Kanematsu Seminar

14:00 - 14:40

Topic

Aggregate Earnings Informativeness and Economic Shocks: International Evidence

Presenter

Yuto YOSHINAGA (Graduate School of Economics and Management, Tohoku University)

Abstract

Our study proposes the usage of aggregate earnings to forecast future GDP growth. Using empirical analyses with global quarterly data, we investigate whether aggregate-level profitability drivers, which are components of aggregate earnings, are relevant for forecasting GDP growth. After confirming that aggregate-level profitability drivers are useful for forecasting future GDP growth worldwide, we show that considering the effects of crises improves the forecast model of GDP growth. In addition, we suggest that predicting GDP growth using aggregate-level profitability drivers is relevant for stock valuation in developed countries, but not in emerging countries.

15:00 - 16:00

Topic

The Rising Importance of Aggregate Earnings for Asset Prices

Presenter

Ayung TSENG (University of California, Davis)

Abstract

This paper re-examines the earnings-returns relation in a framework that unifies the cross section and time series. While prior studies argue that earnings become less important for asset prices, they rely on cross-sectional analyses while ignoring time-series considerations. In contrast, time-series analyses indicate that the firm-level earnings-returns relation has not declined. When including both firm and aggregate earnings in a rolling-window panel setting, firm earnings exhibit a declining coefficient whereas aggregate earnings exhibit an increasing trend (switching from negative to positive). These trends are explained by an increase in firm connectedness and a decline in the predictability of aggregate earnings.

16:20 - 17:20

Topic

Estimating a Firm-Year Measure of Conditional Conservatism for Non-U.S. Firms: Evidence from Japan

Presenter

Keishi FUJIYAMA (RIEB, Kobe University)

Abstract

The firm-year-level accounting conservatism measure known as C_Score, developed by Khan and Watts (2009), is frequently used in accounting research internationally. However, C_Score is a measure developed for the United States (U.S.) and may not be appropriate for other countries. Thus, we investigate its validity in the Japanese context. That is, the institutional features substantially differ from those in the U.S. We begin by replicating the tests conducted by Khan and Watts (2009) and further investigate its validity. We find some evidence that C_Score is not valid for Japanese listed firms. First, two of the three variables used to calculate C_Score—market-to-book ratio and leverage—are not statistically significant for many years. Second, our results show that C_Score cannot predict the future asymmetric timeliness of earnings, unlike the U.S. results. Third, we find that the contributions of the three factors to the variance of C_Score dramatically fluctuate over time. Furthermore, firm size solely determines C_Score in many years of our sample period. Fourth, we find that the asymmetry of cash flows from operating activities, not accrual asymmetry, drives the asymmetric timeliness of earnings over the C_Score decile ranks. Finally, contrary to previous research in the U.S., we find no evidence of the expected association between C_Score and asset write-downs, which are typical, conditionally conservative accruals. Overall, our findings suggest that future research should confirm the validity of C_Score before applying it to non-U.S. samples.