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Review of Quantitative Finance and Accounting

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07-11-2017 | Original Research

Corporate goodness and profit warnings

Authors: Ajit Dayanandan, Han Donker, John Nofsinger

Published in: Review of Quantitative Finance and Accounting | Issue 2/2018

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Abstract

Is a firm that is known for positively engaging stakeholders expected to voluntarily disclose bad financial news? If it makes the announcement, does its corporate goodness help to mitigate the stock price reaction? We examine these issues using a sample of profit warnings, and a sample of firms with negative earnings surprises that did not warn. Firms that have positive corporate social responsibility ratings are more likely to provide earnings warnings than other firms. When they do provide a profit warning, the event negative abnormal returns are of significantly smaller magnitude than the returns of other firms providing warnings. This effect does not occur for social firms that decide not to warn. They suffer the same negative stock price impact on the earnings announcement day as other firms.

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The corporate governance subcategory measures common aspect of governance like executive compensation, ownership structure, accounting controversies, etc. The community subcategory measures community engagement like charitable giving, and support for local housing and education. Pollution, clean energy, recycling, etc. are the components of the environment category. Diversity provides strengths and concerns for gender, minorities, and sexual orientation at various level of the firm. The employee relations subcategory examines union relations, employee compensation and health characteristics. Strengths and concerns related to business activity in countries with abusive governments, labor rights, and child labor are covered in the human rights category. Lastly, issues dealing with product quality, safety, and social impact are in the product subcategory.

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Title: Corporate goodness and profit warnings
Authors: Ajit Dayanandan
Han Donker
John Nofsinger
Publication date: 07-11-2017
Publisher: Springer US
Published in: Review of Quantitative Finance and Accounting / Issue 2/2018
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-017-0680-7

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