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The Effect of the Information Environment on the Relationship between Financial Disclosure and Security Price Variability



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The Effect of the Information Environment on the Relationship between Financial Disclosure and Security Price Variability

McNichols, Maureen, Manegold, James G.

Vol 5, Issue 1, 49-74 (1983)

Examines the effect of information environment on the association between disclosure and security price variability. Initiation of enterim reporting; Variance of returns upon release of annual report; Amount of information available about the firm.

A Comparison of the Skewness of Stock Return Distributions at Earnings and Non-Earnings Announcement Dates

McNichols, Maureen

Vol 10, Issue 3, 239-273 (1988)

This paper presents evidence that stock return prediction errors are less positively skewed m the time period surrounding accounting earnings report announcements than m a subsequent non announcement period Assuming that reformation available about firms in non-announcement periods depends on discretionary disclosure practices of firms and discretionary search for information by investors, the results suggest that earnings reports cause more extreme `bad news' to be reflected in stock prices relative to discretionary sources of information [ABSTRACT FROM AUTHOR]

The impact of taxes on the choice of divestiture method

Maydew, Edward L., Schipper, Katherine, Vincent, Linda

Vol 28, Issue 2, 117-150 (1999)

This paper estimates the magnitude of tax costs and their impact on the decision to divest assets via a taxable sale rather than a tax-free spin-off. We find that the tax costs are substantial, averaging 8% of market value of the divested assets, and that cross-sectional variation in tax costs has a large impact on managers' choice of divestiture method. Our results are consistent with two explanations. First, managers are willing to incur avoidable tax costs to gain earnings and cash flow benefits. Second, managers choose taxable sales because the acquisition premia on the sales exceed the avoidable tax costs. [ABSTRACT FROM AUTHOR]

Efficient Contracting and the Choice of Accounting Method in the Oil and Gas Industry

Malmquist, David H.

Vol 12, Issue 1-3, 173-205 (1990)

This paper's results are consistent with the choice of accounting method in the oil and gas industry being dominated by measurable characteristics of firms and graded by the principles of efficient contracting The results are inconsistent with an alternative hypothesis, opportunistic behavior by managers The efficient contracting explanation is also consistent with the empirical findings from earlier studies [eg, Lilien and Pastena (1982) and Deakin 1979)] [ABSTRACT FROM AUTHOR]

Advanced Management Accounting

Maher, Michael W.

Vol 4, Issue 3, 229-232 (1982)

Reviews the book 'Advanced Management Accounting,' by Robert S. Kaplan.

The Association between Revisions of Financial Analysts' Earnings Forecasts and Security-Price Changes

Lys, Thomas, Sohn, Sungkyu

Vol 13, Issue 4, 341-363 (1990)

Using virtually all publicly available analyst earnings forecasts for a sample of 58 companies in the 1980-86 period (over 23,000 individual forecasts by 100 analyst firms), our evidence indicates that individual analyst earnings forecasts are reformative, even when they are preceded by earnings forecasts made by other analysts or by corporate accounting disclosures However, our results indicate that analyst earnings forecasts contain only roughly 66% of the information reflected by security prices prior to the forecast-release date [ABSTRACT FROM AUTHOR]

Mandated Accounting Changes and Debt Covenants

Lys, Thomas

Vol 6, Issue 1, 39-NA (1984)

Focuses on the relationship between mandated accounting changes, bond covenants and security prices. Evidence on the existence of a bond covenant effect on security prices; Ways to measure the default risk of debt; Utilization of an option pricing framework.

Abandoning the transactions-based accounting model: Weighing the evidence

Lys, Thomas

Vol 22, Issue 1-3, 155-175 (1996)

I develop a benchmark for evaluating whether fair values disclosed by banks differ from investors' estimates of the market value of financial assets and liabilities. Using this benchmark, I conclude that the hypothesis that disclosed fair values closely approximate investors' estimates should be rejected. I present evidence suggesting that the procedure used in establishing fair values results in an understatement of the value of financial assets as an overstatement of liabilities. I also conclude that the reaction of bank stocks to the adoption of SFAS 105, 107, and 115 is more consistent with regulatory concerns and not with potential adverse effects of those statements for contracting. [ABSTRACT FROM AUTHOR]

The Impact of Replacement Cost Disclosure on Security Prices

Lustgarten, Steven

Vol 4, Issue 2, 121-141 (1982)

Reports on the mandated financial disclosure by United States Securities and Exchange Commission as part of reports filed by large corporations. Presence of significant stock price effects; Estimation of regression function of the conditional distribution of abnormal results; Absence of abnormal stock price movements.

