-and-hold return for the quarter. NEG s one f RET s negatve and zero otherwse. YEAR and FFINDUSTRY are year and ndustry fxed effects, respectvely (detaled defntons are gven n Appendx 1). Model (4) s estmated for each sub-sample usng OLS and sgnfcance 27

29 tests are based on standard errors clustered by frms. The results of the 10 regressons are reported n Panel B of Table 2. In order to compare the level of asymmetrc tmelness across samples, CONSD s calculated as arctan(β 3 + β 2 ) - arctan(β 2 ). As can easly be seen, the asymmetrc tmelness of the sub-samples ncreases nearly monotoncally wth ther CONS rank. The trend across all relevant coeffcents and CONSD s sgnfcant at conventonal levels as assessed by OLS regressons of the coeffcents on ther samples ranks and as reported by the rght-most column of Panel B. Based on these results, I conclude that the frm-specfc metrc CONS captures the concept of asymmetrc tmelness. Panel C reports the average levels of CONS across ndustres, ndcatng that asymmetrc tmelness s hghest for frms n the Telecom ndustry and lowest for frms n the Utltes ndustry. Although CONS exhbts sgnfcant varance across ndustres, substantal wthn-ndustry varance of CONS s also observed, leadng to the queston whether asymmetrc tmelness s drven by ndustry-level determnants. Nevertheless, CONSIND, an ndustry rankng based on CONS, s used to test the external valdty of CONS for the full sample. Results for the full sample (not tabulated) ndcate that the level of asymmetrc tmelness consstently ncreases wth CONSIND. I vew ths result as supportng my concluson that CONS s a robust frm-specfc measure of asymmetrc tmelness, and thus a reasonable proxy for the fulfllment of the stewardshp role by accountng nformaton. 3.4 Connecton between Stewardshp and Valuaton Usefulness Ths secton addresses the core research queston of the paper: Do hgher levels of stewardshp lead to hgher levels of valuaton usefulness? As lad out n the second 28

30 secton, two dfferent proxy concepts for the stewardshp-orentaton of fnancal accountng nformaton wll be appled. Frs I wll use the condtonal conservatsm metrc CONS, developed n the prevous secton, as a supply-sde metrc. Usng ths metrc, I apply three dfferent tests usng the panel sample, the full sample, and the crosssectonal sample (Table 3 and 4). After tha four proxes for the relatve mportance of hgh-transacton-costs stakeholders wll be used as demand-ste related metrcs for the stewardshp-orentaton of fnancal accountng nformaton (Table 5). A frst analyss, reported n Panel A of Table 3, nvestgates for the panel sample whether valuaton usefulness has an mpact on the stewardshp role of accountng by estmatng the followng model: (5) NI = γ tyeart + t= 1990 j= 1 β NEG 3 β RET 6 * NEG δ FFINDUSTRY j * VUSCORE + β RET + β RET 7 4 t * NEG + β RET + β NEG 5 1 * VUSCORE + β VUSCORE * VUSCORE ε t +, where NI s prce-deflated earnngs per share, and RET s the buy-and-hold return for the quarter. NEG s one f RET s negatve and zero otherwse. VUSCORE s the combned metrc of valuaton usefulness. YEAR s a seres of yearly and FFINDUSTRY a seres of ndustry fxed effects (detaled defntons are gven n Appendx 1). Model (5) s estmated on the panel sample usng OLS and the sgnfcance tests are based on standard errors clustered by frms. Panel A detals the results. The coeffcents β 5 and β 7 are of partcular nteres ndcatng the mpact of valuaton usefulness on the asymmetrc tmelness of earnngs. The nteracton between RET and the valuaton usefulness score s sgnfcantly postve, ndcatng that frms wth more valuaton useful accountng nformaton have more tmely 29

31 earnngs wth respect to gans. In addton, the three-way nteracton REG*NET*VUSCORE s sgnfcantly negatve, ndcatng that frms wth more valuaton-useful fnancal accountng have less asymmetrc tmely earnngs, whch are tmeler n gan stuatons. Ths result speaks to the paper s man research queston: Havng overall tmely gans wth no asymmetrc component appears to be an attrbute of valuaton-useful earnngs, whle beng less effcent from a stewardshp perspectve, as fulfllng the stewardshp role s supported by asymmetrc tmely earnngs. Based on ths analyss, I would cautously conclude that stewardshp and valuaton usefulness are alternatve objectves of fnancal accountng. I test the robustness of ths fndng out-of-sample based on the full sample and on the ndustry rank measure of valuaton usefulness, VUIND. Specfcally, the followng model s estmated: (6) NI = γ YEAR t t= 1990 β RET 4 β RET β RET 5 * NEG + β NEG 1 * VUIND * VUIND + β VUIND 2 + ε + β RET 6 + β NEG 3 * NEG * VUIND + +, where NI s prce deflated earnngs per share, and RET s the buy-and-hold return for the quarter. NEG s one f RET s negatve and zero otherwse. VUIND s an ndustry rank varable based on VUSCORE, the combned metrc of valuaton usefulness. YEAR s a seres of yearly fxed effects (detaled defntons are gven n Appendx 1). Model (6) s estmated on the full sample usng OLS and the sgnfcance tests are based on standard errors clustered by frms. Agan, the dscusson focuses on β 5 and β 7. Both coeffcents are sgnfcant; the two-way nteracton RET*VUIND s postve and the three-way nteracton 30

