associations between alternative accounting profitability measures and security returns the importance of accounting information on security price determination is of interest to both security analysts and accountants beaver 3 downes and dyckman 6 gonedes 12 beaver and manegold 4 and others have investigated the possible relationships between accounting information and market information rosenberg 26 has shown the existence of extra market components of covariance in security returns while simkowitz and logue s l 28 have derived the interdependent structure of security returns however none of this research has explicitly investigated how the empirical results can be affected by alternative accounting profitability measures within an industry simultaneously

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

changes in the probability of bankruptcy and equity value abstract work in finance suggests that changes in the probability of bankruptcy likely affect firm value by affecting perceptions of the cost of transacting with the firm in this paper accounting information from the balance sheet as well as the income statement is used in conjunction with ohlson s 1980 bankruptcy prediction model to calculate unexpected changes in the probability of bankruptcy for a sample of firms with a large estimated probability of bankruptcy sometime during the ten year study period unexpected changes in the probability of bankruptcy are useful in explaining security returns even after controlling for unexpected earnings

evolution in games with randomly disturbed payoffs we consider a simple model of stochastic evolution in population games in our model each agent occasionally receives opportunities to update his choice of strategy when such an opportunity arises the agent selects a strategy that is currently optimal but only after his payoffs have been randomly perturbed we prove that the resulting evolutionary process converges to approximate nash equilibrium in both the medium run and the long run in three general classes of population games stable games potential games and supermodular games we conclude by contrasting the evolutionary process studied here with stochastic fictitious play

leveraged investments and agency conflicts when cash flows are mean reverting we analyse the effect of mean reverting cash flows on the costs of shareholder bondholder conflicts arising from partially debt financed investments in a partial equilibrium setting we find that such agency costs are significantly lower under mean reverting mr dynamics when compared to the ubiquitous geometric brownian motion gbm the difference is attributed to the stationarity of the mr process in addition through the application of a novel agency cost decomposition we show that for a larger speed of mean reversion agency costs are driven mainly by suboptimal timing decisions as opposed to suboptimal financing decisions in contrast under the standard gbm assumption the agency costs are driven mainly by suboptimal financing decisions for large growth rates and by suboptimal timing decisions for smaller or negative growth rates

exploiting ergodicity in forecasts of corporate profitability abstract theory suggests that competition tends to equalize profit rates through the process of capital reallocation and numerous studies have confirmed that profit rates are indeed persistent and mean reverting recent empirical evidence further shows that fluctuations in the profitability of surviving corporations are well approximated by a stationary laplace distribution here we show that a parsimonious diffusion process of corporate profitability that accounts for all three features of the data achieves better out of sample forecasting performance across different time horizons than previously suggested time series and cross sectional models as a consequence of replicating the empirical distribution of profit rates the model prescribes a particular strength or speed for the mean reversion of all returns which leads to superior forecasts of individual time series when we exploit information from the cross sectional collection of firms the new model should appeal to managers analysts investors and other groups of corporate stakeholders who are interested in accurate forecasts of profitability to the extent that mean reversion in profitability is the source of predictable variation in earnings our approach can also be used in forecasts of earnings and is thus useful for firm valuation

