Regional heterogeneity among non-operating earnings quality, stock returns, and firm value in biotech industry

https://doi.org/10.17221/24/2018-AGRICECONCitation:Lee J. (2019): Regional heterogeneity among non-operating earnings quality, stock returns, and firm value in biotech industry. Agric. Econ. – Czech, 65: 10-20.
download PDF

This paper analyses regional heterogeneity under the discretionary measures of non-operating earnings quality and stock returns on firm value in Taiwan’s biotech industry during 2008–2015. An econometric framework based on panel smooth transition regression models is employed in a non-linear panel data model. The results show that biotech firms near the bottom threshold for operating income have low-quality non-operating earnings and those near the upper threshold demonstrate the opposite. Investors who exclusively focus on stock returns are thus likely to miss important information about the quality of earnings.

References:
Graham John R., Harvey Campbell R., Rajgopal Shiva (2005): The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40, 3-73 https://doi.org/10.1016/j.jacceco.2005.01.002
 
Gonzalez A., Teräsvirta T., van Dijk D.V. (2005): Panel Smooth Transition Regression Models. Working Paper Series in Economics and Finance. Stockholm School of Economics No. 604.
 
Hansen Bruce E. (1999): Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93, 345-368 https://doi.org/10.1016/S0304-4076(99)00025-1
 
Healy Paul M., Wahlen James M. (1999): A Review of the Earnings Management Literature and Its Implications for Standard Setting. Accounting Horizons, 13, 365-383 https://doi.org/10.2308/acch.1999.13.4.365
 
Houge Todd, Loughran Tim (2000): Cash Flow Is King? Cognitive Errors by Investors. Journal of Psychology and Financial Markets, 1, 161-175 https://doi.org/10.1207/S15327760JPFM0134_2
 
Jian M., Wong T.J. (2004): Earnings Management and Tunneling through Related Party Transactions: Evidence from Chinese Corporate Groups. Working paper. Nanyang Technological University and Hong Kong University of Science and Technology.
 
Lambert R., Verrecchia R. (2011): Cost of Capital in Imperfect Competition Settings. Working Paper. University of Pennsylvania.
 
Lindenberg Eric B., Ross Stephen A. (1981): Tobin's $q$ Ratio and Industrial Organization. The Journal of Business, 54, 1- https://doi.org/10.1086/296120
 
Rajgopal Shiva, Venkatachalam Mohan (2011): Financial reporting quality and idiosyncratic return volatility. Journal of Accounting and Economics, 51, 1-20 https://doi.org/10.1016/j.jacceco.2010.06.001
 
Skinner D.J., Sloan R.G. (2002): Earnings surprises, growth expectations and stock returns or don’t let an earnings torpedo sink your portfolio. Review of Accounting Studies, 7: 289–312.https://doi.org/10.1023/A:1020294523516
 
Taiwan Economic Journal (TEJ) (2018): Taiwan Economic Journal database. Taiwan Economic Journal Co. Ltd. Available at http://www.finasia.biz/ensite/Database/tabid/92/language/en-US/Default.aspx
 
download PDF

© 2019 Czech Academy of Agricultural Sciences