Mauricio Melgarejo

Mauricio Melgarejo examines how different accounting standards impact earnings announcements. (Photo by Mark Simons)

Seizing the Day

Mauricio Melgarejo, PhD ’11, Accounting

When the stock market ends the week on a high after several earnings announcements, many investors might be tempted to close their positions and finish their day with a TGIF celebration at a favorite watering hole. Accounting experts like Mauricio Melgarejo are more cautious.

"There is some research, especially in the finance area, that shows investors may be less attentive on particular days of the week,” Melgarejo says. “The market reaction to earning announcements released on Fridays, for example, seems to be weaker than investors' reactions to earning announcements made on other days of the week.

"All investors have behavioral biases, so my advisors and I are trying to understand what factors might distract them or make them inattentive and whether other market participants, like sell-side analysts, experience similar issues. On days when many firms release earnings or analysts release multiple forecasts, the volume of data might overwhelm some market participants and cause them to lose focus.”

Compounding these potential issues is the fact that firms’ financial information is more available than ever before through the Internet and the business media, and the reporting standards can vary widely around the world. “In some cases, the more complex environment may make it more difficult for many global investors to make educated investment decisions,” Melgarejo says.

“There is more financial information available online than ever before, and the reporting standards can vary widely, so it’s difficult for many people to make educated investment decisions.”
In an increasingly global economy, financial reports prepared under different accounting standards might differ in the information they provide to investors and analysts. “Financial analysts are sophisticated market participants for whom firms’ historical financial statements are an important input,” he says.

Toward that end, Melgarejo is researching the link between analysts’ earnings forecasts and earnings attributes for firms reporting under different accounting standards. While most American firms employ U.S. Generally Accepted Accounting Principles (US GAAP), those in other countries follow the International Financial Reporting Standards (IFRS) or other local standards.

Melgarejo’s results show that the association between earnings predictability and the accuracy and dispersion of analysts’ earnings forecasts is stronger for firms reporting under IFRS compared to firms reporting under US GAAP or other domestic accounting standards.

“It seems that financial statements reported under IFRS provide more relevant information to financial analysts,” he says. “Moreover, these results are stronger for firms incorporated in countries with high levels of legal enforcement.”

Although uniform standards and more consistent enforcement would seem to be logical solutions, Melgarejo thinks the changes needed to repair the damage left by the recession and prevent another financial meltdown will come slowly.

“There are so many new variables emerging in this global economy, and just as many debates about the best methods to measure and report them,” he says. “It’s a very complex issue with no easy answers.”

To learn more about Mauricio Melgarejo, visit his PhD student directory page on the Krannert School’s website.

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