stock price reactions to lifo adoptions the association between excess returns and lifo tax savings although long a topic of accounting research little is known about the motives for or effects of voluntary changes in accounting techniques among the motives which have been suggested are attempts by managers to smooth reported earnings gordon 1964 copeland 1968 cushing 1969 white 1972 and ronen and sadan 1981 to influence man agement compensation to reduce regulatory or political costs watts and zimmerman 1978 and to avoid bond covenant restrictions holthausen 1981 while some of these motives may be consistent with a market value rule they often fail to provide unambiguous accounting change predictions e g which accounting changes result in lower regulatory costs moreover empirical verification has been constrained by the unobservability of the variables to which the managers allegedly respond the stock price reaction which should be expected for a given account ing change depends not only on its implications for the valuation of securities but also on the extent to which the implications are already known or anticipated by investors 3 ultimately our ability to detect these stock price effects if any depends on the power of our tests previous studies of the effects of accounting changes have generally not found significant stock price reactions archibald 1972 ball 1972 kaplan and roll 1972 harrison 1977 and holthausen 1981 4 for the most part these studies dealt with accounting changes which had no direct cash flow effects in contrast changes in inventory costing methods especially those involving the last in first out lifo cost flow assumption can generate potentially large changes in a firm s cash flows due to their impact on taxable earnings these cash flow effects provide not only a motive for lifo changes5 which is consistent with the market value rule but also implications for associated stock price effects if investors react to lifo s cash flow implications rather than to its effects on reported earnings then positive stock price adjustments should be associated with lifo adjustments however the evidence from previous studies of stock price reactions to lifo adoptions is inconclusive ball 1972 sunder 1973 1975 abdel khalik and mckeown 1978 brown 1980 and ricks 1982 while several factors may account for these results see section 2 it can be noted that the previous studies have considered only a dichotomous variable whether or not a firm has adopted lifo yet because the cash flow consequences of a lifo adoption decision depend on a number of firm specific factors this approach ignores potentially large differences among firms in the economic consequences of lifo adoptions most firms switching to lifo now reveal in their financial statement disclosures the tax savings which have been realized this study uses these disclosures to examine the association between unsystematic re turns and the magnitudes of first year lifo tax savings for all nyse firms which adopted or extended their use of lifo during the period 1972 80 subject to data availability 6 the research design employs within group comparisons based on cumulative monthly unsystematic excess returns with appropriate controls for unexpected earnings per formance 7 this design avoids several methodological weaknesses inherent in the previous studies and allows more definitive tests of hypotheses relating investor reactions to the income and cash flow effects of lifo adoptions as reported more fully below results based on lifo adoptions made in 1974 are consistent with a positive association between cumulative excess stock returns and the magnitudes of lifo tax savings 8 the results also provide evidence that changes in systematic risk may accompany lifo adoptions however contrary to previous studies most of the sample firms exhibit downward rather than upward changes in systematic risk section 2 reviews the previous studies of stock price reactions to lifo adoptions and suggests explanations for their results section 3 discusses the alternative approach employed in this study while section 4 describes the test methodologies employed the data and data selection procedures are described in section 5 the results and a discussion are presented in section 6 section 7 offers some conclusions

adjustment dynamics and rational play in games when a given strategic situation arises repeatedly the possibility arises that equilibrium predictions can be justified by a dynamic adjustment process we examine myopic adjustment dynamics a class that includes replicator dynamics from evolutionary game theory simple models of imitation models of experimentation and adjustment and some simple learning dynamics we present a series of theorems showing conditions under which behavior that is asymptotically stable under some such dynamic is strategically stable in the sense of kohlberg and mertens this behavior is thus as if the agents in the economy satisfied the extremely stringent assumptions that game theory traditionally makes about rationality and beliefs journal of economic literature classification number c72

market based empirical research in accounting a review interpretation and extension a decade and a half of the most concerted and ambitious research effort in accounting history is evaluated here it is the search into the relationship between publicly disclosed accounting information and the consequences of the use of this information by the major group of usersequity investors as such consequences are reflected in characteristics of common stocks traded in major exchanges this research effort known as market based accounting research mbar obtained its impetus from major developments in finance theory during the late 1950s and early 1960s these were the portfolio selection theory and its offspring the capital asset pricing model capm and the concept of informationally efficient capital markets ecm subsequent developments in information economics agency theory and optimal incentive signaling models were quickly incorporated into mbar while the impetus to this line of research came from other disciplines accounting was not only a beneficiary but also to a modest extent a benefactor mbar is relevant to the study of capital market efficiency the capm information economics and regulation this contribution distinguishes mbar from most accounting areas whose contributions to other disciplines are negligible in

time series distributional properties of financial ratios empirical evidence from finnish listed firms abstract the distributional properties of time series accounting numbers are studied first the distributional characteristics of raw financial ratio distributions are investigated second the normality of the accounting index model residuals is researched by doing this one aims to consider the firm specific and economy wide effects on the observed nonnormalities in financial ratio distributions empirical evidence indicates that a substantial part of the nonnormalities in financial ratio distributions is caused by economy wide effects

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

growth and value hybrid valuation model based on mean reversion abstractthis article proposes a novel valuation model growth and value hybrid model to estimate the stock price this proposed model combines the essence of the asset based approach the income based approach and the principle of mean reversion to develop the theoretical closed form formula consisting of three coefficients value coefficient value support coefficient and growth coefficient regression analysis is employed to fit market data to determine these coefficients moreover this study proposes the double sorting method to build the quantile regression models of the formula to estimate the stock price at a specific quantile the results show that the predictive capability of the hybrid valuation model is superior to the model without using value support coefficient which supports the assumption that the pbr is not associated with the roe when the roe is less than a threshold in different time periods of the stock market no significant difference exists on the value support coefficient howe

assimilating earnings and split information abstract recent studies have implied that the capital market has become more efficient with respect to the announcements of stock splits and corporate earnings this study calculated residual returns associated with these announcements and then tested by time period early and late years for a between period difference the results suggest that for certain earnings and split announcements the market is no more efficient than it has been in the past

