The World Price of Earnings Opacity

By Utpal Bhattacharya, Hazem Daouk, Michael Welker. 2003

1,190 citations recorded by the source corpus.

We analyze the financial statements of 58,653 firm-years from 34 countries for the period 1985-1998 to construct a panel data set measuring three dimensions of reported accounting earnings for each country – earnings aggressiveness, loss avoidance, and earnings smoothing. We hypothesize that these three dimensions are associated with uninformative or opaque earnings, and so we combine these three measures to obtain an overall earnings opacity time-series measure per country. We then explore whether our three measures of earnings opacity affects two characteristics of an equity market in a country – the return the shareholders demand and how much they trade. While not all results are consistent for our three individual earnings opacity measures, our panel data tests document that, after controlling for other influences, an increase in overall earnings opacity in a country is linked to an economically significant increase in the cost of equity and an economically significant decrease in trading in the stock market of that country.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/3281bcfc1d1a54d1b27789053ced0e984deb6e5a

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Citations in the corpus

International Accounting Standards and Accounting Quality (2008, neutral): “A Re-examination of Disclosure Level and Expected Cost of Equity Capital.”
A Review of Markets-Based International Accounting Research (2003, background): “Bhattacharya et al. (2003) investigate the effects of earnings opacity on cost of capital and share turnover.”
Regulatory Competition Among Accounting Standards within and Across International Boundaries (2002, background): “Bhattacharya et al. (2002) find that in their analysis of panel data from 34 countries, an increase in earnings opacity from 25 to 75 percentile rank is associated with an increase of about 3.0% in the cost of capital.”
Auditor quality and earnings management: Singaporean evidence (2010, result): “The higher value, nonetheless, is consistent with recent international comparative studies ( Bhattacharya et al. , 2003”
Does Corporate Transparency Contribute to Efficient Resource Allocation (2009, positive): “Additional transparency metrics are tested based on earnings opacity (Bhattacharya et al. 2003) and stock price synchronicity (Morck et al. 2000).”