32 RET*NEG*VUIND s negatve. These results confrm the fndngs of Panel A dscussed above for the full sample. The documented mpact of valuaton usefulness on asymmetrc tmelness n Table 3 could be drven by other factors that nfluence valuaton usefulness and asymmetrc tmelness smultaneously, causng a spurous correlaton between them. Ths competng explanaton s examned by ncludng determnants of valuaton usefulness n a multvarate settng n Table 4. The followng model s estmated on the cross-sectonal sample usng OLS: (7) VUVAR = δ FFINDUSTRY + β1size + β 2 log( NUMEST ) + β 3MTB +, = 1 β PRED + β PERS + β ZRETURN β CONS 7 + ε where the dependent varable VUVAR s ether ATOVER, ΔBAS, ERC, FCERC, or VUSCORE. SIZE s the natural logarthm of average market captalzaton. NUMEST s the average number of analysts followng the frm. MTB s the average market-to-book rato. PRED s a measure of earnngs predctablty: the R² coeffcent of a AR(4) tmeseres regresson, regressng current quarter earnngs per share (prce-deflated) on pror quarter earnngs per share. PERS s a measure of earnngs persstence: the sum of the AR(1) and AR(4) coeffcents from the AR(4) tme-seres regresson of current quarter earnngs per share on pror perods earnngs per share. ZRETURN s the average percentage of tradng days wth zero returns to the frm. CONS s the frm-specfc measure of asymmetrc tmelness, and FFINDUSTRY s a set of ndustry fxed effects (detaled defntons are gven n Appendx 1). SIZE s ncluded as a varable controllng for the publc vsblty of the frm and other nsttutonal aspects correlated wth the sze of the frm such as rsk, agency 31

33 conflcts, and reportng costs. I make no sgn predcton for sze. In order to evaluate accountng nformaton and transform t nto valuaton-relevant nformaton, an nformatonal nfrastructure s needed. Fnancal analysts are part of ths nfrastructure and, thus, the average number of analysts followng the frm should be postvely related to the valuaton usefulness of accountng nformaton. On the other hand, t can be argued that analysts are actng as substtutes for, and not as complements to, accountng nformaton (Francs et al., 2002). In that case, a negatve relaton could be expected. The market-to-book rato s used as a measure of growth opportuntes avalable to the frm. 9 Decsons made n growng frms tend to be complex than those n statc frms, and thus one could expect accountng nformaton to be more useful for evaluatng growth frms. Agan, ths reasonng mght well be questoned: As growth frms are often part of ntangble, captal-ntensve ndustres, and as accountng s argued to be less nformatve n these settngs (Francs/Schpper, 1999), t could also be expected that fnancal accountng s less valuaton-useful for hgh growth frms. Pror lterature dscusses (Schpper/Vncen 2003) and documents (Francs et al., 2004) the lnk between earnngs attrbutes and the valuaton usefulness of earnngs. From a valuaton framework standpon earnngs should be more valuaton-useful whenever they are more perssten as more persstent earnngs yeld more nformaton about future cash flows. Vewed smlarly, earnngs that are easer to predct provde more relant 9 Market-to-book s used n the lterature as a proxy for a vast dversty of economc concepts ncludng rsk, conservatsm, and growth (for an overvew: Gassen et al., 2006). As the model controls for condtonal conservatsm, t appears to be vald to vew MTB as a proxy for growth. Nevertheless, cauton s to be appled when nterpretng the results. 32

34 nput factors and, thus, can be expected to be more valuaton-useful. 10 Thus, the model ncorporates PERS and PRED and both proxes are expected to be postvely related to the valuaton usefulness of fnancal accountng. 11 In order to manfest tself n the measures of valuaton usefulness, fnancal accountng nformaton has to enter the prce formaton process. In a world where transacton costs are present and dffer systematcally across frms, the prcng mechansm cannot be assumed to be homogenous across all frms. I therefore nclude the percentage of zero returns to control for the nformaton envronment of the frm. The percentage of zero returns s a measure of transacton costs and lqudty (Lesmond et al., 1999) and can be regarded as a proxy for nformaton mpounded nto prces (Ashbaugh- Skafe et al., 2006). The nformaton envronment nfluences the way accountng nformaton s evaluated by market partcpants. If the nformaton envronment s low overall, accountng nformaton mght gan hgher relatve mportance, gven the absence of other valuaton-relevant nformaton (Francs et al., 2002). On the other hand, market partcpants mght have problems ncorporatng accountng nformaton on short notce, due to hgher levels of nformaton asymmetry and fewer market partcpants wllng to trade. Thus, I make no sgn predctons for ZRETURN. The fnal varable of model (8) s the man varable of nteres the frm-specfc measure of asymmetrc tmelness, CONS, It can be argued however that earnngs that are very easy to predct cannot be decson useful, as they convey no new nformaton to the market. Thus, the varable PERS appears to be the concept more drectly lnked to the valuaton role of earnngs, and PRED s ncluded manly due to ts role n pror lterature. In addtonal analyses (not tabulated) a thrd earnngs attrbute, earnngs smoothness, defned as the standard devaton of net ncome dvded by the standard devaton of cash flows from contnung operatons, n ncluded n model (8). Earnngs smoothng s found to be sgnfcantly postvely related to valuaton usefulness, whle other varables of nterest are qualtatvely unchanged. The model wthout smoothng s reported n the paper, as requrng cash flow data reduces the cross-sectonal sample from 3,425 to 2,817 frm observatons. Also, n untabulated robustness results, addtonal explanatory varables (standard devaton of daly abnormal returns, standard devaton of operatng cash flows, frequency of losses, average operatng cycle) are ncluded as proxy varables for the frm s operatng and rsk envronment. These addtonal varables do not qualtatvely affect the results. 33

35 whch I vew as a measure of the relatve fulfllment of the stewardshp role of accountng for the gven frm. Accordng to ths paper s research desgn setup, I make no sgn predcton for CONS. Panels A and B of Table 4 report the descrptve statstcs of the ndependent varables and the correlatons, respectvely. Generally, correlatons are moderate to low and n the expected drecton. The regresson results of model (7) are dsplayed n Panel C. The results for the ndvdual metrcs for valuaton usefulness are dscussed frst. For ATOVER as the valuaton usefulness proxy, the abnormal turnover around quarterly earnngs announcement dates s sgnfcantly postvely related to the number of analysts followng, the growth prospects of the frm, and the nformatonal effcency of the prce process (captured by lower levels of ZRETURN), whle t s negatvely related to sze and the persstence of earnngs. I nterpret these fndngs as ndcatve that the nformatonal envronment plays an actve role when accountng nformaton s beng used by market partcpants. Actve markets wth suffcent analyst coverage support accountng nformaton n generatng abnormal tradng actvtes. When the change n bd-ask spreads around quarterly earnngs announcement dates s used as the dependent varable, t s postvely related to sze, the growth prospects of the frm, and the level of asymmetrc tmelness, and negatvely related to the nformatonal effcency of the prce process. The negatve mpact of the nformatonal envronment on the change n bd-ask spreads s as expected. The relaton to growth fts well wth the result for the abnormal turnover, and t may ndcate tha for growth frms, fnancal accountng nformaton, on average, nduces more nformaton dsperson n the marke causng ncreased tradng and rasng bd-ask spreads. However, 34