accounting measurement price earnings ratio and the information content of security prices a number of papers for example beaver lambert and morse 1980 beaver lambert and ryan 1987 collins kothari and rayburn 1987 and freeman 1987 have documented that stock prices lead accounting earnings these investigations have led to the conclusions that prices provide information about earnings ahead of time and that earnings capture events that affect security prices with a lag the study of p e ratios has supported those conclusions and also produced additional insights beaver and morse 1978 have shown that pie ratios not only predict future earnings changes but they also identify transitory aspects of current earnings investors utilize other information in setting prices which provides both a prediction of future earnings and an indication of whether current earnings are representative of future earnings thus a comparison of price to earnings in a p e calculation can indicate the extent to which current earnings are transitory 1 in this paper we show that information in prices that leads future earnings is contained in financial statements while accrual accounting

an analysis of the use of accounting and market measures of performance in executive compensation contracts prior research has provided useful insights into the structure of compensation plans and their incentive effects however one important limitation of these studies is the virtual absence of any cross sectional analyses of the attributes of compensation contracts 2 this absence is related in part to the problems associated with controlling for other factors that affect compensation that is compensation contracts are

a model of capital structure when earnings are mean reverting a multiperiod model of optimal capital structure is developed under the assumption that earnings follow an autoregressive process firm value and leverage vary through time and at each date the firm achieves an optimal debt level that is a function of the full state contingent debt policy the reversion parameter of the earnings series is shown to be positively related to various measures of variability and negatively related to leverage if earnings processes are not homogeneous across firms then standard earnings risk measures in capital structure studies do not adequately represent crosssectional differences in variability in firm value

the projection dynamic and the geometry of population games abstract the projection dynamic is an evolutionary dynamic for population games it is derived from a model of individual choice in which agents abandon their current strategies at rates inversely proportional to the strategies current levels of use the dynamic admits a simple geometric definition its rest points coincide with the nash equilibria of the underlying game and it converges globally to nash equilibrium in potential games and in stable games

a divisible search model of fiat money this paper extends the kiyotaki wright search model of fiat money to allow for divisible money and goods the extension allows me to examine the standard issues in monetary economics such as the neutrality and superneutrality of money by severing the artificial link in the kiyotaki wright model between the money supply and the number of money holders it is shown that money is neutral but not superneutral money growth generates a trading opportunity effect it changes the fraction of different agents in the economy and hence changes the probability with which agents have a successful match in addition money growth has a negative effect on the real money balance that is familiar in walrasian monetary models the balance of the two effects can imply a positive optimal money growth rate

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

coexistence of money and interest bearing securities abstract a random matching model with money is used to study the nominal yield on small denomination bearer safe discount securities issued by the government there is always one steady state with matured securities circulating at par and for some parameters another with them circulating at a discount in the former a necessary and sufficient condition for a positive nominal yield on not yet matured securities is exogenous discriminatory treatment of them by the government in the latter the post maturity discount on securities induces a deeper pre maturity discount even without such discriminatory treatment

evidence on the effect of bond covenants and management compensation contracts on the choice of accounting techniques the case of the depreciation switch back abstract provisions of bond indenture agreements and management compensation contracts are examined to derive testable implications concerning management s incentives to choose among alternative accounting techniques the hypotheses are subjected to empirical examination by investigating the voluntary change from accelerated to straight line depreciation for financial reporting purposes only the methodology utilized incorporates an expectations model of accounting earnings in an attempt to separate out of the effects of earnings announcements from accounting change announcements which are often concurrent the evidence from both price and non price data is not consistent with the general hypothesis that bond covenants and management compensation contracts are important determinants of the decision to change depreciation techniques five potential explanations for the results are offered

aspiration level effects an empirical investigation abstract theories of aspiration level effects predict that decisions under uncertainty will depend on whether performance is above or below some target level of performance a sample of 5000 quarterly earnings announcements by publicity held companies listed on the compustat and crsp data bases is examined to test this hypothesis four models from the current accounting literature are used as alternative estimates of the target level of earnings for these firms when earnings are announced the difference between actual and forecast earnings here called a forecast error can be computed the data indicate that the relationship between valuation and forecast error differs conditional on the sign of the forecast error

