2.1.1 Definition of return
Stock return is defined as the ratio of the income and the original price as well as other investment costs and taxes to be paid that are associated with the stock.
2.1.2 Information
2.1.2.1 Theory of information
Information is all the events, incidents, ideas, judgments that increase the understanding of humanity, transmitted using many means such as: reports, electronic data, newspapers, movie...
2.1.2.2. Financial information
Financial information reflects financial impact of financial events that are to be collected and processed and reported in order for stakeholders to use and make decisions. Types of financial information related to stocks: there are 3 types of information with regard to
stocks: (i) represent all the available information to do the assessment of price of a stock;
(ii) information represents partly or all the information that is public, (iii) any other information and available information about the stock.
2.1.3. Time of financial statement publication
In Vietnam, according to Clause 4 – Chapter 1 Law no. 03/2003/QH11 after the end of the period allowed for the preparation of financial statements, public companies must publish the financial statements that are audited by independent auditor that is qualified according to the regulations by Ministry of Finance, within 10 days. According to the Circulation No. 52/2012/TTBTC, the time for the handing in of audited financial statements is 10 days at the latest after the signatory date of the independent auditor on the audit report. The period alowed for the publication of financial statement is 90 days max, from the date of financial year end. The audited financial statements prior to 2011 must be published within 100 days from the date of financial year end, and audited financial statements from 2012-2015 must be published within 90 days from the financial year end.
2.1.4 Adjusted accounting income
Corporate income in a financial period includes ―cash income‖ and ―accrual income‖.
Cash income is formed from revenue that firms actually receive and expenses that firms pay in the period. Accrual income is from revenue and expenses recorded at the time of transaction, without concern of the time of actual receipt or payment of cash. Managers adjusting income when preparing financial statement is called earnings management.
In general, investors and analysts in the stock market are interested in firms‘ performance in terms of revenue and net income from operating activities. Therefore, managers have tendency to adjust profit so that it can match expected levels.
2.2. Theories related to stock return and financial information when publishing financial statements
2.2.1. Information asymmetry theory
Information asymmetry occurs when one side of a transaction possesses more information than the other side, and the other side does not know exactly how much their partner knows.
2.2.2. Financial behavior theory
Financial behavior theory was developed to overcome drawbacks of efficient market theory, and it can help to explain why market is not efficient. The main points of financial behavior theory comprise: expectancy; risk aversion; bias in a particular case;
herding behavior.
2.2.3. Agency cost theory
This theory is important and used throughout the dissertation. This theory was developed firstly by Ross (1973), and expanded by Jensen and Meckling in 1976. This theory is about the relationship between authorizing party and authorized agent. The agency issue occurs due to the separation between ownership and control of firms and is worsened due to information asymmetry between managers who have access to more information and shareholders and debtholders. The agency cost stems from the assumption that 2 parties:
managers and shareholders have interest conflict.
2.2.4. Efficient market theory
Efficient market theory originates from efficient market concept in economics. A market is considered efficient when it is deemed efficient in terms of allocation and operation of market and information circulation. Among these concepts, the information efficiency is the most important, which leads to efficient market in general. An efficient market is divided up into 3 types of efficiency: weak, medium and strong efficiency.
2.3. Factors affecting stock returns when publishing financial statements
2.3.1. Information related to the time of financial statement publication affects stock return
Studies show that the time of financial statement publication imposes influence on stock market, based on the assumption that financial information which is irrelevant and unreliable is not helpful. In order to have more relevant and timely information, the revelation of such information is necessary. Therefore, the delay in the publication of financial statements reduces the helpfulness of the information to the users.
Bagnoli (2012) suggests that early and late publication of financial statements have impact on stock returns. In particular, investor feedback is usually manifested by adjusted market cumulated return upon late announcements. Ansah Owusu and Leventis (2006)
show that the on-time publication of financial statements can help with the decision making and plays an important role in minimizing the asymmetric information in the capital market. In emerging capital markets, the discovery of factors that encourage timely reporting will help with the construction of new policies to enhance the market allocation. According to Ball (1968), Bernard 1989; Schadewitz, 2005; Chordia, 2006, 2012, after firms publish financial statements, stock price reacts to the newly announced information, and still reacts depending on the negative and positive news several months later. Stock prices have unexpected changes due to the fact that published income is higher or lower than expected income.
Most market authorities in the world limit the time for publication of financial statements after the financial year end in order for stakeholders to have access to timely reports for decision making process.
2.3.2. Financial information influences stock returns
Studies about the financial factors affecting stock return can be divided into 2 groups:
- Micro-level factors: book to market ratio, size, liquidity, changes in unexpected income (SUE), transaction volume measured in monetary unit (DVOL), adjusted accounting income (DA-discretionary accruals), auditor size, stock return momentum (RET12) and others.