36 t s nterestng that more asymmetrc tmely earnngs have a postve mpact on the bdask spread change around quarterly earnngs announcement dates, ndcatng that asymmetrc tmely earnngs correlate wth hgher levels of nformaton asymmetry. Ths fndng s consstent to LaFond/Watts (2008) whch document that frms wth hgher nformaton asymmetres have more asymmetrc tmely earnngs. Alternatvely, t mght be explaned by the two sdes of asymmetrc tmely earnngs. Losses generally are communcated to the market before earnngs are dsclosed, and gans are not transformed nto earnngs n a tmely manner, yeldng blurred earnngs metrcs n gan stuatons and ncreasng nformaton asymmetry over the short wndow. The next regresson uses the short wndow earnngs change response coeffcent as a drectonal measure for valuaton usefulness. Ths market reacton on earnngs change s found to be postvely related to growth and the predctablty and persstence of earnngs, whle t s negatvely related to the number of analysts followng, the nformatonal effcency of the prce process, and the level of asymmetrc tmelness. Whle the postve results are as expected, the negatve results are very nterestng. Frst of all, asymmetrc tmely earnngs cause a less pronounced market response. Agan, a possble explanaton for ths result s that the market leads the accountng n the case of losses and untmely earnngs have relatvely low valuaton relevance n the case of gans. I take partcular nterest n the result ndcatng that frms wth poorer nformatonal nfrastructure (ndcated by less analyst followng and a hgher percentage of zero tradng days) observe a more pronounced short-wndow market response on earnngs changes. I nterpret ths result as evdence for earnngs beng more valuaton useful for frms wth poorer nformaton nfrastructures. 35

37 When evaluatng the short-wndow market response to earnngs forecast errors t s found that t s postvely related to sze, the number of analysts followng, and the growth prospects of the frm, and negatvely related to the amount of asymmetrc tmelness. Agan, the postve relatons are as expected, as n the case of earnngs forecast errors the nformatonal nfrastructure, especally the number of analysts, has a postve mpact on the qualty of the sgnal. The negatve relaton between the market reacton to earnngs surprses and asymmetrc tmelness can be explaned by asymmetrc tmely earnngs presentng no or only opaque new nformaton to the market. In the rght-most column, the results for the summary metrc of valuaton usefulness are reported. It s found to be postvely related to the number of analysts followng, the persstence of earnngs, and the nformatonal effcency of the prcng process, and negatvely related to the level of asymmetrc tmelness. After nvestgatng the mpact of stewardshp on valuaton usefulness when stewardshp s beng measured by the asymmetrc tmelness of accountng earnngs, Table 5 contans the results for the alternatve demand-sde metrcs whch measure the relatve mportance of hgh-transacton-costs stakeholders. As lad out n secton two, hgh-transacton-costs stakeholders are assumed to have an on average hgher demand for stewardshp-orented fnancal accountng nformaton. The appled metrcs for the relatve mportance of hgh-transacton-costs stakeholders are detaled n Panel A of Table 5. The relatve mportance of debt holders s measured by DEBT whch s the average of total debt dvded by total assets for frm. 12 ACC_PAY, the average of 12 It can well be argued that debt holders do not face sgnfcantly hgher transactons costs than equty holders n general. I stll assume that on average debt holders bare hgher transacton costs n my sample, snce the sample s lmted to frms wth publc equty outstandng but contans frms wth prvate as well as wth publc debt. As nvestors generally face hgher transacton costs on prvate 36

38 accounts payable dvded by total assets over the tme-seres frm, measures the relatve mportance of lenders. The relatve nfluence of lessors s captured by RENTEXP, the average of rental expenses dvded by net sales over the tme-seres of frm. Fnally, the relatve mportance of employees s beng captured by EMPL, the average of employees n thousands dvded by net sales n mllon USD for frm. All varables are based on yearly Compustat data. Requrng ths data reduces the cross-sectonal sample from 3,425 to 2,978 observatons. I refer to the resultng sample as the lmted cross-sectonal sample. Panel B reports the correlaton between the demand-sde stewardshp measures, CONS and VUSCORE. Frst of all, VUSCORE s consstently negatvely correlated wth all demand-sde stewardshp measures, lendng unvarate support for the clam that valuaton usefulness and stewardshp are alternatve objectves of fnancal accountng. Second, asymmetrc tmelness s only sgnfcantly postvely correlated wth DEBT, ndcatng n lne wth pror lterature that the demand for asymmetrc tmely earnngs ncreases wth the relatve mportance of debt fnancng (Peek et al., 2006; Zhang, 2007). The remanng correlaton of CONS wth the demand-sde stewardshp measures are low, ndcatng that these metrcs capture dfferent aspects of the stewardshp orentaton of fnancal accountng nformaton and thus justfyng ther use n ths research desgn. All other correlatons are moderate to low, wth exempton of RENTEXP and EMPL whch exhbt a hgh correlaton probably due to sharng the same denomnator. Because of ths correlaton, cauton s used when nterpretng model (9) whch ncludes both varables as explanatory varables. captal markets, a hgher percentage of captal traded on prvate markets ndcates hgher transactons costs. 37