the market s response to the 1974 lifo adoptions in this paper i report the results of a study of stock price reactions to lifo adoptions in 1974 and 1975 these two years were characterized by high levels of inflation and wide swings in stock prices and more than 400 firms on the new york and american stock exchanges switched to lifo previous studies see below provide conflicting results of the market s reaction to lifo adoptions these studies exhibit certain research design and small sample limitations which prevent one from resolving the issue of how the market reacts to lifo switches using a better matched pair design and a larger sample i conclude that lifo adopters suffered negative abnormal return performance during the period surrounding their annual earnings announcements while several possible explanations for this result are discussed additional research is needed to provide further insight into the nature of the market reaction to lifo adoption

toward a theory of financial accounting welfare and public information in this paper we employ the concepts of neoclassical welfare economics to consider the role of publicly available information in various market configurations modeling pure exchange economies the need for such a study arises for several reasons first while the existing process of producing and disseminating accounting information may with some oversimplification be described as generating publicly available information there has been no systematic study of the effects of such a process on either the allocational efficiency of a market or on the broader welfare implications of such information for the participants transacting in such a market second the existing literature fails at least to some extent to capture the flavor or spirit of the role of public information in a market setting at first glance it might appear that information would have no social benefit in a pure exchange economy since it does not increase the aggregate supply of consumptive goods across states and dates as will be demonstrated this impression is not justified as a general conclusion the important dimension of information is that it affects perceived risks

earnings volatility and earnings predictability abstract survey evidence indicates widely held managerial beliefs that earnings volatility is negatively related to earnings predictability in addition existing research suggests that earnings volatility is determined by economic and accounting factors and both of these factors reduce earnings predictability we find that the consideration of earnings volatility brings substantial improvements in the prediction of both short and long term earnings conditioning on volatility information also allows one to identify systematic errors in analyst forecasts which implies that analysts do not fully understand the implications of earnings volatility for earnings predictability

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

a note on best response dynamics we investigate the relationship between the continuous time best response dynamic its perturbed version and evolutionary dynamics in relation to mixed strategy equilibria we find that as the level of noise approaches zero the perturbed best response dynamic has the same qualitative properties as a broad class of evolutionary dynamics that is stability properties of equilibria are robust across learning dynamics of quite different origins and motivations journal of economic literature classification numbers c72 d83

relation between market model prediction errors and omitted variables a methodological note a number of accounting studies have examined market model prediction errors to evaluate the share price effects of various events such as voluntary or mandatory accounting changes a common approach is to examine the prediction errors around the event date of a portfolio of potentially affected firms this approach has been extended recently through the use of cross sectional regressions e g leftwich 1981 holthausen 1981 collins rozeff and dhaliwal 1981 sepe 1982 and chow 1983 in which prediction errors or raw returns are regressed on firm specific variables such as size the purpose of this paper is to examine the implications of some recent findings in finance for the various finance based empirical accounting studies in general two types of omitted variables from the standard capital assets pricing model have been identified first several studies have reported that certain firm specific variables such as size banz 1981 and reinganum 1981 earnings yield basu 1975 1983 and dividend payout ratio litzenberger and ramaswamy 1979 may be omitted variables from the standard capm in addition other studies have found some special time series characteristics of stock returns such

autoregressive modeling of earnings investment causality the purpose of this paper is to empirically test the relationships between corporate earnings and investment in particular the study investigates whether knowledge of past investments improves the prediction of future earnings beyond predictions that are based on past earnings alone similarly it investigates whether knowledge of past earnings improves the prediction of future investments beyond knowledge of past investments alone this is the empirical definition of granger causality the empirical results show that the bivariate past series of earnings and investments is superior to the univariate series in predicting future investments but not in predicting future earnings

the ex ante and ex post price effects of quarterly earnings announcements reflected in option and stock prices the subject of this study is the effect of investors anticipations of impending informative disclosures on the behavior of option and stock prices our approach introduced in a previous paper patell and wolfson 1979 and substantially extended here represents the following significant departure from traditional information content studies instead of analyzing security price reactions to announcements we analyze preannouncement option prices in order to discern investors beliefs about the range of possible stock price reactions expected to accompany a forthcoming disclosure whose actual content is not yet known in the tests reported here we focus on quarterly earnings announcements as disclosure events whose timing is predictable and we attempt to detect their systematic influence on the relationship between stock and option prices our operational definition of information content emphasizes changes in the variability of common stock returns in response to earnings disclosures while market efficiency precludes investors from predicting the direction of the stock price change which will accompany a future earnings announcement it is likely that investors will anticipate increased price variability at the time of disclosure and indeed several studies have documented announcement date increases in stock price volatility

