The perceived credibility of forward-looking performance disclosures

Figures & data

Table 1. Descriptive statistics and correlations of variables.

Table 2. The determinants of FLPD (FDSCORE).

Variables	Pred. sign	Coeff. (t-stat)	Coeff. (t-stat)	Coeff. (t-stat)
FDSCOREt−1	+		0.285***	0.284***
			(8.97)	(9.01)
AG	−	−0.095***	−0.113***	−0.135***
		(−4.38)	(−3.67)	(−3.86)
σSALES	+	0.160*	0.138	0.114
		(1.74)	(1.45)	(1.26)
BMt−1	−			−0.289***
				(−3.48)
BM	−	0.162**	0.143**	0.309***
		(2.13)	(1.98)	(3.54)
NANAL	+	0.016	0.018*	0.022**
		(1.25)	(1.74)	(2.16)
DISPERSION	+	0.012	0.012	0.011
		(0.40)	(0.40)	(0.34)
SIZE	+/−	−0.321***	−0.222***	−0.252***
		(−8.42)	(−6.71)	(−7.11)
SEO	+/−	−0.137**	−0.133*	−0.133*
		(−2.55)	(−1.86)	(−1.90)
DEBTISSUES	+	0.238***	0.185***	0.179***
		(2.97)	(3.40)	(3.34)
DECLINE	+	0.089**	0.058	0.062*
		(2.08)	(1.53)	(1.66)
MISS	+	0.367***	0.354***	0.330***
		(5.15)	(4.70)	(4.72)
LOSS	+	−0.070	0.022	0.018
		(−0.54)	(0.21)	(0.17)
UNDERPERFORMANCE	+	0.093***	0.073***	0.085***
		(2.95)	(3.66)	(4.62)
EQ	−	−0.122	−0.475	−0.528
		(−0.24)	(−1.21)	(−1.36)
Year dummies		YES	YES	YES
Industry dummies		YES	YES	YES
Observations		5459	4824	4824
Adj. R^2		0.1842	0.2622	0.2640

Notes: The sample consists of 5459 observations during the period 1996–2007 for 1273 UK listed non-financial firms with available accounting and analyst forecast data from Datastream and I/B/E/S. Six hundred and thirty-five (635) observations are eliminated when including lagged frequency of forward-looking performance statements. Appendix 2 defines the variables. We report the coefficient estimates from ordinary least squares (OLS) regressions of the frequency of FLPD (FDSCORE) on a dynamic factor and variables proxying for the firm's information environment and situational incentives. t-Statistics in parentheses are based on robust standard errors clustered by year and firm to control for cross-sectional dependence and heteroskedastic and autocorrelated residuals.

*Significance at the 0.1 level (two-tailed).

**Significance at the 0.05 level (two-tailed).

***Significance at the 0.01 level (two-tailed).

Table 3. Forward-looking disclosure (FDSCORE), situational incentives and share price anticipation of earnings.

