the timing of industry and firm earnings information in security prices a re evaluation abstract this paper re evaluates evidence in ayers and freeman ayers f freeman r 1997 market assessment of industry and firm earnings information journal of accounting and economics 24 205 218 suggesting that investors anticipate industry wide components of earnings earlier than firm specific components and that post earnings announcement drift following annual earnings announcements is due primarily to firm specific components of earnings our tests indicate that post announcement drift is entirely attributable to coefficient bias due to measurement errors in the use of realized earnings changes as proxies for unexpected earnings also coefficient differences in the market s anticipation of subsequent year industry and firm specific earnings become insignificant when we introduce suitable controls for non linearity in the return earnings relation

the effect of experience on security analyst underreaction abstract we examine if analysts more fully incorporate prior earnings and returns information in their current quarter forecasts as their experience following a firm increases we measure analyst firm specific forecasting experience as the number of prior quarters for which the analyst has issued an earnings forecast for the firm we find that analysts underreact to prior earnings information less as their experience increases suggesting one reason why analysts become more accurate with experience

the changing time series properties of earnings cash flows and accruals has financial reporting become more conservative abstract this paper documents changes in the patterns of earnings cash flows and accruals over the last four decades in the absence of a generally accepted definition of conservatism a number of measures of reporting conservatism are identified and examined these measures rely on the accumulation of nonoperating accruals the timeliness of earnings with respect to bad and good news characteristics of the earnings distribution and the market to book ratio the patterns are consistent with an increase in conservative financial reporting over time the findings have implications for accounting standard setting regulation of financial information and financial statement analysis

agricultural productivity and convergence europe and the united states this article applies the window malmquist index wmi approach to measure changes in agricultural total factor productivity tfp for the united states and a sample of nine european countries for the period 1973 to 1993 the dataset used in this article is obtained from ball et al 2001 the wmi is constructed by combining data envelopment analysis window analysis with the malmquist index approach furthermore the kruskal and wallis rank test is used for testing frontier shifts among observed periods the article also explores the question of convergence in tfp across the countries under consideration by testing for and convergence as well as for stochastic or long run convergence the results show wide variation in the rate of tfp growth across countries with an average trend growth rate of 1 62 the results indicate the presence of convergence but the absence of convergence for the full period under consideration but the presence of both and convergence for the sub period 1983 to

an empirical assessment of the residual income valuation model abstract this paper provides an empirical assessment of the residual income valuation model proposed in ohlson ohlson j a 1995 earnings book values and dividends in security valuation contemporary accounting research 11 661 687 we point out that existing empirical research relying on ohlson s model is similar to past research relying explicitly on the dividend discounting model we establish that the key original empirical implications of ohlson s model stem from the information dynamics that link current information to future residual income our empirical results generally support ohlson s information dynamics however we find that our empirical implementation of ohlson s model provides only minor improvements over existing attempts to implement the dividend discounting model by capitalizing short term earnings forecasts in perpetuity

the nature of option interactions and the valuation of investments with multiple real options this paper deals with the nature of option interactions and the valuation of capital budgeting projects possessing flexibility in the form of multiple real options it identifies situations where option interactions can be small or large negative or positive interactions generally depend on the type separation degree of being in the money and the order ofthe options involved the paper illustrates through a generic example the importance of properly accounting for interactions among the options to defer abandon contract or expand in vestment and switch use it is shown that the incremental value of an additional option in the presence of other options is generally less than its value in isolation and declines as more options are present therefore valuation errors from ignoring a particular option may be small however configurations of real options exhibiting precisely the opposite behavior are identified comparative statics results confirm that the value of flexibility despite interactions manifests familiar option properties

information in prices about future earnings abstract stock return over a period reflects the market s revision in expectation of future earnings accounting earnings over the same period however have limited ability to reflect such revised expectations therefore returns anticipate earnings changes and the earnings response coefficient from a regression of returns on contemporaneous earnings changes is biased toward zero we reduce this bias by including leading period returns in price earnings regressions the resulting estimated earnings response coefficient magnitudes suggest that the capital market on average views earnings changes to be largely permanent this is consistent with the random walk time series property of annual earnings

the value relevance of intangibles the case of software capitalization the value relevance of intangibles the case of software capitalization author s david aboody and baruch lev source journal of accounting research vol 36 studies on enhancing the financial reporting model 1998 pp 161 191 published by blackwell publishing on behalf of accounting research center booth school of business university of chicago stable url http www jstor org stable 2491312 accessed 14 09 2010 16 12

changes in the value relevance of earnings and book values over the past forty years this paper investigates systematic changes in the value relevance of earnings and book values over time we report three primary findings first contrary to claims in the professional literature the combined value relevance of earnings and book values has not declined over the past forty years and in fact appears to have increased slightly second while the incremental value relevance of bottom line earnings has declined it has been replaced by increasing value relevance of book values finally much of the shift in value relevance fiom earnings to book values can be explained by the increasing frequency and magnitude of one time items the increasing frequency of negative earnings and changes in average firm size and intangible intensity across time