39 Panel C reports the results of two determnant models: (8) (9) VUSCORE = δ FFINDUSTRY + β1size + β 2 log( NUMEST ) + = 1 β MTB + β PRED + β PERS 3 VUSCORE 4 10 = 1 β MTB + β PRED + β PERS β ZRETURN 6 + β ZRETURN + β SSHIP + ε = δ FFINDUSTRY + β1size + β 2 log( NUMEST ) + β ACC _ PAY + β RENTEXP + β EMPL + β CONS + ε β DEBT , and where SSHIP stands for one of the demand-sde stewardshp measures (DEBT, ACC_PAY, RENTEXP, EMPL) and all other varables are as defned and dscussed n the presentaton of model (7). In model (9) all stewardshp metrcs are ncluded together to assess ther nter-relatedness. Both models are estmated usng OLS. Turnng to the model results, the model estmates for the non-stewardshp-related explanatory varables are n general qualtatvely the same as presented n Table 4 and wll thus not be dscussed further. Focusng on the stewardshp-retaled metrcs, I fnd for the four versons of model (8), that all metrcs load sgnfcantly negatve, ndcatng that the valuaton usefulness of quarterly fnancal accountng nformaton decreases as the relatve mportance of hgh-transacton-cost stakeholders ncreases. I nterpret ths fndng as consstent wth the noton that the hgher the demand for stewardshp-orented fnancal reportng the lower the valuaton usefulness of fnancal accountng nformaton, clearly lendng support to the clam that stewardshp and valuaton usefulness are alternatve objectves of fnancal accountng. The results of model (9) ndcate that demand-sde related stewardshp measures possess explanatory power up-and-above the supply-sde motvated measure of asymmetrc tmelness, whle n turn asymmetrc tmelness stll contnues to be sgnfcantly negatvely related wth VUSCORE. The only 38

40 stewardshp measure whch s not longer sgnfcantly negatvely related to VUSCORE when all stewardshp measures are ncluded s EMPL. Taken together, model (9) clearly supports the negatve lnk between stewardshp and valuaton usefulness: All stewardshp measures are negatvely related to valuaton usefulness after controllng for other determnants, four out of fve sgnfcantly so. The results of the multvarate analyses can be summed up as follows: Fnancal accountng s valuaton usefulness s predomnantly a functon of a frm s nformatonal nfrastructure and earnngs propertes. Frms wth persstent and smooth earnngs and an nformatonally effcent nfrastructure have more valuaton useful fnancal accountng nformaton, whereas frms n poorer nformatonal nfrastructures, frms wth hgher levels of hgh-transacton-costs stakeholders, and frms that report earnngs n an asymmetrc tmely fashon n order to fulfll the stewardshp role of fnancal accountng have less valuaton-useful fnancal accountng nformaton n general. 4 Concluson I conclude that valuaton usefulness and stewardshp are alternatve objectves of fnancal accountng. Based on the results of ths paper, for some frms wthn rch nformaton envronments, accountng nformaton appears to fulfll predomnantly a confrmatory role. Ths accountng nformaton appears to be more useful n makng economc decsons related to contractng rather than valuaton. Frms operatng n weak nformaton envronments, however, lack the channels to effectvely communcate valuaton-relevant nformaton by any means other than accountng nformaton. For these frms, accountng nformaton appears to be valuaton-useful from a valuaton perspectve. 39

41 The results of ths study are subject to several lmtatons. As far as nternal valdty s concerned, the nterpretaton of the results reles on the used metrcs for valuaton usefulness and stewardshp to succeed n capturng ther underlyng economc concepts. I try to carefully motvate ther use, balance ther respectve strengths and weaknesses, and provde some evdence that they are predctably related wth factors, whch theory suggests should be lnked to ther underlyng concepts. However, f the metrcs do not proxy for ther underlyng economc concepts, the conclusons of the paper are not vald. In addton, I tred to dentfy addtonal ndependent varables that mght have an mpact on the dependent constructs of nterest and ncluded these varables n the determnant models. If I faled to nclude addtonal varables that are causally related to the dependent varables, whle beng correlated wth the ndependent varables, the resultng omtted varables problem would queston the valdty of the fndngs. In respect to external valdty, ths paper addresses only a lmted tme perod of a selected natonal captal market. Whle the U.S. market consttutes the largest equty market n the world, and the chosen tmeframe covers the last 16 years, t s stll an emprcally open queston whether the results of ths paper extend to other tme perods and other markets as well. Based on these lmtatons, t s obvous that I leave a lot to future research. The usage of contract-related frm-year specfc measures for the relatve mportance of the stewardshp role to assess the nter-relatedness of the valuaton usefulness and the stewardshp role of accountng mght be an nterestng avenue. Another promsng area s the nvestgaton of the valuaton usefulness of fnancal accountng nformaton on nonequty markets. Buldng on the results of ths paper about the nfluence of the 40

42 nformaton envronment on the role of accountng nformaton t could be nterestng to explore the frm-specfc determnants for the usage of fnancal accountng nformaton by market partcpants n greater detal. From a standard-settng perspectve, the results of ths paper could contrbute to the development of the jont conceptual framework. If the Boards decde to adopt ther broad defnton of decson usefulness, every pece of nformaton s decson-useful and stewardshp as well as valuaton usefulness are assumed to be compatble sub-objectves of the sngle overall objectve decson usefulness. However, the results of ths paper suggest that ths broad defnton blurs an mportant dfference n the channels by whch accountng nformaton affects economc relatonshps. Thus, stressng the mportance of ths study s lmtatons dscussed above, I cautously suggest that the Boards should consder explctly statng that the overall objectve of decson usefulness gves rse to two alternatve sub-objectves, valuaton usefulness and stewardshp. In dong so, they would acknowledge that fnancal reportng standard settng has to balance these alternatve objectves of fnancal reportng. 41

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45 Krnskey, I., Lee, J., Earnngs announcements and the components of the bd ask spread. Journal of Fnance 51: LaFond, R., Watts, R., The nformaton role of conservatsm, The Accountng Revew 83: Lamber R Contractng theory and accountng. Journal of Accountng and Economcs 32: Landsman, W., Maydew, E., Has the nformaton content of quarterly earnngs announcements declned n the past three decades? Journal of Accountng Research 40: Lamber R., Contractng theory and accountng. Journal of Accountng and Economcs 32: Lesmond, D., J. Ogden, and J. Trzcnka., A New Estmate of Transacton Costs. Revew of Fnancal Studes 12: Lang, P., Accountng recognton, moral hazard, and communcaton. Contemporary Accountng Research 17: Lang, P., Recognton: An nformaton content perspectve. Accountng Horzons 15: Lpe, R., The relaton between stock returns and accountng earnngs gven alternatve nformaton. Accountng Revew 65: Lo, K., Lys, T., Brdgng the gap between value relevance and nformaton content. Workng paper. O Connell, V., Reflectons on stewardshp reportng. Accountng Horzons 21: Peek, E., Cujpers, R., Bujnk, W Credtors' and shareholders' reportng demands n publc versus prvate frms: Evdence from Europe. Workng Paper. Roulstone, D., Analyst followng and market lqudty. Contemporary Accountng Research 20: Schpper, K., Vncen L., Earnngs qualty. Accountng Horzons Supplement 13, Watts, R., 2003a. Conservatsm n accountng, Part I: Explanatons and mplcatons. Accountng Horzons 17: Watts, R., 2003b. Conservatsm n accountng, Part II: Evdence and research opportuntes. Accountng Horzons 17: Zhang, J The contractng benefts of accountng conservatsm to lenders and borrowers. Journal of Accountng and Economcs (forthcomng). 44