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

the association between accounting earnings and security returns for large and small firms abstract the differential information hypothesis advanced by atiase 1980 states that information production and dissemination by private parties for the purpose of identifying mispriced securities is an increasing function of firm size this study examines two corollaries of that hypothesis first security prices of large firms anticipate accounting earnings earlier than security prices of small firms second for a given level of unexpected earnings the cumulative abnormal returns of small firms exceed those of large firms the results are generally consistent with atiase s hypothesis

excess payoff dynamics and other well behaved evolutionary dynamics abstract we consider a model of evolution in games in which agents occasionally receive opportunities to switch strategies choosing between them using a probabilistic rule both the rate at which revision opportunities arrive and the probabilities with which each strategy is chosen are functions of current normalized payoffs we call the aggregate dynamics induced by this model excess payoff dynamics we show that every excess payoff dynamic is well behaved regardless of the underlying game each excess payoff dynamic admits unique solution trajectories that vary continuously with the initial state identifies rest points with nash equilibria and respects a basic payoff monotonicity property we show how excess payoff dynamics can be used to construct well behaved modifications of imitative dynamics and relate them to two other well behaved dynamics based on projections

evolutionary implementation and congestion pricing we consider an implementation problem faced by a planner who manages a roadway network the problem entails both hidden information and hidden actions we solve the planner s problem by introducing a new class of mechanisms and a new notion of implementation the mechanisms called price schemes attach transfers to the available routes they do not involve direct revelation the method of implementation is evolutionary requiring that players who follow any reasonable myopic adjustment process eventually learn to behave as the planner desires we show that efficient behaviour can be guaranteed using simple decentralized price schemes

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

the systematic risk of corporate bonds this statement presents the usual perception of bond risk it is striking in that it does not discuss what is from a portfolio theoretic view the risk of a bond the covariance of its return with the returns of other assets this is in contrast to the typical discussion of the riskiness of common stocks where we find some discussion of systematic risk and the role it plays in determining equilibrium expected security returns

econometric properties of alternative security return methods in recent years security price research has experienced a proliferation of research designs as a result there is a lack of interstudy comparability which is aggravated by the absence of a formal analysis of the properties of the alternative designs under various conditions the purpose here is to examine one important aspect of research design the choice of the security return measure in a simple but well defined setting of limited parameter uncertainty the analysis leads to the following results 1 with respect to raw returns versus residual returns it explicitly offers three potential rationales for residual returns as such the analysis provides a formal statement of the reasons for residual analyses to supplement the intuitive but less precise statements in the early literature 2 with respect to residual return versus difference in returns methods the analysis indicates the conditions under which a the residual approach dominates the difference in returns approach as judged by the statistical criteria examined b the converse holds and c the two methods possess the same econometric properties 3 the relative properties described in 2 are derived for a general model of nonzero covariation among returns and for two important special cases the zero beta model and the industry effects model

on cross sectional analysis in accounting research abstract this paper examines cross sectional analysis procedures common to many market based accounting research papers both the economic and econometric properties of levels and returns studies are discussed topics covered include the relations between the accounting studies and cash flow valuation models the role of expectations of accounting variables deflators spurious inference risk adjustment and its relation to growth size and leverage residual dependence dependence among explanatory variables and the effect of scale differences across firms major conclusions are that market value is the correct deflator in returns studies and that levels and returns studies are economically but not econometrically equivalent

evolutionary drift and equilibrium selection this paper develops an approach to equilibrium selection in game theory based on studying the learning process through which equilibrium is achieved the differential equations derived from models of interactive learning typically have stationary states that are not isolated instead nash equilibria that specify different out of equilibrium behaviour appear in connected components of stationary states the stability properties of these components can depend critically on the perturbations to which the system is subjected we argue that it is then important to incorporate such drift into the model a sufficient condition is provided for drift to create stationary states with strong stability properties near a component of equilibria applications to questions of forward and backward induction are developed

discussion of empirical research on accounting choice abstract this discussion considers four aspects of the survey paper on empirical accounting choice research by fields lys and vincent implications of the authors selection of an expansive definition of accounting choice and their decision to classify this research by managerial motives implications of the authors decision to include implementation decisions in their definition of accounting choice implications of the authors call for research on the consequences of accounting choice including the costs of defective accounting choices and the benefits of superior choices implications of the authors call for a reconsideration of research designs that explicitly consider groups of accounting choices