the characteristics of individual analysts forecasts in europe abstract this study investigates the determinants of financial analysts forecasts differential accuracy in 14 different european stock markets using the i b e s detail history database i find that european financial analysts forecast accuracy is positively associated with analyst firm specific experience forecast accuracy is negatively associated with the number of countries followed by analysts and the age of the forecast surprisingly i find no relationship between forecast accuracy and analysts job experience and the size of the bank employing the analyst

the american put option valued analytically an analytic solution to the american put problem is derived herein the hedge ratio and other derivatives of the solution are presented the formula derived implies an exact duplicating portfolio for the american put consisting of discount bonds and stock sold short the formula is extended to consider put options on stocks paying cash dividends a polynomial expression is developed for evaluating these formulae values and hedge ratios for puts on both dividend and nondividend paying stocks are calculated tabulated and compared with values derived by numerical integration and binomial approximation as with european options evaluating an analytic formula is more efficient than approximating the stock price process or the partial differential equation by binomial or finite difference methods finally applications of this american put solution are discussed

default premiums in commodity markets theory and evidence we model the effect of nonperformance risk on forward and futures pricing and look for evidence of nonperformance risk in precious metals futures prices from the hunt brothers episode changes in default premiums are measured and related to the sequence of events in the metals markets during this period results suggest first that ex ante costs of nonperformance can be a significant priced factor in commodity markets and second that the arrival of new information is often associated with changes in these costs the evidence has implications for both theoretical and empirical research on commodity markets organized commodity markets offer traders an efficient medium in which to execute their hedging and speculative strategies in particular the markets have developed mechanisms that reduce the costs of nonperformance which would be substantial in the absence of an organized exchange devices such as margin requirements position limits daily marking to market price limit moves and the clearinghouse reduce the expected costs of distress and default in commodity markets while organized exchanges greatly reduce expected costs of nonperformance they do not eliminate such costs throughout the history of organized futures trading there have been many instances of markets collapsing or coming to the brink of collapse after a period of unusual trading activity the most prominent example in recent times is the near collapse of the new

investment opportunity in china s overseas oil project an empirical analysis based on real option approach abstract china s overseas oil investments uphold national energy security located in the complex international economic and political environment the benefits of overseas oil projects are affected by various uncertainties oil companies call for a set of evaluation method dealing with these uncertainties especially when encountering low oil price conditions it is much more crucial to answer when to optimally invest rather than whether to invest this paper analyzes the investment opportunity of an oil project in the development and production phase considering uncertainty irreversibility and management flexibility the decision making process combines discounted cash flow dcf method and the trinomial tree model of real option approach roa for practical purposes tools of hurdle price cumulative probability and decision tree are adopted in addition results of the case project show the economic feasibility at present and optimal start up timing at the end of 2016 besides the lower cost parameters generally make it easier to meet the opportunity the scenario analysis suggests the higher risk contributes to an earlier start up furthermore the issues of method applicability investment signals and decision lag effects are discussed

security analyst superiority relative to univariate time series models in forecasting quarterly earnings abstract this paper provides evidence of security analyst sa superiority relative to univariate time series ts models in predicting firms quarterly earnings numbers and shows that sa forecast superiority in our sample is attributable to 1 better utilization of information existing on the date that ts model forecasts can be initiated a contemporaneous advantage and 2 use of information acquired between the date of initiation of ts model forecasts and the date when sa forecasts are published a timing advantage

earnings skewness and analyst forecast bias abstract we argue that if analysts objective is to provide the most accurate forecast by minimizing the mean absolute forecast error then the optimal forecast is the median instead of the mean earnings forecast bias is observed when the median is different from the mean in a skewed earnings distribution thus part of the observed analyst forecast bias could be a result of analysts efforts to improve forecast accuracy when the earnings distribution is skewed we find that earnings skewness is significantly related to analyst forecast bias we also provide evidence that the market adjusts for part of the skewness induced bias

the valuation of sequential exchange opportunities sequential exchange opportunities are valued using the techniques of modern option pricing theory the vehicle for analysis is the concept of a compound exchange option this security is shown to exist implicitly in several contractual settings a valuation formula for this option is derived the formula is shown to generalize much previous work in option pricing several applications of the formula are presented

analyzing the analysts career concerns and biased earnings forecasts this paper examines the career concerns of security analysts we relate long histories of their earnings forecasts to job separations we find that relatively accurate past forecasts lead to favorable career outcomes such as remaining at or moving up to a high status large prestigious brokerage house controlling for accuracy optimistic forecasts relative to the consensus increase the chances of favorable job separations job separations depend much less on accuracy for analysts who cover stocks that are underwritten by their brokerage houses such analysts are also much more likely to be rewarded for optimistic forecasts than other analysts furthermore job separations were much less sensitive to accuracy and somewhat more sensitive to optimism during the stock market mania of the late 1990s these findings suggest that the well documented analyst forecast optimism bias is likely due to incentives to promote stocks