46 Varable Defnton APPENDIX 1: Varable Defntons Independent Varables BAS d, = dfference between daly closng ask and closng bd prce from CRSP, dvded by the average of the closng bd and ask prce for date d of frm. Measured n base ponts. CAR = cumulatve abnormal value weghted return from the day pror to the day after the Compustat quarterly earnngs announcement date for quarter t of frm. ΔNI = change n Compustat quarterly earnngs per share from the quarterly earnngs per share of the prevous year s same quarter, deflated by the closng prce per share of the prevous year quarter for quarter t of frm. FCE = IBES quarterly earnngs forecast error, defned as the dfference between the last summary mean earnngs per share forecast and the actual earnngs per share reported by IBES deflated by the closng prce per share of the prevous year quarter for quarter t of frm. NI = Compustat quarterly earnngs per share deflated by prce per share at the begnnng of the quarter for quarter t of frm. FFINDUSTRY = varable ndcatng the membershp of the frm n one of the ten ndustry groups proposed by Fama/French (1997). YEAR t = yearly fxed effects. RET = buy and hold return of the quarter t of frm. NEG = one f RET < 0 and zero otherwse. SIZE = natural logarthm of the market captalzaton of equty, averaged over all quarterly observatons of frm. NUMEST = number of analysts for the most recent quarterly earnngs forecast on IBES, averaged over all quarterly observatons of frm. MTB = market value of equty dvded by book value of equty, averaged over all quarterly observatons of frm. PRED = R² of an AR(4) forecas regressng earnngs per share deflated by prce on prevous quarters earnngs per share, requrng a mnmum of ten observatons. PERS = sum of the AR(1) and AR(4) coeffcent from a AR(4) forecas regressng earnngs per share deflated by prce on prevous quarters earnngs per share, requrng a mnmum of ten observatons.. ZRETURN = percentage of tradng days wthout return for frm, averaged over all quarterly observatons of frm. 45

47 (APPENDIX 1 Contnued) Varable Defnton Measures of valuaton usefulness ATOVER = average daly turnover from the day pror to the day after the Compustat quarterly earnngs announcement date mnus the average daly turnover of a combned pre and post wndow, the pre wndow begnnng 30 days and endng 5 days pror and the post wndow begnnng 5 days and endng 30 days post the earnngs announcement date. Averaged over all avalable observatons of frm, requrng a mnmum of ten observatons. ΔBAS = dfference between the average BAS d, from a wndow begnnng 2 days and endng 5 days post the quarterly earnngs announcement date and the average BAS d, from a wndow begnnng 5 days and endng 2 days pror the earnngs announcement date. Averaged over all avalable observatons of frm, requrng a mnmum of ten observatons. ERC = coeffcent α 1, from the regresson: CAR = α 0, + α1, ΔNI + ε over the tme seres of quarterly observatons of frm, requrng a mnmum number of 10 observatons. FCERC = coeffcent α 1, from the regresson: CAR = α 0, + α1, FCEt, + ε over the tme seres of quarterly observatons of frm, requrng a mnmum number of 10 observatons. VUSCORE = sum of the decle ranks of ATOVER, -ΔBAS, ERC, and FCERC, [0,1] dstrbuted. VUIND j = rankng of the ten ndustry groups j proposed n Fama/French (1997), ranked by ther average VUSCORE, [0,1] dstrbuted. Measures of stewardshp CONS = knk n the regresson lne of the regresson NI = β 0, + β1, NEGt, + β2, RETt, + β3, NEGt, * RETt, + ε, calculated n degrees as CONS = arctan( β 2, + β3, ) arctan( β 2, ) for each frm, requrng a mnmum of 10 observatons and a mnmum of 5 observatons wth NEG equal to one. DEBT j = average of total debt dvded by total assets over the tme seres of frm. ACC_PAY j = average of accounts payable dvded by total assets over the tme seres of frm. RENTEXP j = average of rental expenses dvded by net sales over the tme seres of frm. EMPL j = average of employees n thousands dvded by net sales n mllon USD over the tme seres of frm. 46

48 APPENDIX 2: Quarterly Earnngs Observatons by Year and Industry (Panel Sample) Year Fama/French Industry Total Consumer Consumer Extractng Manufacturng Chemcals Non. Dur Durable Industres Telecom Utltes Shops Money Other , ,475 (2.9 %) , ,821 (3.2 %) , , ,547 (3.8 %) , , ,432 (4.5 %) , , ,628 (5.5 %) , ,761 1, ,530 (6.3 %) , ,109 1, ,445 (7.1 %) , ,413 1, ,222 (7.7 %) , ,568 1, ,619 (8.0 %) , ,572 1, ,557 (8.0 %) , ,699 1, ,849 (8.2 %) , ,550 1, ,591 (8.0 %) , ,474 1, ,218 (7.7 %) , ,329 1, ,780 (7.3 %) , ,139 1, ,204 (6.8 %) , ,533 1, ,943 (5.0 %) Total 4,873 4,042 2,418 9,784 35,457 2, ,618 19,243 9,863 (4.1 %) (3.4 %) (2.0 %) (8.2 %) (29.6 %) (2.3 %) (0.7 %) (25.5 %) (16.1 %) (8.2 %) 119,861 (100 %) 47