time series properties of earnings a comparison of extrapolative and component models for several years now accounting researchers have applied univariate time series analysis to investigate the behavior of reported numbers see foster 1977 griffin 1977 watts and leftwich 1977 and brown and rozeff 1979 univariate methods examine the interstructure of a series that is the behavior of the series explained by its own past variability when modeling the behavior of accounting data however the intrastructure between variables may also be relevant relationships exist between reported accounting numbers because economic events are interrelated and because the accounting measurement system imposes its own relationships consider the impact of investment in plant or equipment on earnings a direct impact occurs through depreciation an additional impact may occur through interest charges depending on both the extent of debt financing and the cost of debt finally since earnings is the aggregate of components such as revenue depreciation and interest charges its behavior is also the result of component aggregation multivariate methods are able to model such intrastructure while univariate

price and trading volume reaction surrounding earnings announcements a closer examination the process of information dissemination and interpretation in securities markets is very complex and mostly unobservable while changes in prices and the amount of trading that takes place at the market level provide evidence of information processing verrecchia 1981 demonstrated that these are not sufficient to describe completely the dissemination of information and its interpretation by investors a descriptive study of price changes and trading volume however may still provide some insights into how investors react to information this paper is an empirical investigation of price changes and trading volume during the days surrounding the announcement of quarterly and annual earnings in the wall street journal wsj in the original paper investigating trading volume and price changes surrounding earnings announcements beaver 1968 was primarily concerned with whether the annual earnings announcement had information content i e led to changes in investors assessments of the probability distribution of future returns if there were any significant price changes and or trading volume during the week of the announcement then the annual earnings announcement was assumed to have had

evidence of the impact of mandatory changes in accounting principles on corporate loan agreements abstract the theory in this paper predicts that mandatory changes in accounting princples can affect the measurement rules defined in restrictive covenants in firms lending agreements consequently those mandatory changes can have an impact on the value of a firm s equity even if the changes appear to be merely cosmetic this contracting cost theory is tested by examining of both event related and cross sectional abnormal performance of the equity of a sample of firms when the accounting princples board changes accounting princples for business combinations the theory provides at best in incomplete explanation of the observed abnormal performance

social stability and equilibrium in the field of noncooperative game theory nash equilibrium nash 1951 has played a central role as a solution concept in bold strokes one may discern two major interpretations of nash equilibrium in the context of rational players the first which is close to the eductive interpretation of binmore 1987 1988 and the complete information interpretation of kaneko 1987 assumes that the game is played exactly once if it is a repeated game the repetition occurs once and the players have sufficient knowledge and ability to analyze the game in a rational manner sometimes it is assumed that all players have consistent hierarchies of beliefs where the game and their priors are common knowledge bayesian interpretation such as proposed by aumann 1987 advanced this idea to the level that the players have a common prior from this point of view however nash equilibrium seems far from being satisfactory

government transaction policy the medium of exchange and welfare abstract policy regarding what the government accepts in transactions is embedded in a version of the kiyotaki wright model of media of exchange in an example with two goods and one fiat money the policies that are consistent with fiat money as the unique medium of exchange are identified these policies have the government favoring fiat money in its transactions a benefit and a cost accompany any such policy the benefit is that a worse nonmonetary steady state is eliminated the cost is that a better monetary steady state is eliminated journal of economic literatureclassification number e40

measuring investors opinion divergence numerous proxies for divergence of investors opinions have been suggested in the empirical accounting and finance literatures i offer a new proxy constructed from proprietary limit order and market order data this allows me to capture additional information on investors private valuations proxies from the extant literature based on publicly available data do not contain such information given my new measure i ask which of the extant proxies correlates best with it in my regression analysis unexplained volume is the best proxy for opinion divergence conditioning on various firm specific and order specific characteristics generally does not change this conclusion the main exception is the sample of firms without ibes forecast dispersion data for which bid ask spread is the best proxy for opinion divergence factor analysis also suggests that unexplained volume is the preferred proxy for opinion divergence

the trade off model with mean reverting earnings theory and empirical tests the trade off theory of capital structure predicts a positive relationship between earnings and leverage contradictory to well established empirical evidence since corporate earnings are known to be mean reverting we reformulate the trade off model with mean reverting earnings we show that with mean reverting earnings there should be a negative relationship between optimal leverage and the current earnings level the model also illustrates the importance of the earnings reversion parameter in the determination of capital structure the major implications of the model are supported by empirical tests carried out with a sample of firms in the s p 500 index

the 1993 tax rate increase and deferred tax adjustments a test of functional fixation this paper uses a sample of 158 deferred tax adjustments resulting from the omnibus budget reconciliation act of 1993 obra to explore the magnitude and nature of analysts and investors functional fixation on reported accounting numbers the 1993 obra passed on august 10 of 1993 included a provision that raised the corporate tax rate from 34 to 35 gaap requires companies to adjust their deferred tax assets and liabilities to recognize the income effects of tax changes in the period of the tax change sfas no 109 1992 in this case the effects of the tax rate increase on deferred taxes would be included in the income tax expense component of 1993 third quarter earnings 1