valuing modularity as a real option we provide a general valuation approach for capital budgeting decisions involving the modularization in the design of a system within the framework developed by baldwin and clark baldwin c y k b clark 2000 design rules the power of modularity mit press cambridge ma we implement a valuation approach using a numerical procedure based on the least squares monte carlo method proposed by longstaff and schwartz longstaff f a e s schwartz 2001 valuing american options by simulation a simple least squares approach rev financial stud 14 1 113 147 the approach is accurate general and flexible

changes versus levels in earnings as explanatory variables for returns some theoretical considerations this paper considers theoretical aspects of the specification of an earnings variable to explain contemporaneous returns the traditional approach in market based accounting research centers on changes in earnings deflated by beginning of period price as the benchmark explanatory variable for returns the reasons for using this variable appear to follow a three step argument first unexpected earnings determine the theoretically correct concept of the earnings variable second the change in earnings approximates unexpected earnings because current earnings approximate expected earnings i e the random walk hypothesis applies 1 third the beginning of period price deflates the earnings change variable to make it dimensionally consistent with returns 2 while this argument seems overly heuristic we are unaware of a generally acceptable analysis that provides a more compelling argument this lack of rigor has recently become an issue because

the forecast accuracy of individual analysts evidence of systematic optimism and pessimism o brien 1990 examines the annual earnings forecast accuracy of individual analysts reporting to the institutional brokers estimate system ibes of lynch jones and ryan during july 1975 september 1982 using a regression model which adjusts for average firm and year effects o brien finds no evidence of differential forecast accuracy comparing individual analysts earnings forecasts to median consensus forecasts during 1983 86 we also find no statistically significant evidence of differential analyst forecast accuracy our result however does not mean that one analyst s forecasts are much like another s we find that analysts are persistently optimistic or pessimistic relative to consensus forecasts we examine this persistent behavior and its effect on measures of forecast accuracy over a sample

productivity across industries and countries time series theory and evidence the authors examine whether convergence in aggregate productivity is also occurring at the industry level in fourteen oecd countries from 1970 to 1987 using both cross section and time series methods they find convergence in some sectors such as services however surprisingly the authors find that convergence does not hold for the manufacturing sector decomposing aggregate convergence into industry productivity gains and changing sectoral shares of output they find the service sector to be responsible for the bulk of cross country convergence to the united states the authors develop a new result on the asymptotic normality of panel unit root estimators to formally test within sector convergence copyright 1996 by mit press

ldc agriculture nonparametric malmquist productivity indexes abstract this paper examines changes in agricultural productivity in 18 developing countries over the period 1961 1985 we use the nonparametric output based malmquist index to examine whether the results from such an approach confirm results from other methods that have indicated declining agricultural productivity in less developed countries ldcs the results confirm previous findings indicating that at least half of these countries have experienced productivity declines in agriculture we also found that those countries that tax agriculture most heavily had the most negative rates of productivity change

convergence or divergence in latin america a time series analysis this article investigates the occurrence of per capita income convergence in 19 latin american countries we apply a time series approach to test for stochastic convergence and convergence based on structural breaks unit root tests where the dates of breaks are unknown and determined endogenously this approach is essential since it does not impose common break dates and parameter homogeneity among countries in fact the econometric methodology employed attempts to provide what was lacking in previous works as a consequence unlike prior studies the results indicate that there is substantial evidence in favor of conditional convergence in latin america we show that this evidence is even greater when analyzing south and central america separately

capital budgeting for interrelated projects a real options approach this paper explores the effect of project interrelationships on investment decisions and project values in a real options framework we examine in detail the mutually exclusive case where a firm may invest in the development stage of two projects and then may select only a single project to implement the firm can develop the projects in parallel or in sequence the choice of development policy depends on the relative values of the embedded options for each strategy sequential development is shown to be superior to parallel development when projects have highly correlated values and when they require a large commitment of capital for development are short term in nature and have relatively low volatility we also show that the optimal ordering of sequential projects does not always begin with the most profitable project

regional agricultural labour productivity convergence in china abstract this paper tests for regional agricultural labour productivity alp convergence in china the analysis indicates that alp diverges between 1985 and 1992 but converges between 1992 and 2000 further analysis shows that these findings can be explained by the different rates of agricultural out migration in these two periods we argue that these different rates of regional agricultural out migration can be attributed to the different government policies and economic conditions before and after 1992 in particular migrants from rural to urban areas found it easier to obtain both food and work in the post 1992 era

the information content of losses abstract this study hypothesizes that because shareholders have a liquidation option losses are not expected to perpetuate they are thus less informative than profits about the firm s future prospects the results are consistent with the hypothesis they also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses the liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests

management by the numbers a formal approach to deriving informational and distributional properties of unmanaged earnings we explore the theoretical relation between earnings and market returns as well as the properties of earnings frequency distributions under the assumption that managers use unbiased accounting information to sequentially decide on real options their firms have and report generated earnings truthfully with the market pricing the firm based on those reported earnings we generate benchmarks against which empirically observed earnings returns relations and aggregate earnings distributions can be evaluated this parsimonious model shows a coherent set of results reported losses are less persistent than reported gains decision making diminishes the s shaped market response to earnings and earnings relate to returns asymmetrically in the way documented by basu 1997 furthermore the implied frequency distribution of aggregate earnings is neither symmetric nor necessarily single peaked instead it may exhibit a kink at zero and look similar to the plots reported by burgstahler and dichev 1997 however within our model none of these phenomena are due to reporting noise bias or some undesirable strategic managerial behavior they are the natural consequences of using past earnings as the basis for value increasing managerial decision making that in turn generates the future earnings on which future decisions will be based

capital gains and asset switching abstract we consider an uncertain asset defined on a wiener dividend process which can be exited to a certain asset for low realizations of the dividend and asset value we characterize the value that triggers exit and re entry and observe that pure capital gains in the asset define the switch point we observe an option value of the possibility of exit and note some links between our set up and an alternative measurement of risk aversion

permanent versus transitory components of annual earnings and estimation error in earnings response coefficients abstract previous research has generally estimated unexpected earnings as the change relative to the previous year assuming that shocks to annual earnings are purely permanent in the presence of transitory components of annual earnings we predict that using earnings changes as a proxy for unexpected earnings causes earnings response coefficients to be understated and the estimation error to be negatively cross sectionally correlated with persistence the negative correlation causes the association between earnings response coefficients and persistence to be overstated we use the ima 1 1 model to capture transitory components of annual earnings and obtain results that are consistent with our predictions

multi factor agricultural productivity efficiency and convergence in botswana 1981 1996 abstract this paper applies the sequential malmquist index to calculate multi lateral multi factor productivity mfp indices for agriculture in the 18 districts and the commercial sector of botswana from 1981 to 1996 the mfp index grew at an average rate of 1 7 per annum led by the regions that specialize in livestock which grew at well over 3 per annum this growth was powered by technological change at 4 per year but offset by technical efficiency falling at 2 4 per annum as the commercial sector and the better regions exploited new technologies and infrastructure whereas the less productive areas fell further behind the best practice frontier thus convergence tests show that the gap between the more productive and the poorer regions widened

integrated optimization of procurement processing and trade of commodities we consider the integrated optimization problem of procurement processing and trade of commodities in a multiperiod setting motivated by the operations of a prominent commodity processing firm we model a firm that procures an input commodity and has processing capacity to convert the input into a processed commodity the processed commodity is sold using forward contracts while the input itself can be traded at the end of the horizon we solve this problem optimally and derive closed form expressions for the marginal value of input and output inventory we find that the optimal procurement and processing decisions are governed by price dependent inventory thresholds we use commodity markets data for the soybean complex to conduct numerical studies and find that approximating the joint price processes of multiple output commodities using a single composite output product and using the approximate price process to determine procurement and processing decisions is near optimal compared to a myopic spread option based heuristic the optimization based dynamic programming policy provides significant benefits under conditions of tight processing capacities and high price volatilities finally we propose an approximation procedure to compute heuristic policies and an upper bound to compare the heuristic against when commodity prices follow multifactor processes

market demand for conservative analysts abstract sell side analysts on balance have incentives to emphasize good company news and downplay the bad resulting in inefficient forecasts we conjecture that this behavior generates a demand for forecasts from conservative analysts who unwind this pattern at least in part resulting in more efficient forecasts to investigate we introduce a measure of analyst conservatism and assess the market reaction to analysts forecast revisions conditioned on their past levels of conservatism we find a stronger market reaction to forecast revisions by more conservative analysts and that this result is heightened for companies with greater institutional investor following

a real effects perspective to accounting measurement and disclosure implications and insights for future research accounting measurement and disclosure rules have a significant impact on the real decisions that firms make in this essay we provide an analytical framework to illustrate how such real effects arise using this framework we examine three specific measurement issues that remain controversial 1 how does the measurement of investments affect a firm s investment efficiency 2 how does the measurement and disclosure of a firm s derivative transactions affect a firm s choice of intrinsic risk exposures risk management strategy and the incentive to speculate 3 how could marking to market the asset portfolios of financial institutions generate procyclical real effects we draw upon these real effects studies to generate sharper and novel insights that we believe are useful not only for the development of accounting standards but also for guiding future empirical research

misspecification of capital asset pricing this study documents empirical anomalies which suggest that either the simple one period capital asset pricing model capm is misspecified or that capital markets are inefficient in particular portfolios based on firm size or earnings price e p ratios experience average returns systematically different from those predicted by the capm furthermore the abnormal returns persist for at least two years this persistence reduces the likelihood that these results are being generated by a market inefficiency rather the evidence seems to indicate that the equilibrium pricing model is misspecified however the data also reveals that an e p effect does not emerge after returns are controlled for the firm size effect the firm size effect largely subsumes the e p effect thus while the e p anomaly and value anomaly exist when each variable is considered separately the two anomalies seem to be related to the same set of missing factors and these factors appear to be more closely associated with firm size than e p ratios