	Entire sample
Variables	Coeff. (t-stat)	Coeff. (t-stat)	Coeff. (t-stat)	DEBTISSUES = 1Coeff. (t-stat)	DECLINE =  1 Coeff. (t-stat)	MISS = 1Coeff. (t-stat)	UNDER-PERFORM = 1Coeff. (t-stat)	Multiple situational incentivesCoeff. (t-stat)
Xt	0.543***	0.485***	0.393***	0.482**	0.072	0.068	0.233	−0.001
	(4.41)	(4.86)	(2.87)	(2.03)	(0.28)	(0.38)	(1.26)	(−0.00)
Xt3	0.055	0.028	−0.046	−0.019	−0.041	−0.121	0.021	−0.089
	(1.07)	(0.73)	(−1.03)	(−0.15)	(−0.37)	(−1.24)	(0.24)	(−0.61)
Rt3	−0.039	−0.045	−0.044	−0.060	−0.069	−0.047	−0.081*	−0.108**
	(−0.82)	(−1.09)	(−1.09)	(−1.35)	(−1.63)	(−1.25)	(−1.82)	(−2.21)
AGt	0.118***	0.099***	0.097***	0.115***	0.089***	0.102***	0.090***	0.112***
	(3.27)	(3.78)	(3.77)	(4.20)	(2.88)	(6.03)	(4.09)	(3.71)
EPt−1	0.126	0.129	0.119	0.449**	0.089	−0.070	−0.006	−0.039
	(0.86)	(1.16)	(1.03)	(2.24)	(0.65)	(−0.61)	(−0.04)	(−0.23)
FDSCOREt			−0.013***	−0.011**	−0.020***	−0.008	−0.015**	−0.020***
			(−3.70)	(−2.15)	(−4.36)	(−1.63)	(−2.14)	(−4.27)
FDSCOREt × Xt			0.027	0.065	0.040	0.085***	0.037	0.047
			(1.62)	(1.02)	(1.22)	(4.96)	(1.36)	(1.25)
FDSCOREt × Xt3			0.024*	0.029	0.030*	0.028	0.021	0.031
			(1.65)	(1.16)	(1.89)	(1.20)	(1.59)	(1.28)
Year dummies	NO	YES	YES	YES	YES	YES	YES	YES
Industry dummies	NO	YES	YES	YES	YES	YES	YES	YES
Observations	4321	4321	4321	2000	1567	1671	1352	821
Adj. R^2	0.0588	0.1242	0.1282	0.1615	0.1226	0.1331	0.1536	0.1816

Notes: The sample consists of 4321 observations during the period 1996–2007 for 1056 UK listed non-financial firms with available accounting, stock price and analyst forecast data from Datastream and I/B/E/S. Appendix 2 defines the variables. Multiple situational incentives include firm-year observations with at least two of the following situational incentives: debt issues, earnings declines, missing of analyst forecasts and underperformance compared with the industry peers (DEBTISSUES, DECLINE, MISS and UNDERPERFORM). We report the coefficient estimates from OLS regressions of annual stock returns on contemporaneous and future earnings interacted with the frequency of forward-looking performance statements within subsets of observations with situational incentives. t-Statistics in parentheses are based on robust standard errors clustered by year and firm to control for cross-sectional dependence and heteroskedastic and autocorrelated residuals.

*Significance at the 0.1 level (two-tailed).

**Significance at the 0.05 level (two-tailed).

***Significance at the 0.01 level (two-tailed).

Table 4. Forward-looking disclosure (FDSCORE), situational incentives, earnings quality and share price anticipation of earnings.

