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Purpose – Effective August 23, 2004, the US Securities and Exchange Commission (SEC) requires all firms to disclose restatements via an item 4.02 Form 8-K filing. However, a significant number of firms continue to disclose restatements using means other than an 8-K. Commonly referred to as stealth restatements, the purpose of this paper is to investigate the materiality of restatements disclosed in either the 10-K or the 10-Q by comparing them to those disclosed via 8-K. Design/methodology/approach – Univariate and multivariate analyses compare the characteristics of and the market reaction to 10-K/10-Q restatements to those of 8-K restatements. Findings – The authors find stealth restatements are more likely to be those not affecting net income, with longer filing delays, not subject to SEC investigation and made by firms audited by non-big four accounting firms. The authors document a negative market reaction to 8-K restatements around the restatement disclosure date. However, for stealth restatements they find no market reaction around the 10-K/10-Q filing date and for up to 22 trading days after the 10-K/10-Q filings. Research limitations/implications – The study shows a significant difference in materiality between stealth and 8-K restatements. Practical implications – The study is important to investors, regulators and academics because it supports the notion that stealth restatements include less significant information relative to that disclosed in 8-K restatements. This result is in line with the SEC disclosure requirement. Originality/value – The significant number of stealth restatements since 2004 begs the question as to what kind of information is being disclosed in these restatements. The paper responds to this question. [ABSTRACT FROM AUTHOR]

Purpose – The purpose of this study is to examine whether financial analysts mislead investors in recognizing the differential persistence of the three cash flow components of earnings, defined by Dechow et al., in forecasting annual earnings. Design/methodology/approach – The paper uses Mishkin's econometric approach to compare the persistence of the cash flow components within and across the historical, analysts' and investors' weightings. Findings – It is found that financial analysts' weightings of the cash flow components are more closely aligned with the historical relations than are investors' weightings, both in direction and in magnitude. The degree of analysts' mis-weighting is economically small and much lower than the degree of investors' mis-weighting. Moreover, the extent of both investors' and analysts' mis-weightings of the cash components is generally smaller for firms with greater levels of analyst following, a proxy for the quality of the information environment. Research limitations/implications – The findings suggest that financial analysts' bias in weighting the cash components of earnings is at best a partial explanation for investors' bias. Practical implications – This study is important to academics and the investment community that relies upon financial analysts as information intermediaries, because the ability of analysts to incorporate value-relevant information in their published expectations may impact securities prices. Originality/value – The study is the first to document the weightings of the cash components of earnings by financial analysts. In addition, this paper provides evidence that financial analysts, as information intermediaries, are less biased than investors in processing not only the accrual but also the cash components of earnings. [ABSTRACT FROM AUTHOR]

Purpose – Frankel and Lee (1998) report significant abnormal security returns to a trading strategy based on the ratio of the intrinsic value to the market value of common equity (V/P). However, they measure the intrinsic value estimates based on the residual income model using several fundamental variables that have been documented to be associated with subsequent abnormal stock returns. The purpose of this paper is to test whether combining all these individual anomalies to V/P has generated additional predictive power, and whether the abnormal returns related to V/P are due to thepredictive ability of the residual income model or to that of the components used in constructing V/P. Design/methodology/approach – Two methods are used in this study to examine V/P's incremental effect. First, all the component variables of V/P are included in the same regression with V/P to test whether the coefficient of V/P remains significant. Second, an alternative ex ante transformation of the same component variables is developed and a test is conducted to see whether the trading profits based on V/P and the ex ante transformation differ. Findings – Overall, the paper finds that V/P does not provide additional explanatory power for subsequent abnormal returns over its component variables, especially analyst forecasts of earnings. The results imply that the source of the delayed security returns related to V/P is the biases in investors' expectations regarding the constituent anomaly variables. Originality/value – This paper shows that V/P is not a distinct market anomaly. This finding is important to various stock market participants. [ABSTRACT FROM AUTHOR]