accounting for changing prices the value relevance of historical cost price level and replacement cost accounting in mexico this paper investigates the value relevance of historical cost price level and replacement cost accounting using a sample of mexican firms from 1989 to 1995 it contributes to prior research by distinguishing between two distinct aspects of changing prices 1 the change in the general price level and 2 the change in the value of specific non monetary assets i select mexico to examine because it is unique in requiring and disclosing separately price level and replacement cost adjustments a sample of mexican firms also addresses a key reason cited for mixed results in previous assessments of the usefulness of price level and replacement cost accounting using united states data the effects of inflation are too weak to detect high rates of inflation in mexico ranging between 7 and 52 during the sample period mitigate that potential problem results indicate that replacement cost adjustments are relatively and incrementally relevant beyond historical cost and price level measures while price level adjustments are incrementally value relevant beyond historical measures

is comprehensive income superior to net income as a measure of firm performance abstract with the exception of financial firms we find no evidence that comprehensive income is more strongly associated with returns market value or better predicts future cash flows income than net income moreover the only component of comprehensive income that improves the association between income and returns is the marketable securities adjustment our results do not support the claim that comprehensive income is a better measure of firm performance than net income our results also raise questions about the appropriateness of items included in sfas 130 comprehensive income as well as the need for mandating uniform comprehensive income disclosures for all industries

productivity growth in indian agriculture is there evidence of convergence across states this paper explores the question of convergence in total factor productivity tfp in agriculture across fourteen major agricultural states of india using a tornqvist theil index for tfp growth for the period 1973 1993 we find no evidence to support convergence to a single tfp level convergence after grouping the various states on the basis of their productivity performance we find that the high performing states show a gradual movement towards the trend whereas the low performing states generally show more volatility testing for long run convergence in levels of agricultural productivity we find evidence of conditional beta convergence after controlling for state specific factors and idiosyncratic year specific volatility the results are robust to alternative specifications of tests of unit root in panel data developed recently

three paradigms for the role of capitalization requirements in insured financial institutions standard models for deposit insurance strike analogies to more familiar financial contracts and conceive of risk as exogenous the oldest model of deposit insurance likens it to passively underwriting casualty insurance a more sophisticated but still bilateral model likens deposit insurance to writing a passive put option on the enterprise whose funding is insured delays in acknowledging the wreck of the s l industry and its federal insurer fslic discredit these models as guides to managing a deposit insurance fund deposit insurance is better interpreted as a trilateral performance bond that enhances the credit of an insured institution this interpretation endogenizes risk emphasizes incentive conflict and underscores the need to optimize loss control activity the bonding model clarifies that a subset of the monitoring and disciplinary activities traditionally undertaken by government officials can usefully be privatized

the valuation of the foreign income of us multinational firms a growth opportunities perspective we demonstrate the value relevance of foreign earnings for us multinational firms by examining the associations between annual abnormal stock performance and changes in firms domestic and foreign incomes for 2570 tirm year observations between 1985 and 1993 both foreign and domestic earnings changes have significant positive associations with annual excess return measures however the association coefficient on foreign income is significantly larger than the association coefficient on domestic income we demonstrate this larger association coefficient for foreign income is consistent with differences in growth opportunities between domestic and foreign operations

empirical research on accounting choice abstract we review research from the 1990s that examines the determinants and consequences of accounting choice structuring our analysis around the three types of market imperfections that influence managers choices agency costs information asymmetries and externalities affecting non contracting parties we conclude that research in the 1990s made limited progress in expanding our understanding of accounting choice because of limitations in research design and a focus on replication rather than extension of current knowledge we discuss opportunities for future research recommending the exploration of the economic implications of accounting choice by addressing the three different reasons why accounting matters

excessive continuation and dynamic agency costs of debt abstract this paper analyses the incentives of the equityholders of a leveraged company to shut it down in a continuous time stochastic environment keeping the firm as an ongoing concern has an option value but equity and debt holders value it differently equityholders decisions exhibit excessive continuation and reduce firm s value using a compound exchange option approach we characterise the resulting agency costs of debt derive the price of these costs and analyse their dynamics we also show how agency costs can be reduced by the design of debt

earnings as an explanatory variable for returns in this paper we investigate whether the level of earnings divided by price at the beginning of the stock return period is relevant for evaluating earnings returns associations the primary model motivating this research relies on the idea that book value owners equity and market value are both stock variables indicating the wealth of the firm s equity holders the related flow variables after adjusting for dividends are respectively earnings divided by price at the beginning of the return period a p 1 and market returns it then follows that earnings divided by beginning of period price should be associated with stock returns although models based on a relation between market value and book value are used occasionally in the accounting research literature see for example landsman 1986 harris and ohlson 1987 and barth

do analysts understand the economic and reporting complexities of derivatives we investigate whether and how the complexity of derivatives influences analysts earnings forecast properties using a difference in differences design we find that relative to a matched control sample of non users analysts earnings forecasts for new derivatives users are less accurate and more dispersed after derivatives initiation these results do not appear to be driven by the economic complexity of derivatives but rather the financial reporting of such economic complexity overall despite their financial expertise analysts routinely misjudge the earnings implications of firms derivatives activity however we find evidence that a series of derivatives accounting standards has helped analysts improve their forecasts over time