49 TABLE 1: Metrcs of Valuaton Usefulness Panel A: Cross-Sectonal Valuaton Usefulness Metrcs Varable # of Frms Frst Quartle Medan Thrd Quartle Mean Std. Dev. ATOVER 3, *** *** ΔBAS 3, *** *** ERC 3, *** *** FCERC 3, *** *** VUSCORE 3, Panel B: Correlatons (Cross-Sectonal Sample) Varable ATOVER ΔBAS ERC FCERC VUSCORE ATOVER ΔBAS ERC FCERC VUSCORE Panel C: Valuaton-Usefulness Metrc VUSCORE by Industry Industry # of Frms Frst Quartle Medan Thrd Quartle Mean Std. Dev Shops (1) a Manufacturng (2) a,b Consumer Non Durable (2) a,b,c Other (4) a,b,c Consumer Durable (5) a,b,c,d Telecom (6) b,c,d Chemcals (8) c,d Money (6) d Extractng Industres (8) d,e Utltes (10) e Notes: ATOVER s the average abnormal share turnover of frm over a three day wndow centered on the quarterly earnngs announcement date. ΔBAS s the change n frm s average closng bd-ask-spread from a wndow pror to a wndow post the quarterly earnngs announcement date. ERC s the coeffcent of the explantory varable n a regresson of the three-day quarterly earnngs announcement perod s abnormal returns of frm on the change n quarterly earnngs from the same quarter of the prevous fscal year. FCERC s the coeffcent of the explanatory varable n a regresson of the three-day quarterly earnngs announcement perod s abnormal returns of frm on the IBES based earnngs forecast error. VUSCORE s the sum of the decles of ATOVER, -ΔBAS, ERC, and FCERC. All varables are 1%- wnsorzed where approprate. See Appendx 1 for more detaled varable defntons. In Panel A, the sgnfcance of dstrbuton means aganst zero s assessed by t-tests (Wlcoxon tests) for means (medans). ***/**/* marks two-sded sgnfcance at the 1/5/10% level. In Panel B, Pearson are above and Spearman correlatons are below the dagonal. Bold typeset ndcates two-sded sgnfcance below the 1 % level. In Panel C, the superscrpts a,b,c,d,e ndcate that the respectve ndustry groups dstrbutons means of VUSCORE are not sgnfcantly dfferent from each other at the 1 % level. 48

50 TABLE 2: Asymmetrc Tmelness as a measure of Stewardshp Panel A: Cross-Sectonal CONS Metrc Varable # of Frms Frst Quartle Medan Thrd Quartle Mean Std. Dev. CONS 3, *** *** Panel B: Portfolo Test of CONS (Panel Sample) (4) NI = γ tyeart + δ jffindustryt, + β1negt, + β 2RETt, + β3rett, * NEGt, + ε t = j= 1 Coeff. Lower Decles of CONS Hgher Decles of CONS Trend β *** *** ** 0.002** *** 0.00 β *** 0.011*** ** * *** *** *** *** *** 0.00 β *** *** 0.034*** 0.030*** 0.055*** 0.080*** 0.107*** 0.165*** 0.362*** 0.00 CONSD Adj. R² n 10,384 12,400 12,735 12,579 12,804 12,226 12,480 11,952 11,742 10,559 49

51 (TABLE 2 Contnued) Panel C: Stewardshp Metrc CONS by Industry Industry # of Frms Frst Quartle Medan Thrd Quartle Mean Std. Dev Telecom (1) a Extractng Industres (2) a,b Other (6) a,b Consumer Durable (3) a,b Shops (5) a,b Manufacturng (4) b Consumer Non Durable (8) b Money (9) b,c Chemcals (7) b,c Utltes (10) c Notes: CONS s the knk (measured n degrees) of a frm-specfc Basu-type regresson. NI s prcedeflated earnngs per share, and RET s the buy-and-hold return for the quarter. NEG s one f RET s negatve and zero otherwse. YEAR and FFINDUSTRY are year and ndustry fxed effects, respectvely. All varables are 1%-wnsorzed where approprate. See Appendx 1 for more detaled varable defntons. In Panel A, the sgnfcance of dstrbuton means aganst zero s assessed by t-tests (Wlcoxon tests) for means (medans). ***/**/* marks two-sded sgnfcance at the 1/5/10% level. In Panel B, the Panel Sample s grouped n decles accordng to CONS and then OLS coeffcents of model (4) are estmated for each sub sample. The standard errors used to calculate the sgnfcance levels of the coeffcents are clustered by frm. CONSD measures the knk n the regresson lne of model (4) for each sub sample n degrees as CONSD=arctan(β 2 +β 3 ) - arctan(β 2 ). The sgnfcance of the trend n the coeffcents across the CONS decles s based on OLS regressons of the coeffcents on the ranks. In Panel C, the superscrpts a,b,c ndcate that the respectve ndustry groups dstrbutons means of VUSCORE are not sgnfcantly dfferent from each other at the 1 % level. 50

52 (5) NI = γ tyeart + t= 1990 j= 1 β RET 4 t TABLE 3: Impact of Valuaton Usefulness on Stewardshp Panel A: Panel Regresson Analyss (Panel Sample) + β RET 5 δ FFINDUSTRY j + β NEG * VUSCORE + β RET 6 1 * NEG + β VUSCORE + β NEG 2 + β RET 7 3 * NEG * VUSCORE + * VUSCORE + ε t Panel Sample Estmate Prob. NEG VUSCORE NEG *VUSCORE RET RET *VUSCORE RET *NEG RET *NEG *VUSCORE R n 119,861 Panel B: Out-of-Sample Evdence (Full Sample) (6) NI 2005 = γ YEAR t t= β RET 5 + β NEG 1 * VUIND + β VUIND + β RET 6 2 * NEG + β NEG 3 + β RET 7 * VUIND * NEG + β RET 4 * VUIND + ε Full Sample Estmate Prob. NEG VUIND NEG *VUIND RET RET *VUIND RET *NEG RET *NEG *VUIND R n 311,907 Notes: NI s prce-deflated earnngs per share, and RET s the buy-and-hold return for the quarter. NEG s one f RET s negatve and zero otherwse. YEAR and FFINDUSTRY are year and ndustry fxed effects, respectvely. VUSCORE s a combned rank measure of the valuaton-usefulness measures presented n Table 1. VUIND s the ndustry rankng based on VUSCORE as presented n Table 1. All varables are 1%- wnsorzed where approprate. See Appendx 1 for more detaled varable defntons. The coeffcents of model (5) and (6) are estmated usng OLS and the standard errors used to calculate ther sgnfcance levels are clustered by frm. 51

