A comparison of the value relevance of interim and annual financial statements

Background: This study tests the value relevance of interim accounting information. The study also explores whether the value relevance of annual and interim financial statements has changed over time.Aim: It explores whether the value relevance of interim financial statements is higher than the value relevance of annual financial statements. Finally, it investigates whether accounting information published in interim and annual financial statements has incremental value relevance.Setting: Data for the period from 1999 to 2012 were collected from a sample of non-financial companies listed on the Johannesburg Stock Exchange.Method: The Ohlson model to investigate the value relevance of accounting information was used for the study.Results: The results show that interim book value of equity is value relevant while interim earnings are not. Interim financial statements appear to have higher value relevance than annual financial statements. The value relevance of interim and annual accounting information has remained fairly constant over the sample period. Incremental comparisons provide evidence that additional book value of equity and earnings that accrue to a company between interim and annual reporting dates are value relevant.Conclusion: The study was conducted over a long sample period (1999–2012), in an era when a technology-driven economy and more timely reporting media could have had an effect on the value relevance of published accounting information. To the best of our knowledge, this is the first study to evaluate and compare the value relevance of published interim and annual financial statements.

Earnings Performance And Interim Reporting

This study documents that interim period earnings performance is relatively favorable to year-end earnings performance. Earnings performance is measured as the difference between reported earnings and the Value Line forecast. Additional analysis indicates the observed difference is due to a positive interim earnings performance bias not any particular negative year-end earnings performance bias. Interim earnings are found to be overstated on average about five cents per interim quarter. Previous studies have argued that since only year-end earrings are audited, they include adjustments for misstatements of previously reported interim earnings (as a result of errors, poor estimates, misallocations, etc.). The results here support the notion that management may have incentive to overstate interim (unaudited) earnings, and may do so by delaying the announcement of bad news, and/or making optimistic estimates of full fiscal year amounts requisite for interim period reporting purposes.

The Influence of Interim Auditor Reviews on the Association of Returns with Earnings

The Securities and Exchange Commission now requires auditors to review interim earnings reports on a timely basis. Previously, auditors could perform this review retrospectively, as part of the year-end audit. We investigate whether timely reviews are likely to increase the relevance and reliability of reported earnings, as reflected by the extent to which the earnings-return relation is contemporaneous. We find that when the auditor reviews interim earnings on a timely basis, the association between quarterly returns and earnings (and between quarterly returns and unexpected earnings) is predominantly contemporaneous. When the auditor reviews interim earnings retrospectively, however, the association between quarterly returns and earnings is not entirely contemporaneous; with retrospective reviews, returns lead interim earnings. We conclude from these findings that timely reviews increase the likelihood that accounting earnings reflect economic events contemporaneously with returns.

The Effect of Legal Environment on Voluntary Disclosure: Evidence from Management Earnings Forecasts Issued in U.S. and Canadian Markets

Citing fear of legal liability as a partial explanation, prior research documents (1) managers' reluctance to voluntarily disclose management earnings forecasts, and (2) greater forecast disclosure frequencies in periods of bad news. We provide evidence on how management earnings forecast disclosure differs between the United States (U.S.) and Canada, two otherwise similar business environments with different legal regimes. Canadian securities laws and judicial interpretations create a far less litigious environment than exists in the U.S. We find a greater frequency of management earnings forecast disclosure in Canada relative to the U.S. Further, although U.S. managers are relatively more likely to issue forecasts during interim periods in which earnings decrease, Canadian managers do not exhibit that tendency. Instead, Canadian managers issue more forecasts when earnings are increasing, and their forecasts are of annual rather than interim earnings. Also consistent with a less litigious environment, Canadian managers issue more precise and longer-term forecasts. These findings hold after controlling for other determinants of management earnings forecast disclosure that might differ between the two countries—firm size, earnings volatility, information asymmetry, growth, capitalization rates, and membership in high-technology and regulated industries.