fair value disclosures by bank holding companies abstract this paper examines the value relevance of fair value data disclosed under sfas 107 by banks for 1992 and 1993 collectively the evidence suggests differences between fair and book values of financial instruments are associated with market to book ratios however fair value disclosures for financial instruments other than securities are value relevant only in limited settings in addition only in 1992 are fair value variables associated with market to book ratios after incorporating existing historical cost information further analysis suggests the weaker 1993 results are not necessarily due to increased measurement error in fair value numbers

the relevance of the value relevance literature for financial accounting standard setting another view this paper explains that value relevance research assesses how well accounting amounts reflect information used by equity investors and provides insights into questions of interest to standard setters a primary focus of financial statements is equity investment other uses of financial statement information such as contracting do not diminish the importance of value relevance research value relevance questions can be addressed using extant valuation models value relevance studies address econometric issues that otherwise could limit inferences and can accommodate and be used to study the implications of accounting conservatism r 2001 elsevier science b v all rights reserved jel classification m41 m44 g12

investor reaction to celebrity analysts the case of earnings forecast revisions we examine the effects of analysts celebrity on investor reaction to earnings forecast revisions we measure celebrity as the quantity of media coverage analysts receive in sources included in the dow jones interactive database and find that media coverage is positively related to investor reaction to forecast revisions the effect of celebrity on the reaction to forecast revisions remains significant after controlling for forecast performance variables examined in prior studies ex post forecast accuracy ex ante accuracy award status and other variables shown to be related to forecast accuracy while these results are consistent with the familiarity of the analyst s name affecting the market reaction we cannot rule out that our measure of celebrity is correlated with error in the performance measures we examine and or correlated with other unexamined dimensions of forecast performance a content analysis of a random subsample of the media coverage of our sample analysts suggests that our

convergence in italian regional per capita gdp this paper addresses the issue of convergence of per capita gdp of the 20 italian regions the paper first focuses on the notion of convergence and proposes a new hierarchical clustering algorithm grouping regions according to the presence of a monotonically decreasing trend in entropy then alternative definitions of long run convergence are given based on the notion of cointegration and common trends and the evidence arising from application of stationarity tests to the time series of regional contrasts is examined the conclusion is that both kind of convergence can be used to characterize the dynamics of regional per capita gdp

repeated real options optimal investment behaviour and a good rule of thumb abstract this paper extends the standard investment under uncertainty set up with a single investment option to the case of infinitely repeated options analytical solutions are derived and it is shown that repeated options not only imply a smaller value of waiting than in the case of a single option but also that the optimal stopping rule is affected differently by changes in underlying parameters this is shown to allow for the use of a simple hurdle rate rule as a good and robust approximation to optimal behaviour when investment options are repeated something which is unlikely in the single option case

experimental design in tests of linear factor models for various reasons cross sectional tests of linear factor models have employed the returns on portfolios of assets as opposed to individual securities there is a good deal of flexibility in how one goes about choosing which portfolios to examine the experimental design this article points out that some choices can lead to collinearity among factor loadings with potentially harmful consequences for power a diagnostic procedure for detecting collinearity is discussed and several illustrations of the procedure on existing tests of linear factor models are used to illustrate their value to the researcher finally a series of experiments is carried out to validate the diagnostics and to confirm their assessment of the experimental design in the models examined

why have measures of earnings quality changed over time the properties of earnings have changed dramatically over the past 40 years prior studies interpret this trend as a decline in earnings quality but disagree on whether it results from changes in the real economy or changes in accounting standards i find that each new cohort of listed firms exhibits lower earnings quality than its predecessors mainly because of higher intangible intensity i conclude that the trend of decline in earnings quality is due more to changes in the sample of firms than to changes in generally accepted accounting principles gaap or in the earnings quality of previously listed firms

insider trading earnings changes and stock prices this study empirically examines the relation between reportable insider trading and the information captured by annual unexpected earnings for a large sample of firms spanning a ten year period 1978 87 each observation is assigned to one of four groups based on the direction of net insider trading buy sell and the sign of unexpected earnings for each of these groups 15 month cumulative abnormal returns are regressed on annual unexpected earnings the slope coefficient is the largest for the group where insiders are net purchasers and the sign of unexpected earnings is positive this is consistent with an inference that insider buying interactively confirms the favorable information captured by positive unexpected earnings and this interaction reduces the noise in unexpected earnings the result with regard to the unfavorable information captured by the group with insider selling and negative unexpected earnings is similar but less pronounced the analysis also suggests that insider trading conveys information not fully captured by the year s earnings

has the information content of quarterly earnings announcements declined in the past three decades this paper examines changes in the information content of earnings over the past three decades using the two metrics from beaver 1968 abnormal trading volume and abnormal return volatility we find no evidence of a decline in the information content of earnings announcements over the past three decades as measured by both abnormal trading volume and return volatility around quarterly earnings announcements if anything our results suggest an increase over time in the informativeness of quarterly earnings announcements variables reflecting changes in firm specific factors account for a portion of the observed increase