53 TABLE 4: Determnants of Valuaton Usefulness Panel A: Addtonal Independent Varables Varable # of Frms Frst Quartle Medan Thrd Quartle Mean Std. Dev. SIZE 3, NUMEST 3, MTB 3, PRED 3, PERS 3, ZRETURN 3, Panel B: Correlatons (Cross-Sectonal Sample) Varable NUMEST MTB PRED PERS ZRETURN CONS ATOVER ΔBAS ERC FCERC VUSCORE SIZE (0.740) (0.361) (0.012) (0.022) (-0.663) (-0.049) (0.240) (0.070) (-0.065) (0.308) (0.178) NUMEST (0.375) (0.013) (0.004) (-0.586) (-0.025) (0.471) (0.041) (-0.076) (0.302) (0.288) MTB (0.063) (-0.007) (-0.450) (-0.004) (0.356) (0.020) (-0.023) (0.141) (0.201) PRED (0.401) (-0.115) (0.027) -(0.017) (0.000) (0.108) (-0.010) (0.038) PERS (0.047) (0.012) -(0.027) (0.018) (0.096) (0.058) (0.050) ZRETURN (-0.019) (-0.380) (0.040) (0.090) (-0.214) (-0.239) CONS (0.062) (0.017) (-0.085) (-0.080) (-0.057) 52

54 (7) VUVAR = 1 β PRED + β PERS 4 10 Panel C: Cross-sectonal Regresson Analyses = δ FFINDUSTRY + β1size + β 2 log( NUMEST ) + β 3MTB 5 + β ZRETURN 6 + β CONS 7 + ε + VUVAR = ATOVER Estmate (Prob.) VUVAR = ΔBAS Estmate (Prob.) VUVAR = ERC Estmate (Prob.) VUVAR = FCERC Estmate (Prob.) VUVAR = VUSCORE Estmate (Prob.) SIZE (0.000) (0.000) (0.245) (0.000) (0.070) log(numest) (0.000) (0.636) (0.043) (0.000) (0.000) MTB (0.000) (0.012) (0.005) (0.000) (0.210) PRED (0.195) (0.161) (0.000) (0.356) (0.537) PERS (0.027) (0.598) (0.020) (0.270) (0.000) ZRETURN (0.000) (0.000) (0.001) (0.499) (0.000) CONS (0.232) (0.004) (0.001) (0.000) (0.000) R n 3,425 3,425 3,425 3,425 3,425 Notes: ATOVER s the average abnormal share turnover of frm over a three day wndow centered on the quarterly earnngs announcement date. ΔBAS s the average change n frm s closng bd-ask-spread from a wndow pror to a wndow post the quarterly earnngs announcement date. ERC s the coeffcent of the explanatory varable n a regresson of the three-day quarterly earnngs announcement perod s abnormal returns of frm of the on the change n quarterly earnngs. FCERC s the coeffcent of the explanatory varable n a regresson of the three-day quarterly earnngs announcement perod s abnormal returns of frm on the IBES based earnngs forecast error. VUSCORE s the sum of the decles of ATOVER, -ΔBAS, ERC, and FCERC. SIZE s the natural logarthm of average market captalzaton. NUMEST s the average number of analysts followng the frm. MTB s the average market-to-book rato. PRED s a measure of earnngs predctablty, the R² coeffcent of a AR(4) tme-seres regresson, regressng current quarter earnngs per share (prce-deflated) on pror quarter earnngs per share. PERS s a measure of earnngs persstence, the sum of the AR(1) and AR(4) coeffcents from the AR(4) tme-seres regresson of current quarter earnngs per share on pror perods earnngs per share. ZRETURN s the average percentage of tradng days wth zero returns to the frm. CONS s the frm-specfc measure of asymmetrc tmelness, the knk (measured n degrees) of a frm-specfc BASU-type regresson and FFINDUSTRY s a set of ndustry fxed effects All varables are 1%-wnsorzed where approprate. See Appendx 1 for more detaled varable defntons. In Panel B, numbers above are Pearson and numbers n brackets below are Spearman correlatons. Bold typeset ndcates two-sded sgnfcance below the 1 % level. In Panel C, model (7) s estmated for the cross-sectonal sample usng OLS. 53

55 TABLE 5: Demand-Sde Metrcs of Stewardshp Panel A: Cross-Sectonal Metrcs Varable # of Frms Frst Quartle Medan Thrd Quartle Mean Std. Dev. DEBT 2, ΑCC_PAY 2, RENTEXP 2, EMPL 2, Panel B: Correlatons (Lmted Cross-Sectonal Sample) Varable VUSCORE CONS ZRETURN DEBT ACC_PAY RENTEXP EMPL VUSCORE CONS ZRETURN DEBT ΑCC_PAY RENTEXP EMPL

56 (8) (9) VUSCORE TABLE 5 (Contnued) Panel C: Cross-sectonal Regresson Analyses = 1 β PRED + β PERS 4 VUSCORE = δ FFINDUSTRY + β1size + β 2 log( NUMEST ) + β 3MTB 5 10 = 1 β PRED + β PERS 4 + β ZRETURN β RENTEXP + β EMPL + β CONS + ε β ZRETURN + β SSHIP + ε 7 = δ FFINDUSTRY + β1size + β 2 log( NUMEST ) + β 3MTB β DEBT + β ACC _ PAY SSHIP = DEBT Estmate (Prob.) SSHIP = ACC_PAY Estmate (Prob.) SSHIP = RENTEXP Estmate (Prob.) SSHIP = EMPL Estmate (Prob.) Model (9) Estmate (Prob.) SIZE (0.952) (0.592) (0.101) (0.283) (0.292) log(numest) (0.000) (0.000) (0.000) (0.000) (0.000) MTB (0.560) (0.266) (0.009) (0.042) (0.091) PRED (0.751) (0.718) (0.805) (0.914) (0.720) PERS (0.007) (0.004) (0.003) (0.002) (0.005) ZRETURN (0.000) (0.000) (0.000) (0.000) (0.000) DEBT (0.000) (0.000) ACC_PAY (0.037) (0.011) RENTEXP (0.000) (0.000) EMPL (0.000) (0.126) CONS (0.000) R n 2,978 2,978 2,978 2,978 2,978 55