Variables	Entire sample		Debtissues DEBTISSUES = 1		Earnings declines DECLINE = 1		Missed expectations MISS = 1		Underperformance UNDERPERFORM = 1		Multiple situational incentives
	High earnings quality	Low earnings quality	High earnings quality	Low earnings quality	High earnings quality	Low earnings quality	High earnings quality	Low earnings quality	High earnings quality	Low earnings quality	High earnings quality	Low earnings quality
	Coeff. (t-stat)	Coeff. (t-stat)	Coeff. (t-stat)	Coeff. (t-stat)	Coeff. (t-stat)	Coeff. (t-stat)	Coeff. (t-stat)	Coeff. (t-stat)	Coeff. (t-stat)	Coeff. (t-stat)	Coeff. (t-stat)	Coeff. (t-stat)
Xt	0.254**	0.489**	0.280	0.559*	−0.114	0.246	−0.135	0.412	0.158	0.414	0.061	0.098
	(2.16)	(2.30)	(1.25)	(1.90)	(−0.44)	(0.77)	(−0.81)	(1.30)	(0.61)	(1.42)	(0.22)	(0.24)
Xt3	−0.125	0.048	−0.153	0.052	−0.175	0.176	−0.262*	0.108	−0.044	0.187	−0.102	0.172
	(−1.58)	(0.58)	(−1.09)	(0.49)	(−0.87)	(1.01)	(−1.85)	(0.69)	(−0.34)	(1.39)	(−0.60)	(0.56)
Rt3	−0.053	−0.027	−0.040	−0.073	−0.075	−0.048	−0.065*	−0.024	−0.106**	−0.035	−0.079*	−0.112*
	(−1.29)	(−0.59)	(−1.04)	(−1.28)	(−1.63)	(−0.87)	(−1.78)	(−0.51)	(−1.97)	(−0.99)	(−1.90)	(−1.71)
AGt	0.087***	0.104***	0.112***	0.109**	0.061**	0.110***	0.091***	0.119***	0.036	0.176***	0.020	0.162***
	(3.28)	(3.31)	(4.42)	(2.50)	(2.17)	(3.27)	(6.03)	(10.43)	(0.99)	(5.72)	(0.46)	(5.51)
EPt−1	−0.054	0.326*	0.076	0.734***	−0.075	0.414***	−0.185	0.297*	−0.026	0.094	−0.103	0.554**
	(−0.52)	(1.86)	(0.54)	(3.31)	(−0.41)	(2.65)	(−1.20)	(1.78)	(−0.16)	(0.41)	(−0.54)	(2.27)
FDSCOREt	−0.015***	−0.005	−0.005	−0.016**	−0.016***	−0.019**	−0.015***	−0.004	−0.016***	−0.009	−0.017**	−0.013
	(−3.21)	(−1.63)	(−0.76)	(−2.23)	(−3.79)	(−2.32)	(−3.72)	(−0.39)	(−2.67)	(−0.84)	(−2.24)	(−0.92)
FDSCOREt × Xt	0.046**	0.023	0.164*	0.054	0.097*	0.014	0.120***	0.043	0.063	0.001	0.103*	0.020
	(2.32)	(0.90)	(1.80)	(0.89)	(1.78)	(0.31)	(3.34)	(1.17)	(1.59)	(0.03)	(1.93)	(0.32)
FDSCOREt × Xt3	0.032*	0.012	0.055*	0.023	0.061*	−0.000	0.071***	−0.010	0.027*	0.002	0.060***	−0.014
	(1.77)	(1.19)	(1.85)	(1.21)	(1.65)	(−0.02)	(3.24)	(−0.85)	(1.67)	(0.09)	(2.64)	(−0.29)
Year dummies	YES	YES	YES	YES	YES	YES	YES	YES	YES	YES	YES	YES
Industry dummies	YES	YES	YES	YES	YES	YES	YES	YES	YES	YES	YES	YES
Observations	2171	2150	1043	957	812	755	855	816	667	685	411	410
Adj. R^2	0.1611	0.1742	0.1445	0.1941	0.1336	0.1479	0.1492	0.1511	0.1844	0.1827	0.2427	0.2167

Notes: The sample consists of 4321 observations during the period 1996–2007 for 1056 UK listed non-financial firms with available accounting, stock price and analyst forecast data from Datastream and I/B/E/S. High (low) earnings quality includes firm-year observations where EQ (inverse measure of earnings quality) is lower (higher) than the industry and year median. Multiple situational incentives includes firm-year observations with at least two of the following situational incentives: debt issues, earnings declines, missing of analyst forecasts and underperformance compared with the industry peers (DEBTISSUES, DECLINE, MISS and UNDERPERFORM). We report the coefficient estimates from OLS regressions of annual stock returns on contemporaneous and future earnings interacted with the frequency of forward-looking performance statements within subsets of observations with situational incentives. t-Statistics in parentheses are based on robust standard errors clustered by year and firm to control for cross-sectional dependence and heteroskedastic and autocorrelated residuals.

*Significance at the 0.1 level (two-tailed).

**Significance at the 0.05 level (two-tailed).

***Significance at the 0.01 level (two-tailed).

Table 5. Earnings quality as a gauge of management credibility.