evaluating pharmaceutical r d under technical and economic uncertainty this study sets up a compound option approach for evaluating pharmaceutical r d investment projects in the presence of technical and economic uncertainties technical uncertainty is modeled as a poisson jump that allows for failure and thus abandonment of the drug development economic uncertainty is modeled as a standard diffusion process which incorporates both up and downward shocks practical application of this method is emphasized through a case analysis we show that both uncertainties have a positive impact on the r d option value moreover from the sensitivity analysis we find that the sensitivity of the option with respect to economic uncertainty and market introduction cost decreases when technical uncertainty increases

the value relevance of german accounting measures an empirical analysis in this study we compare the value relevance of accounting measures for u s and german firms matched on industry and firm size and evaluate the incremental informativeness of earnings adjusted on the basis of a formula proposed by analysts german companies have been at the center of a controversy between the new york stock exchange nyse and the securities and exchange commission sec the controversy arises from the sec s insistence that to list on a u s stock exchange non u s companies must reconcile earnings and shareholders equity to u s generally accepted accounting practice u s gaap fuerbringer 1992 and jarrell 1992 41 the nyse s concern has been that

dividend taxation in firm valuation new evidence in this paper we develop a residual income model showing how taxes on dividends affect the relative valuation of retained earnings versus contributed equity as well as the value of expected future earnings tests of predictions from our model for a sample of compustat firms from 197594 suggest that overall firm value and the relative valuation weights investors assign to retained earnings contributed equity and current earnings all critically depend on dividend taxes the findings also suggest that investors take a proprietary perspective in valuation and impute an unrecorded shareholder level tax liability on retained earnings the u s tax system subjects retained earnings to dividend taxes upon distribution to shareholders while contributed equity is returned to shareholders as a nontaxable return of capital from the shareholder s proprietary perspective therefore retained earnings should be valued on

do security analysts improve their performance with experience we investigate if sell side security analysts generate more accurate quarterly earnings forecasts and more profitable stock recommendations as their experience following a specific firm increases we measure firmspecific experience as the number of prior quarters for which the analyst has issued an earnings forecast for the firm if analysts improve their forecasting performance with repetition as suggested by the learning by doing lbd model an analyst s earnings forecasts will become more accurate with experience prior empirical work provides mixed evidence on whether analysts exhibit individual forecasting performance differences e g butler and

the evolution of new industries and the determinants of market structure several empirical regularities concerning firm growth rates and industry firm size distributions have been developed by studying primarily mature industries the primary purpose of this article is to bring together and extend empirical regularities on the evolution of new industries and to use these regularities to gain further insight into the forces governing industry evolution to explain these regularities a model is constructed which emphasizes how factors governing the early evolution of industries may shape their market structure at maturity it stresses how chance events and exogenous factors that influence the number of potential entrants to the industry the growth rate of incumbents and the ease of imitation of industry leaders will influence the ultimate number and size distribution of firms in the industry

the association between stock returns and foreign gaap earnings versus earnings adjusted to u s gaap abstract this study examines the association between stock returns and foreign gaap earnings versus earnings adjusted to u s gaap using a sample of foreign firms with common stock or american depositary receipt adr traded in u s exchanges we compare the returns earnings relations between u s and foreign gaap based earnings results based on the ja test indicate that earnings based on foreign gaap are more closely associated with contemporaneous stock returns than earnings reconciled to u s gaap we find evidence that our results may be driven by institutional factors which are specific to foreign markets

agricultural productivity in developing countries abstract this paper examines changes in agricultural productivity in 18 developing countries over the period 1961 1985 we use a nonparametric output based malmquist index and a parametric variable coefficients cobb douglas production function to examine whether our estimates confirm results from other studies that have indicated declining agricultural productivity in ldcs the results confirm previous findings indicating that at least half of these countries have experienced productivity declines in agriculture

should intangibles be measured what are the economic trade offs we investigate whether a firm s intangible investments should be measured and separated from operating expenses we find that the information extracted from accounting reports of investments and earnings is different when intangibles are measured and identified separately from operating expenses than when intangibles are left commingled with operating expenses this difference in the market s information causes a change in the behavior of market prices inducing changes in the firm s investments and cash flows thus from a real effects perspective measuring intangibles is not unambiguously desirable we identify the conditions under which providing information on intangibles may be desirable this study also shows the inadequacy of statistical associations between accounting numbers and prices as a basis for evaluating the desirability of measuring intangible investments we show that the measurement of intangibles alters the very distribution of cash flows about which the measurement regime is seeking to provide information

does eva beat earnings evidence on associations with stock returns and firm values this study tests assertions that economic value added eva is more highly associated with stock returns and firm values than accrual earnings and evaluates which components of eva if any contribute to these associations relative information content tests reveal earnings to be more highly associated with returns and firm values than eva residual income or cash flow from operations incremental tests suggest that eva components add only marginally to information content beyond earnings considered together these results do not support claims that eva dominates earnings in relative information content and suggest rather that earnings generally outperforms eva