57 Notes: The lmted cross-sectonal sample contans all frm observatons from the cross-sectonal sample for whch suffcent data are avalable to calculate the demand-sde stewardshp metrcs. DEBT s the average of total debt dvded by total assets for frm. ACC_PAY s the average of accounts payable dvded by total assets for frm. RENTEXP s the average of rental expenses dvded by net sales for frm. EMPL s the average of employees n thousands dvded by net sales n mllon USD for frm. All varables are based on yearly Compustat data. VUSCORE s a combned rank measure of the valuatonusefulness measures presented n Table 1. SIZE s the natural logarthm of average market captalzaton. NUMEST s the average number of analysts followng the frm. MTB s the average market-to-book rato. PRED s a measure of earnngs predctablty, the R² coeffcent of a AR(4) tme-seres regresson, regressng current quarter earnngs per share (prce-deflated) on pror quarter earnngs per share. PERS s a measure of earnngs persstence, the sum of the AR(1) and AR(4) coeffcents from the AR(4) tme-seres regresson of current quarter earnngs per share on pror perods earnngs per share. ZRETURN s the average percentage of tradng days wth zero returns to the frm. CONS s the frm-specfc measure of asymmetrc tmelness, the knk (measured n degrees) of a frm-specfc BASU-type regresson and FFINDUSTRY s a set of ndustry fxed effects All varables are 1%-wnsorzed where approprate. See Appendx 1 for more detaled varable defntons. In the correlatons tables of Panel B, Pearson are above and Spearman correlatons are below the dagonal. Also n Panel B, bold typeset ndcates two-sded sgnfcance below the 1 % level. In Panel C, models (8) and (9) are estmated for the lmted crosssectonal sample usng OLS. 56

58 SFB 649 Dscusson Paper Seres 2008 For a complete lst of Dscusson Papers publshed by the SFB 649, please vst "Testng Monotoncty of Prcng Kernels" by Yur Golubev, Wolfgang Härdle and Roman Tmonfeev, January "Adaptve pontwse estmaton n tme-nhomogeneous tme-seres models" by Pavel Czek, Wolfgang Härdle and Vladmr Spokony, January "The Bayesan Addtve Classfcaton Tree Appled to Credt Rsk Modellng" by Junn L. Zhang and Wolfgang Härdle, January "Independent Component Analyss Va Copula Technques" by Ray-Bng Chen, Mehu Guo, Wolfgang Härdle and Shh-Feng Huang, January "The Default Rsk of Frms Examned wth Smooth Support Vector Machnes" by Wolfgang Härdle, Yuh-Jye Lee, Dorothea Schäfer and Y-Ren Yeh, January "Value-at-Rsk and Expected Shortfall when there s long range dependence" by Wolfgang Härdle and Julus Mungo, Januray "A Consstent Nonparametrc Test for Causalty n Quantle" by Kho Jeong and Wolfgang Härdle, January "Do Legal Standards Affect Ethcal Concerns of Consumers?" by Drk Engelmann and Dorothea Kübler, January "Recursve Portfolo Selecton wth Decson Trees" by Anton Andryashn, Wolfgang Härdle and Roman Tmofeev, January "Do Publc Banks have a Compettve Advantage?" by Astrd Matthey, January "Don t am too hgh: the potental costs of hgh aspratons" by Astrd Matthey and Nadja Dwenger, January "Vsualzng exploratory factor analyss models" by Sgbert Klnke and Cornela Wagner, January "House Prces and Replacement Cost: A Mcro-Level Analyss" by Raner Schulz and Axel Werwatz, January "Support Vector Regresson Based GARCH Model wth Applcaton to Forecastng Volatlty of Fnancal Returns" by Shy Chen, Kho Jeong and Wolfgang Härdle, January "Structural Constant Condtonal Correlaton" by Enzo Weber, January "Estmatng Investment Equatons n Imperfect Captal Markets" by Slke Hüttel, Olver Mußhoff, Martn Odenng and Natalya Znych, January "Adaptve Forecastng of the EURIBOR Swap Term Structure" by Olver Blaskowtz and Helmut Herwatz, January "Solvng, Estmatng and Selectng Nonlnear Dynamc Models wthout the Curse of Dmensonalty" by Vktor Wnschel and Markus Krätzg, February "The Accuracy of Long-term Real Estate Valuatons" by Raner Schulz, Markus Staber, Martn Wersng and Axel Werwatz, February "The Impact of Internatonal Outsourcng on Labour Market Dynamcs n Germany" by Ronald Bachmann and Sebastan Braun, February "Preferences for Collectve versus Indvdualsed Wage Settng" by Tto Boer and Mchael C. Burda, February SFB 649, Spandauer Straße 1, D Berln Ths research was supported by the Deutsche Forschungsgemenschaft through the SFB 649 "Economc Rsk".

59 022 "Lumpy Labor Adjustment as a Propagaton Mechansm of Busness Cycles" by Fang Yao, February "Famly Managemen Famly Ownershp and Downszng: Evdence from S&P 500 Frms" by Jörn Hendrch Block, February "Skll Specfc Unemployment wth Imperfect Substtuton of Sklls" by Runl Xe, March "Prce Adjustment to News wth Uncertan Precson" by Nkolaus Hautsch, Deter Hess and Chrstoph Müller, March "Informaton and Belefs n a Repeated Normal-form Game" by Detmar Fehr, Dorothea Kübler and Davd Danz, March "The Stochastc Fluctuaton of the Quantle Regresson Curve" by Wolfgang Härdle and Song Song, March "Are stewardshp and valuaton usefulness compatble or alternatve objectves of fnancal accountng?" by Joachm Gassen, March SFB 649, Spandauer Straße 1, D Berln Ths research was supported by the Deutsche Forschungsgemenschaft through the SFB 649 "Economc Rsk".