Variables	Low earnings volatility Coeff. (t-stat)	High earnings volatility Coeff. (t-stat)	High discretionary earnings quality Coeff. (t-stat)	Low discretionary earnings quality Coeff. (t-stat)	Multiple situational incentives			Low earnings quality Coeff. (t-stat)	Low analyst dispersion Coeff. (t-stat)	High analyst dispersion Coeff. (t-stat)
					Low analyst coverage Coeff. (t-stat)	High analyst coverage Coeff. (t-stat)	High earnings quality Coeff. (t-stat)
Xt	−0.103	0.285	0.036	−0.325	0.009	0.360	0.033	0.028	0.688	−0.194
	(−0.29)	(0.56)	(0.17)	(−0.60)	(0.04)	(0.81)	(0.12)	(0.07)	(1.38)	(−0.73)
Xt3	−0.201	0.168	−0.046	−0.209	−0.042	0.247	−0.108	0.198	0.037	−0.112
	(−1.09)	(0.75)	(−0.37)	(−1.06)	(−0.28)	(0.89)	(−0.67)	(0.69)	(0.24)	(−0.75)
Rt3	−0.137*	−0.051	−0.148***	−0.075	−0.086**	−0.173**	−0.079*	−0.116	−0.021	−0.104*
	(−1.78)	(−1.62)	(−5.69)	(−0.96)	(−2.15)	(−2.24)	(−1.89)	(−1.62)	(−0.36)	(−1.94)
AGt	0.116**	0.006	0.162***	0.087**	0.144***	0.085*	0.018	0.166***	0.148	0.097*
	(2.35)	(0.16)	(5.04)	(2.23)	(4.18)	(1.85)	(0.40)	(5.40)	(1.48)	(1.74)
EPt−1	−0.164	−0.049	−0.090	0.033	−0.012	0.790	−0.109	0.534**	−0.085	−0.043
	(−0.70)	(−0.16)	(−0.49)	(0.07)	(−0.13)	(1.53)	(−0.61)	(2.20)	(−0.51)	(−0.24)
FDSCOREt	−0.024***	−0.011	−0.013	−0.022**	−0.015	−0.024***	−0.017**	−0.017	−0.021*	−0.018*
	(−2.77)	(−1.55)	(−1.09)	(−2.28)	(−1.37)	(−2.94)	(−2.31)	(−1.19)	(−1.96)	(−1.81)
FDSCOREt × Xt	0.074**	−0.055	0.120***	0.070	0.052	0.023	0.108*	0.019	−0.166	0.058
	(2.39)	(−0.68)	(2.94)	(1.45)	(1.14)	(0.24)	(1.88)	(0.33)	(−1.21)	(1.00)
FDSCOREt × Xt3	0.053*	−0.023	0.065**	0.013	0.023	0.006	0.061***	−0.014	−0.127	0.035
	(1.89)	(−0.54)	(2.19)	(1.28)	(0.74)	(0.06)	(2.70)	(−0.32)	(−1.60)	(1.25)
DISPERSIONt							−0.001	−0.015**
							(−0.65)	(−2.23)
Year dummies	YES	YES	YES	YES	YES	YES	YES	YES	YES	YES
Industry dummies	YES	YES	YES	YES	YES	YES	YES	YES	YES	YES
Observations	384	437	377	444	392	429	411	410	231	590
Adj. R^2	0.1989	0.1486	0.2971	0.1159	0.2102	0.1519	0.2346	0.2387	0.2109	0.1765

Notes: The original sample consists of 4321 observations during the period 1996–2007 for 1056 UK listed non-financial firms with available accounting, stock price and analyst forecast data from Datastream and I/B/E/S. In this table we retain only 821 observations of firms facing multiple situational incentives. Multiple situational incentives includes firm-year observations with at least two of the following situational incentives: debt issues, earnings declines, missing of analyst forecasts and underperformance compared with the industry peers (DEBTISSUES, DECLINE, MISS and UNDERPERFORM). Appendix 2 defines the variables. High (low) earnings quality includes firm-year observations where EQ (inverse measure of earnings quality) is lower (higher) than the industry and year median. Low (high) earnings volatility includes firm-year observations where firm-specific earnings variability (σEARN) is lower (higher) than the industry and year median. Low (high) analyst coverage includes firm-year observations where the number of analysts following the firm (NANAL) are below (above) the sample median. Low (high) analyst dispersion includes firm-year observations where the analyst forecast dispersion (DISPERSION) is below (above) the sample median. We report the coefficient estimates from OLS regressions of annual stock returns on contemporaneous and future earnings interacted with the frequency of forward-looking performance statements within subsets of observations with situational incentives. t-Statistics in parentheses are based on robust standard errors clustered by year and firm to control for cross-sectional dependence and heteroskedastic and autocorrelated residuals.