real convergence in some central and eastern european countries this article examines the real convergence hypothesis in some central and east european countries both towards the german and the us economies by means of using time series techniques during the period 1950 to 2003 no evidence is found of real convergence for the whole period however when one allows for structural breaks evidence is found of a catch up process during the 1990s to 2003 period for poland the czech republic and hungary towards germany and only for poland towards the us economy

pitfalls in cross section studies with integrated regressors a survey and new developments in cross section studies if the dependent variable is i 0 but the regressor is i 1 the true slope must be zero in the resulting unbalanced regression a spuriously significant relationship ma

investor sophistication and market earnings expectations this paper investigates whether sophisticated investors rely more on analyst forecasts than on time series model forecasts in forming expected earnings although analyst forecasts are generally more accurate than time series model forecasts e g o brien 1988 analyst forecasts are not clearly superior to time series model forecasts as a proxy for expected earnings e g brown et al 1987b recent research has concluded that earnings expectations reflected in stock prices at least partially reflect a seasonal random walk srw model bernard and thomas 1990 and abarbanell and bernard 1992 in particular ball and bartov 1996 find that market earnings expectations incorporate the sign of the serial correlation in seasonally differenced earnings but underestimate the correlation magnitude see also maines and hand 1996 these findings suggest that at least some market participants ignore public information in forming expected earnings i examine whether information usage is correlated with investor sophistication and or the degree to which investors are informed

capital market effects of u s canada gaap differences canadian firms that list securities on u s stock exchanges are generally required to provide a reconciliation of reported income measured using canadian generally accepted accounting principles gaap to reported earnings measured using u s gaap this paper examines both the magnitudes and the information content of the reported reconciliations between canadiangaap income and u s gaap income two recent studies of cross country gaap differences do not address u s canada differences because of perceived similarities between gaap in the two countries amir harris and venuti 1993 and mcqueen 1993 if u s canada gaap differences are in fact unimportant then no further examination is warranted professional bodies however are

retracted relationship incentives and the optimistic pessimistic pattern in analysts forecasts we examine whether analysts incentives to maintain good relationships with management contribute to the optimistic pessimistic within period time trend in analysts forecasts in our experiments 81 experienced sell side analysts from two brokerage firms predict earnings based on historical information and management guidance analysts forecasts exhibit an optimistic pessimistic pattern across the two timing conditions early and late in the quarter and the effect is significantly stronger when the analysts have a good relationship with management than when their only incentive is to be accurate debriefing results indicate that analysts are aware of this pattern of forecasts and believe that this benefits their future relationships with management and with brokerage clients the analysts most frequently cite favored conference call participation and information access when describing benefits from maintaining good relationships with management our results suggest the following the optimistic pessimistic pattern in forecasts is in part a conscious response to relationship incentives information access is perceived to be a major benefit of management relationships and recent regulatory changes may have lessened but have not eliminated this conflict of interest source

relative valuation roles of equity book value and net income as a function of financial health abstract this study tests predictions that pricing multiples on and incremental explanatory power of equity book value net income increase decrease as financial health decreases tests using a sample of 396 bankrupt firms and tests using a larger pooled sample both yield inferences consistent with predictions findings are robust to inclusion of controls for industry size return on equity and volatility of equity returns equity book value and net income multiples and incremental explanatory power vary predictably across three illustrative industries selected based on the likely extent of unrecognized intangible assets

initial evidence on the role of accounting earnings in the bond market we document that 1 the incidence of bond trade increases during the days surrounding earnings announcements 2 there is a bond price reaction to the announcement of earnings and 3 there is a positive association between annual bond returns and both annual changes in earnings and annual analysts forecast errors all of these effects are larger when earnings convey bad news or when the underlying bond is more risky taken together our results suggest that the nonlinear payoff structure of bond securities affects the role of accounting earnings in the bond market

accounting for the impairment of long lived assets evidence from the petroleum industry abstract we investigate write downs of assets of oil and gas firms due to the application of the sec full cost ceiling test during the period of the largest decline in oil and gas prices since this test was mandated the correlation between the write down amounts and contemporaneous returns is statistically significant but it is lower than the correlation with lagged returns this and other evidence suggests that although the market perceived that some of the decline in asset value occurred in the quarter in which the write down was recorded much of the share market price adjustment due to this decline occurred earlier

the effect of issuing biased earnings forecasts on analysts access to management and survival this study offers evidence on the earnings forecast bias analysts use to please firm management and the associated benefits they obtain from issuing such biased forecasts in the years prior to regulation fair disclosure analysts who issue initial optimistic earnings forecasts followed by pessimistic earnings forecasts before the earnings announcement produce more accurate earnings forecasts and are less likely to be fired by their employers the effect of such biased earnings forecasts on forecast accuracy and firing is stronger for analysts who follow firms with heavy insider selling and hard to predict earnings the above results hold regardless of whether a brokerage firm has investment banking business or not these results are consistent with the hypothesis that analysts use biased earnings forecasts to curry favor with firm management in order to obtain better access to management s private information