Bonus and penalty incentives: Contract choice by employees

Luft, Joan

Vol 18, Issue 2, 181-206 (1994)

Controlled experiments provided evidence that (1) employees are more likely to accept incentive contracts described in bonus terms than contracts that appear identical except for being described in penalty terms, and (2) when employees' judgment of their past performance is dependent on memory, the preference for bonus over penalty contracts increases with experience. These phenomena are explained in terms of the human information processing costs of communicating and evaluating the contract terms, and further implications are drawn for the empirical study of contracting. [ABSTRACT FROM AUTHOR]

The Incremental Information Content of Cash-Flow Components

Livnat, Joshua, Zarowin, Paul

Vol 13, Issue 1, 25-46 (1990)

This study examines whether components of operating, financing, and investing cash flows are differentially associated with annual security returns, as predicted by theoretical models in finance and economics The results of the study indicate that disaggregation of net income into cash from operations and accruals does not contribute significantly to the association with security returns beyond the contribution of net income alone However, further disaggregation of financing and operating cash flows into their components significantly improves the degree of association, as predicted by theory In contrast, we find no evidence of differential associations across components of investing cash flows [ABSTRACT FROM AUTHOR]

Do nonlinearity, firm-specific coefficients, and losses represent distinct factors in the relation between stock returns and accounting earnings?

Lipe, Robert C., Bryant, Lisa, Widener, Sally K.

Vol 25, Issue 2, 195-214 (1998)

Recent studies have provided theory and evidence that the contemporaneous relation between stock returns and accounting earnings is nonlinear, different for profits and losses, and different across firms. Since each factor can result from differences in earnings persistence, existing theory is ambiguous as to whether these factors are distinct or overlapping. Thus, we conduct a simultaneous examination. Our primary tests show that each factor explains a significant portion of the variance of returns after controlling for the other two factors, with firm-specific estimation providing the largest incremental explanatory power. Alternative tests produce similar conclusions. Empirically, the three factors are distinct. [ABSTRACT FROM AUTHOR]

Accuracy of Linear Valuation Rules in Industry-Segmented Environments

Lim, Suk S., Sunder, Shyam

Vol 13, Issue 2, 167-188 (1990)

The comparative ability of valuation rules using economy-weighted versus industry-weighted price indexes to estimate the unobserved economic value of a basket of assets is modelled Industry-weighted indexes do not necessarily provide valuations of higher accuracy than economy-weighted indexes Dominance depends on (1) the relative magnitude of the mean and variability of price changes and (2) the magnitude of errors of measurement in the current price data Larger measurement errors favor economy-weighted indexes, larger mean and variability of prices changes favor industry-weighted indexes [ABSTRACT FROM AUTHOR]

Determinants of Intramethod Choice in the Oil and Gas Industry

Lilien, Steven, Pastena, Victor

Vol 4, Issue 3, 145-170 (1982)

Examines the determinants of intramethod choice in the oil and gas industry. Impact of procedural flexibility on reported costs, revenues, expenses and balance sheet valuations; Discriminatory ability of the economic incentives of firms; Definition of the reporting strategies of firms in terms of choice of accounting methods and procedural applications.

Self-serving behavior in manager's discretionary information disclosure decisions

Lewellen, Wilbur G., Taewoo Park, Wilbur G., Ro, Byung T.