*Significance at the 0.1 level (two-tailed).

**Significance at the 0.05 level (two-tailed).

***Significance at the 0.01 level (two-tailed).

Table 6. Forward-looking disclosure (FDSCORE) and share price anticipation of earnings over time and across earnings quality.

Variables	Entire sample	High earnings quality	Low earnings quality
	Coeff. (t-stat)	Coeff. (t-stat)	Coeff. (t-stat)
Xt	0.433***	0.290**	0.597**
	(2.97)	(2.03)	(2.57)
Xt3	0.007	−0.029	−0.007
	(0.12)	(−0.24)	(−0.05)
Rt3	−0.051	−0.057	−0.046
	(−1.07)	(−1.15)	(−0.86)
AG	0.103***	0.058***	0.129***
	(8.01)	(2.66)	(6.75)
EPt−1	0.176*	0.081	0.318*
	(1.77)	(0.65)	(1.68)
FDSCORE	−0.006	−0.010**	−0.001
	(−1.10)	(−1.97)	(−0.11)
FDSCORE × Xt	0.026	0.186***	−0.031
	(0.44)	(3.39)	(−0.69)
FDSCORE × Xt3	−0.066	0.027	−0.004
	(−1.35)	(0.99)	(−0.11)
TIME	0.001	−0.006***	0.010***
	(1.51)	(−10.28)	(6.57)
FDSCORE × Xt × TIME	−0.001	−0.023**	0.007
	(−0.05)	(−2.42)	(1.16)
FDSCORE × Xt3 × TIME	0.013**	0.006	0.016***
	(2.26)	(0.79)	(3.15)
Year dummies	YES	YES	YES
Industry dummies	YES	YES	YES
Observations	2831	1526	1305
Adj. R^2	0.1369	0.1228	0.1475

Notes: The sample consists of 2831 observations during the period 1996–2007 for a sample of 394 UK listed non-financial firms with at least five years available accounting, stock price and analyst forecast data from Datastream and I/B/E/S. Appendix 2 defines the variables. High (low) earnings quality includes firm-year observations where EQ (inverse measure of earnings quality) is lower (higher) than the industry and year median. TIME is a trend variable equal to the difference between the current year and 1996. We report the coefficient estimates from OLS regressions of annual stock returns on contemporaneous and future earnings interacted with the frequency of forward-looking performance statements and a time trend. t-Statistics in parentheses are based on robust standard errors clustered by year and firm to control for cross-sectional dependence and heteroskedastic and autocorrelated residuals.

*Significance at the 0.1 level (two-tailed).

**Significance at the 0.05 level (two-tailed).

***Significance at the 0.01 level (two-tailed).

Table

Accelerate	Estimate	Next	Scope for, scope to
Anticipate	Eventual	Novel	Shall
Await	Expect	Optimistic	Shortly
Coming (financial) years	Forecast	Outlook	Should
Coming months	Forthcoming	Planned, planning	Soon
Confidence, confident	Hope	Predict	Will
Convince	Intend, intention	Prospect	Well placed, well positioned
Current (financial) year	Likely, unlikely	Remain	Year(s) ahead
Envisage	Look forward, look ahead	Renew

Table

Benefit	Contribution	Loss	Profitability
Break even	Earnings	Margin	Return
Budget	EPS	Profit	Trading