the information content of non earnings accounting numbers as earnings predictors this paper provides empirical evidence on the predictive ability and information content of nonearnings annual report numbers beyond that contained in earnings i take an earnings prediction approach to address the incremental information content issue 2 under this approach nonearnings accounting numbers jointly play the role of predictors of future earnings changes specifically i investigate whether nonearnings accounting numbers convey information about future earnings that is not reflected in current earnings and if they do whether this incremental predictive content is reflected in stock prices

do industry level analyses improve forecasts of financial performance prior research documents mean reversion in firm profitability and growth under the implicit assumption that profitability and growth of all firms revert to a common benchmark at the same rate however a large body of academic research suggests that there are systematic interindustry differences e g industry barriers to entry that differentially affect firm performance based on industry membership we evaluate the relative forecast accuracy of mean reverting models at the industry and economywide levels and find that industry specific models are generally more accurate in predicting firm growth but not profitability

proxies for the corporate marginal tax rate abstract this paper focuses on how best to measure the corporate marginal tax rate which is an important input into financial analysis of the cost of capital financing policy corporate hedging and corporate reorganizations the results indicate that the simulated tax rate used by shevlin 1990 and graham 1996 although difficult to calculate is the best available proxy for the true marginal tax rate if the simulated rate is unavailable an easy to calculate trichotomous variable or the statutory marginal tax rate which captures the progressivity in the tax schedule are reasonable alternatives better than most commonly used tax variables

alternative measures of profit margin an empirical study of the potential information content of current cost accounting the primary purpose of this study is to investigate the link between price changes in product markets and price changes in financial markets the nature of the association is central to evaluating the information content of current cost accounting measurements such as those promulgated in the sec s accounting series release no 190 asr 190 and the fasb s statement of financial accounting standards no 33 sfas 33 although both asr 190 and sfas 33 state that financial statements based only on historical costs do not provide investors with sufficient information to assess the underlying economics of firms in periods of rapidly changing prices empirical evidence suggests there was no apparent reaction to the initial replacement cost releases mandated by asr 190 e g see beaver christie and griffin 1980 1 this study offers one explanation for the lack of an observed market

sufficient and necessary conditions for information to have social value in pure exchange this paper extends corrects and unifies earlier statements concerning the social value of public information as well as the no trading conditions in pure exchange sufficient and necessary conditions are provided for both the single period and two period cases in a postsignal trading model the social value of information is shown to be closely linked to the allocational efficiency of the market the degree of homogeneity of prior beliefs and of information structures the time additivity of preferences and the efficiency of endowments we conclude that the case in favor of public information is much stronger than previously suggested

the multiperiod information content of accounting earnings confirmations and contradictions of previous earnings reports in this study we propose and test the hypothesis that investors reevaluate earnings announcements in the light of postannouncement information 1 our argument for multiperiod price reactions to earnings news is motivated by the literature linking price responses to earnings persistence 2 when earnings are announced we assume that investors are unable to determine with certainty the persistence of an earnings

equilibrium warrant pricing models and accounting for executive stock options under apb opinion no 25 compensation expense arising from executive stock options consists of the excess of the market value of the stock over the exercise price of the options on their grant dates if the exercise price equals the market value of the stock on the grant date which is typically the case no compensation expense is recognized this accounting treatment has been frequently criticized for its bias toward underestimating the cost of an option to the issuing firm and a number of alternative valuation models have been suggested in the accounting literature by and large these valuation models have been borrowed from the finance literature where they were developed to explain the pricing of warrants and traded options the purpose of this paper is to assess empirically how well two of these valuation models perform in providing estimates of the value of traded securities warrants that are similar in many respects to executive stock options 2 this evidence should help calibrate the magnitude of the errors

the market s response to recurring events the case of stock splits abstract a substantial body of literature suggests that stock splits convey information in this paper we extend this literature by examining firms that split their stock at least twice during 1970 1988 we focus on firms with multiple splits to provide evidence on the market s use of previous split experience in interpreting a recurring event our major findings are that stock price responses to both stock splits and post split earnings changes depend on earnings realizations observed after previous splits these findings support the conclusion that the market uses previous split experience to interpret a recurring event