- Macro-level factors: inflation, interest rate, exchange rates
2.4. The link between the time of publication of financial statements, the information contained on financial statements and stock returns
Studies about the relationship between the time of financial statement publication, information contained on financial statement and stock returns are based on the assumption that financial information that is irrelevant and unreliable is not helpful.
Therefore, to have relevant and timely information the publication of such information is crucial. Consequently the delay in report publication can reduce its usefulness for users (Roychowdhury and Sletten, 2012; Cullinan et al., 2012; Bagnoli et al., 2002; Haw et al., 2000; Begley and Fischer, 1998, Damodaran, 1989; Kross and Schroeder, 1984;
Chambers and Penman, 1984; Kross, 1982; Givoly and Palmon, 1982; Kross, 1981;
Mahdi Moradi et al., 2013). However, in contrast with the above studies, bad news is to
be published early to prevent litigation risk in comparison with good news (Chen and Mohan, 1994; Skinner, 1994; Aubert, 2009).
2.4.2. The link between financial information and stock returns
Studies about this link use several macro- and micro-variables; however, standing on several research perspectives, research methodologies are also different which leads to varying results about the link. Studies are mainly about the impact of financial information on stock returns when announcing financial statements. Ost studies show the existence of the link between published financial information and abnormal return, and investors can look for abnormal returns from the publication of financial statements (see Brennan, 1998; Chordia, 2006; Vinh and Phuong, 2014; Data, Naik and Radcliffe, 1998;
Chordia, 2013; Weigiang, 2008; Vinh and Phuong (2014). Erlynda Y. Kasim (2013) analyzes adjusted accounting income; Asava Irene Kageha (2013), Miwity Jacqueline Kendi (2015) analyzes the impact of macro-variables such as inflation, exchange rate on stock returns.
2.5. Related literature
2.5.1. Study about the the time of financial statement publication and stock return 2.5.1.1 Study outside of Vietnamese context:
Studies have shown that managers tend to publish good news early and delay publishing bad news, which is evident in Beaver 1968, Pastena and Ronen 1979 Givoly and Palmon 1982 Chambers and Penman 1984 for US stock market; Kross and Schroeder 1984;
Kalav and Loewenstein 1986; Kross 1981; Chen and Mohan 1994; Begley and Fischer 1998; Venky Nagara et al. 2002; Bagnoli et al. 2002; haw et al. 2006; Jeffrey T. Doyle and Matthew J. Magilke 2009; Richard et al. 2010; Roychowdhury and Sletten 2012 Cullinan et al. 2012; Mahdi Moradi et al. 2013; Livnat, Joshua and Zhang, Li, 2015.
On the contrary to the previous papers, Chen and Mohan 1994 and Skinner 1994 show that firms publish financial statements early to reveal bad news, in a bid to avoid litigation risk.
2.5.1. Research in Vietnamese context
Up to now, few studies in Vietnamese context about the time of financial statement publication and stock return. Most of the papers are just the descriptive statistics and
summary of violations, especially from State Stock Commission about the delay of financial statement publication, and other types of abnormal news.
Ministry-levelled research by State Stock Commission (2002) about the enhancement and betterment of system of information publication, thereby assessing the operation of Vietnamese stock market.
Based on the Survey Report on Information Publication in 2017 by the Association of Finance Executives in Vietnam (VAFE), firms that are qualified according to information publication criteria tend to have better operation efficiency than those that are not qualified.
2.5.2. Studies about the impact of information contained on financial statements on stock returns
2.5.2.1. International studies
There are many studies quantifying the impact of factors on published financial statements on stock returns: Ball và Brown (1968); Bhushan (1994); Chordia (2006); Ng (2008); Weiqiang (2008); Nguyen (2010); Vinh and Phượng (2013); Haw (2006);
Yuenan Wang and Amalia Di Iorio (2007); Weiqiang (2008); Nandi and Ghosh (2012);
Dechow (1994); Subramanyam (1996); Haw et al. (2000); Erlynda Y. Kasim (2013);
Chordia (2013); Oktay Yamrali et al. (2014); Mwiti Jacqueline Kendi (2015).
2.5.2.2. Domestic studies
Nguyễn Thị Vạn Hạnh (2006); Nguyễn Thị Kim Yến (2011); Trần Văn Trí (2012);
Nguyễn Thị Cành and Lê Văn Huy (2013); Vinh and Phượng (2013); Nguyễn Anh Phong (2015).
2.6. Research gap
- There are no studies that analyze the impact of the time of financial statement publication on stock returns for each industry, especially in the context of Vietnamese stock market using event study.
- For international and domestic studies, there are very few studies about how the information contained in financial statements influences stock returns, considering the relationship with adjusted accounting income and auditor size.
CONCLUSION OF CHAPTER 2
Chapter 2 presents theories and related studies on stock returns and financial information when financial statements are published.