Table

Sample of forward-looking performance statements
Statement	Source (year of annual report)
‘Management is confident that, with the launch of its new division “The Film Factory at VTR”, the company is now well placed to capture a large stake of these special effects commercials and feature film market which will ensure the company's continuing growth in profitability’	VTR PLC (1996)
‘Of the three divisions, RCO Healthcare is attracting the highest level of investment and offers considerable prospects for good returns in the medium and long term’	RCO Holdings PLC (1996)
‘We intend to increase profits both by a controlled programme of organic expansion and by improving the performance of the existing units’	Vardon PLC (1996)
‘We believe that the restructuring and investment programme will restore profitability to the group and strengthen our position in the market place’	Stoddard Sekers International PLC (1996)
‘Its merger into Montgomery will provide an opportunity for profits recovery in future years’	Macfarlane Group (Clansman) PLC (1996)
‘We will continue to invest to improve the business and to translate the many opportunities available to us into good returns for our shareholders’	FirstBus PLC (1997)
‘The Directors believe that the company is now well positioned to support further growth which should result in a consequent improvement in operating margin’	Stoves Group PLC (1997)
‘Going forward, Cantab will retain key commercial rights to provide both flexibility and greater financial return’	Cantab Pharmaceuticals PLC (1997)
‘Importantly, we expect to produce solid profits and cash flow above the norms of our competition, whilst maintaining our capability to take advantage of improving markets’	Abacus Polar PLC (1997)
‘I am confident that our carefully targeted expansion programmes across all our businesses will result in strong growth in earnings for the future’	Stagecoach Holdings PLC (1997)
‘As with our previous acquisitions we expect them to benefit from being part of McBride and to be earnings enhancing during the forthcoming year’	McBride PLC (1998)
‘Superscape will invest these funds to continue to grow the company and move towards profitability’	Superscape VR PLC (1998)
‘We are looking forward to the years ahead and are confident of generating major rights assets and of producing significant growth in earnings’	Bloomsbury Publishing PLC (1998)
‘The development programme will concentrate primarily on large capacity key sites in high profile locations which have the potential individually to generate profits well in excess of the average bar or nightclub’	Chorion PLC (1998)
‘Our focus on sales will ensure that the Group produces revenue growth and a return to profit and thus progressively build value for our shareholders’	IES Group PLC (1999)
‘To match this investment in technology, we have also increased our sales and marketing activities and expect to see the benefits coming through in the near future’	Dee Valley Group PLC (1999)
‘We believe that such opportunities combined with our reorganised UK operations will lead to improved levels of profitability’	Liberfabrica PLC (1999)
‘A consistent focus on service quality, at sustainable margins, will contribute to long term profitable growth in this business’	Go Ahead Group PLC (1999)
‘Future prospects look encouraging and we intend to take advantage of every opportunity to increase Group profits and earnings, and enhance value to shareholders’	Columbus Group PLC (1999)
‘However, the situation is now improving significantly and the company is moving towards profit and regaining the confidence of its retail and contract customers’	Mcbride PLC (2000)
‘The winning of new contracts and the maintenance of existing relationships will ensure that SSS continues its positive contribution to the Group’	IES Group PLC (2000)
‘It is our intention to continue to expand the sales of our testing services, which will bring the benefits of greater flexibility and additional income’	Dee Valley Group PLC (2000)
‘Thus the Group is well placed for further acquisitions and profit growth in the future’	Beale PLC (2000)
‘Demand for our products remains buoyant and I am confident that the addition of further CD and DVD case capacity in the coming months should provide the opportunity to further increase turnover and profitability’	Coral Products PLC (2000)
‘We shall be actively exploiting new growth opportunities to enhance the Group's profitability’	Stoves Group PLC (2000)
‘The business is building but will inevitably take time to achieve an acceptable return’	Burnden Leisure PLC (2001)
‘We expect there to be benefits from increased capacity and improved efficiency’	W T Foods PLC (2001)
‘The Board is confident that the enlarged estate will continue to produce substantial returns in the years ahead’	Fuller Smith & Turner PLC (2001)
‘We are confident that our significant investment in filtration and our strategic strengths will produce a good and increasing return for shareholders, and a rewarding environment for our employees and customers’	Mcleod Russel Holdings PLC (2001)
‘Over the short term, profit growth will be constrained by the cost of investment’	Boots Company PLC – (2002)
‘This was achieved despite significant revenue investment in areas such as the Argos store card and new products at Experian, which will underpin future profits growth’	Great Universal Stores PLC (2002)
‘We shall continue our ongoing strategy of using this surplus to buy back shares, in order to enhance long term growth in earnings per share’	Next PLC (2002)

Table

Variable	Definition
AG	The growth rate of total book value of assets in period t
BM	Book (DS307) to market (DSHMV) ratio. HMV is the item code for the market value of equity.
CFO	Operating cash flows (DS1015) scaled by lagged total assets
DEBTISSUES	Equals one if total debt (DS1301) increases by more than 5% during the year, zero otherwise
DECLINE	Equals one if annual change in I/B/E/S actual EPS is negative, zero otherwise
DISPERSION	Standard deviation of analyst forecasts during the accounting period scaled by the absolute value of actual earnings
EP	I/B/E/S reported actual EPS for year t − 1 divided by beginning of year share price
EQ	The standard deviation of a firms’ abnormal working capital accruals calculated over years t − 4 through t. Abnormal accruals are estimated using the modified Jones (1991) model extended with return on assets (Kothari et al. 2005), and negative changes in cash flows to account for the role of accruals in timely loss recognition (Ball and Shivakumar 2006). Working capital accruals measured as change in total current assets (DS376) net of change in cash (DS375), minus change in current liabilities (DS389) net of change in the current portion of long-term debt (DS309)
FDSCORE	The number of forward-looking performance statements included in the annual report narratives divided by the total number of sentences in the annual report narrative sections and multiplied by 100
LOSS	Equals one if in I/B/E/S actual EPS is negative in the current accounting period, 0 otherwise
MISS	Equals one if the earnings surprise (SURP) is negative, zero otherwise
NANAL	Number of analysts following the firm over the accounting period (source: I/B/E/S)
UNDERPERFORMANCE	Average industry return on assets (ROA) minus firm-specific ROA. ROA is earnings before interest, tax, depreciation and amortisation (DS1502) over total assets (DS392)
UNDERPERFORM	Equals one if UNDERPERFORMANCE is positive (i.e. the firm underperforms compared its industry peers), 0 otherwise
Rt	Buy-and-hold returns from eight months before end of financial year t to four months after the end of financial year t
Rt3	Buy-and-hold returns from eight months before the financial year-end to four months after the financial year-end for years t + 1 to t + 3
SEO	Equals one if the share capital (DS301) increases by more than 5% during the year, zero otherwise
SIZE	Log of market value of equity (DSHMV)
SURP	Earnings surprise calculated as the difference between I/B/E/S actual EPS and the forecast outstanding at the earnings announcement date for year t
Xt	The annual change in I/B/E/S actual EPS from year t to t + 1 scaled by the stock price at the beginning of the year t
Xt3	The sum of annual change in I/B/E/S actual EPS for years t + 1 to t + 3 scaled by the stock price at the beginning of the year t
σSALES	The standard deviation of total sales (DS104) over the accounting periods over years t − 2 through to t

Note: DS, Datastream code.

Jones, J., 1991. Earnings management during import relief investigations. Journal of Accounting Research, 29 (2), 193–228. doi: 10.2307/2491047

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Kothari, S.P., Leone, A.J., and Wasley, C.E., 2005. Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39 (1), 163–197. doi: 10.1016/j.jacceco.2004.11.002

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Ball, R. and Shivakumar, L., 2006. The role of accruals in asymmetrically timely gain and loss recognition. Journal of Accounting Research, 44 (2), 207–242. doi: 10.1111/j.1475-679X.2006.00198.x

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