PhD, University of Cincinnati, 2010, Business: Business Administration

Valuation theory (Ohlson and Juettner-Nauroth (OJ), 2005) demonstrates that Abnormal Earnings Growth AEG drives firm value. There are three implications. First, a firm ought to grow at the rate of cost of capital net of dividends paid out, similar to a savings bank account. This characterization has been labeled as earnings dynamics (ED) in Ohlson (1991). Second, Abnormal earnings growth forecast ought to translate previous knowledge of past earnings and dividend into earnings growth potential beyond the firms's expected return and firm value as well. The last, if the market does not completely adjust to abnormal earnings growth information, portfolio created based on abnormal earnings growth ought to produce arbitrage returns. Those three implications are developed into papers as follows: the first paper tests whether the market recognizes the forecast of abnormal growth in earnings as benchmark for performance when analysts announce their earnings forecasts. The second paper examines whether higher abnormal growth expectation in the current year will yield higher future accounting and stock performances. Results indicate that the market uses the ED information asymmetrically to interpret bad news from the first analyst earnings forecasts and seem to punish dividend payouts if it leads to the ED forecast to be lower than the past earnings. The evidence in the second paper shows that higher abnormal earnings growth leads to higher future accounting performance over following two years and continue to persist up to four years. Arbitrage profit based on abnormal earnings growth is profitable and significant in 23 out of 23 years. After control for expected abnormal earnings growth and the cost of capital, regression results show that B/M and E/P anomaly does not go away. Results indicate that abnormal earnings growth is another valuation anomaly separate from B/M and E/P. A hedge test provides the evidence that abnormal earning growth strategy can be refined by contr (open full item for complete abstract)

Committee: Pradyot Sen PhD (Committee Chair); Martin Levy PhD (Committee Member); Xiaowen Jiang DBA (Committee Member); Jens Stephan PhD (Committee Member) Subjects: Accounting

Doctor of Philosophy, The Ohio State University, 2004, Business Administration

This dissertation studies how psychological and reputational considerations affect the behavior of individual investors and security analysts. The first essay examines investors' preference for framing their gains and losses using trading records of individual investors at a large discount brokerage firm. I find that investors tend to bundle sales of losers on the same day and separate sales of winners over different days. The result is consistent with the principles of mental accounting (Thaler (1985)), according to which individuals attain higher utility by integrating losses and segregating gains. Alternative explanations based on tax-loss selling strategies, margin calls, the number of winners and losers in a portfolio, the difference in the potential proceeds from selling winners and losers, and correlations among winners and losers in a portfolio do not fully account for the observed behavior. Logistic analyses show that investors are more likely to sell multiple stocks when they realize losses, after controlling for various factors including market and portfolio returns, overall sales activity during the day, and investor characteristics. The second essay provides a theoretical and empirical analysis of analysts' incentives to incorporate public information in their earnings forecasts. The model show that analysts may underreact to public news due to their reputational concerns, and that an analyst's incentive to underreact to public information 1) decreases with the size of unexpected news; 2) decreases with the uncertainty of earnings; 3) increases with the analyst's initial reputation; and 4) increases with how much the analyst values his/her current reputation relative to forecast accuracy. I test the implications of the model and find that analysts underreact to earnings news less when the size of unexpected earnings is large, when there is more uncertainty about the earnings, and when they have long track records. The model also implies that the strateg (open full item for complete abstract)

Committee: David Hirshleifer (Advisor) Subjects: Business Administration, General

Doctor of Philosophy, Case Western Reserve University, 2005, Accounting

For at least two decades, it was believed that making managers into owners could ameliorate many agency conflicts existing in capital markets settings. In fact, it now appears that managerial ownership of stock itself may encourage earnings manipulations. In this paper, we hypothesize that investors' focus on reported earnings relative to a benchmark and management compensation related to equity based compensation create incentives to use earnings management to exceed consensus earnings forecasts. The hypotheses are empirically tested using a sample of around 1500 observations from 1992-1999. These tests specifically address the use of discretionary accruals to exceed forecasts, insider trading patterns relative to performance and relative to performance under earnings management, abnormal profits earned from insider trading, and firm performance subsequent to insider trading. The results show, consistent with prior research, that managers use discretionary accruals to exceed consensus earnings forecasts. Broadly, managerial insider selling increases with performance relative to consensus forecasts, and is magnified by stock option holdings. Insider selling is more intense among managers who have used discretionary accruals to exceed forecasts. Managers who sell following the announcement of an earnings surprise are able to earn abnormal profits. Firms having both positive earnings surprises and insider selling exhibit lower subsequent accounting performance. These results provide insights into the effects of equity compensation arrangements on broad managerial strategies related to using discretionary accruals in conjunction with insider trading contingent on firm performance.

Committee: Robert Bricker (Advisor) Subjects: Business Administration, Accounting