Vol 21, Issue 2, 227-251 (1996)

Research has shown that managers display self-serving behavior in a variety of discretionary information production decisions. We test whether such behavior is also manifest in discretionary information disclosure decisions in particular, in the common stock return performance comparisons now required in corporate proxy statements. We find evidence that the industry and peer-company stock return benchmarks, and broader market indices, chosen by management for those comparisons are downward biased, thereby overstating relative reporting-firm performance. Cross-sectionally, the extent of the bias varies with key reporting-firm attributes, including firm performance and the character of firm ownership structure. [ABSTRACT FROM AUTHOR]

Merger Decisions and Executive Stock Ownership in Acquiring Firms

Lewellen, Wilbur, Loderer, Cladio, Rosenfeld, Ahron

Vol 7, Issue 1/2/3, 209-231 (1985)

Focuses on the influence of managerial welfare on merger decisions in the United States. Association between abnormal stock returns and percentage of own-company stock; Emphasis on the maximum welfare of stockholders; Impact of merger to management ownership of the firm.

Executive Compensation and Executive Incentive Problems

Lewellen, Wilbur, Loderer, Claudio, Martin, Kenneth

Vol 9, Issue 3, 287-310 (1987)

Focuses on the problem of providing incentives to executives in a public corporations. Attempts to reduce agency cost between shareholders and managers; Variations in the components of senior executive pay in firm; Interrelation between managerial decisions and the structure of managerial pay.

Methodological Issues in the Use of Financial Ratios

Lev, Baruch, Sunder, Shyam

Vol 1, Issue 3, 187-210 (1979)

Investigates the methodological issues in the use of financial ratios. Analysis on the choice of optimal size variable; Evaluation of corporate performance; Relationship between financial data and stock characteristics.

The capitalization, amortization, and value-relevance of R&D

Lev, Baruch, Sougiannis, Theodore

Vol 21, Issue 1, 107-138 (1996)

GAAP mandates the full expensing of R*D in financial statements, presumably because of concerns with the reliability, objectivity, and value-relevance of R*D capitalization. To address these concerns, we estimate the R*D capital of a large sample of public companies and find these estimates to be statistically reliable and economically meaningful. We then adjust the reported earnings and book values of sample firms for the R*D capitalization and find that such adjustments are value-relevant to investors. Finally, we document a significant intertemporal association between firms' R*D capital and subsequent stock returns, suggesting either a systematic mispricing of the shares of R*D-intensive companies, or a compensation for an extra-market risk factor associated with R*D. [ABSTRACT FROM AUTHOR]

Some Economic Determinants of Time-Series Properties of Earnings

Lev, Baruch

Vol 5, Issue 1, 31-48 (1983)

Investigates the economic determinants of time-series properties of earnings. Explanation of the autocorrelations and variances of earnings changes; Nature of processes generating corporate earnings; Relationship between economic factors and earnings behavior.

Economic determinants of accounting policy choice

Lemke, Kenneth W., Page, Michael J.

Vol 15, Issue 1, 87-114 (1992)

This study seeks to identify economic and financial characteristics that distinguish three groups of companies classified by response to the UK's mandatory CCA standard (SSAP 16) as loyal compliers, early defectors and hard-line noncompliers Three major explanatory variables emerge -- leverage, firm size, and the fixed assets to total assets ratio Overall results suggest that a major motivation for compliance was lower income reporting, especially as an argument for continuing recognition of CCA for tax and regulatory purposes The belief that noncompliance was largely motivated by preparation costs is discounted [ABSTRACT FROM AUTHOR]

Market Failure Fallacies and Accounting Information

Leftwich, Richard

Vol 2, Issue 3, 193-211 (1980)

Examines the use of accounting information in stock market failures. Proponents of increased accounting regulation; Evaluation on the logical fallacy of market failure; Criticisms in accounting information.

Evidence of the Impact of Mandatory Changes in Accounting Principles on Corporate Loan Agreements

Leftwich, Richard

Vol 3, Issue 1, 3-36 (1981)

Forecasts the effects of mandatory changes in accounting principles on the measurement rules defined in restrictive covenants in firms' lending agreement. Impact of mandatory changes on firm equity value; Test of contracting cost theory; Explanation of observed abnormal performance.

Aggregation of Test Statistics

Leftwich, