An Examination of Earnings Surprises for Urban and Rural Firms

• Main Authors: BAIK, Bok, CHOI, Jong-Hag, ZANG, Yoonseok
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2014
• Subjects: Non-GAAP earnings; earnings benchmarks; urban firms; Accounting; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/239; https://ink.library.smu.edu.sg/context/soa_research/article/1238/viewcontent/Exam_Earning_Surprises_Urban_Rural_Firsm_pv_oa.pdf
• Institution: Singapore Management University

In this paper, we examine the association between firm location and management’s opportunistic financial reporting at earnings announcements. Because of investors’ preference for local stocks and the existence of large investment communities in urban areas, firms located in urban areas (i.e., urban firms) tend to have a higher level of visibility and attention. We predict that this tendency in turn motivates urban firms to opportunistically behave in an earnings surprises game. Consistent with our prediction, we find that (1) urban firms are more likely to report non-negative earnings surprises than rural firms; (2) urban firms are more likely to report non-GAAP earnings numbers; and (3) urban firms are more likely to make income-increasing adjustments to GAAP earnings to arrive at non-GAAP earnings than rural firms. In addition, we find that the market response to earnings surprises is consistent with investors perceiving urban firms’ opportunistic financial reporting.