infection and immunization a new class of evolutionary game dynamics abstract building upon a central paradigm of evolutionary game theory namely the invasion barrier we propose the new infection and immunization dynamics infimmdyn modelling a plausible adaptation process in a large population for general games this yields a novel refinement of the nash equilibrium concept based on dynamical arguments close in spirit to nash s original mass action idea in his ph d thesis for partnership games infimmdyn exhibits a better asymptotic behavior compared to other popular procedures like fictitious play and replicator dynamics we establish even support separation of infimmdyn in finite time which can never be achieved by any interior point method like those mentioned above in fact this property has not yet been established for any other evolutionary game dynamics

the impact of corporate pollution on market valuation some empirical evidence abstract this paper investigates the relation between the market valuation of publicly listed corporations and their social performance as measured by their pollution record relative to environmental regulations expectations are that corporations with a good bad environmental record should be valued at a premium discount by the stock market such a relation results from the emergence of ethical or green investing and from an increased awareness by investors of the potential negative consequences from corporate environmental damages two significant innovations are introduced in this study first using governmental data a pollution index is computed for each sample firm second the relevance of social information for investors purposes is directly assessed by looking at the relation between the pollution index and a firm s market valuation within the accounting identity framework modigliani and miller 1958 results suggest that a firm s pollution performance is interpreted by market participants as providing information about its environmental liabilities furthermore results weakly support the existence of a premium discount in the stock market valuation of firms that meet do not meet environmental regulations thus lending some credence to the existence of a demand by some stock market participants for ethical or green investments this suggests that the disclosure of audited social information of a non financial nature in a firm s annual report could be beneficial to market participants

the economic determinants of the market reaction to proposed mandatory accounting changes in the oil and gas industry a cross sectional analysis abstract this paper examines the economic reasons for the observed negative abnormal common stock performance of firms whose reported earnings and stockholders equity were negatively affected by the proposed elimination of full cost accounting in the oil and gas industry four explanations of the market effects of this mandatory accounting change are examined 1 naive investor theory 2 modified naive investor theory 3 contracting cost theory and 4 estimation risk theory these hypotheses are developed in detail and used to generate variables for a cross sectional model which explains observed return behavior the effect of the accounting change on total stockholder s equity the existence of financial contracts denominated in terms of accounting numbers and to a lesser extent firm size are shown to be important explanatory variables the importance of these variables is consistent with both the contracting cost and estimation risk theories

intra industry information transfers associated with earnings releases abstract the impact that a firm s earnings releases have on the stock prices of other firms in its industry is examined for an identifiable sub set of firms the results are consistent with a significant information transfer occurring between the earnings release firm and the other firms in its industry this subset is identified by examining the impact of the release on the stock price of the announcing firm the magnitude of this impact is more significant for a sample of firms which have a larger percentage of their revenues in the same line of business as the earnings release firm vis a vis a sample with a lower percentage of their revenues from the same line of business alternative interpretations of the empirical results are also discussed the research findings have implications for information content and market efficiency research and for research on policy issues associated with disclosure regulation

book rate of return and prediction of earnings changes an empirical investigation over the years there has developed a fairly substantial body of research on the time series of earnings as a whole this literature concludes that changes in annual accounting earnings are unpredictable that is earnings follow a random walk 1 based on this result some inferences of economic substance policy have been claimed 2 in this paper we reconsider empirical issues which at least to some extent have been obscured by this conclusion we argue that the above result is only true in a limited sense since a modest enlargement of the predictive information set should allow for a rejection of the hypothesis that earnings changes are

forecasting profitability and earnings a study of the uk market 1982 2000 an approach recently developed by fama and french 2000 is applied to the study of whether uk company profitability is mean reverting a sample of roughly 987 firms per year for a period from 1982 2000 is used drawn from datastream in a simple partial adjustment model convergence towards the mean at a rate of about 25 per year is found the results are very similar in direction to those of fama and french 2000 but the results do not display significant non linearities the change in profitability appears to be more strongly influenced by dividends in the uk

information aggregation in a noisy rational expectations economy abstract this paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset each trader conditions his estimate of the return both on his own private source of information and price which in equilibrium serves as a noisy aggregator of the total information observed by all traders a closed form characterization of the rational expectations equilibrium is presented a counter example to the existence of fully revealing equilibrium is developed

negative externalities and evolutionary implementation in this paper we model externality abatement as an implementation problem our model incorporates techniques from evolutionary game theory assuming that agents dynamically adjust their choices in response to the incentives they currently face we offer a simple condition on aggregate payoffs under which a planner with limited information about preferences can nevertheless ensure that efficient behaviour is globally stable finally we present a series of applications that show that our sufficient condition holds in a variety of models involving negative externalities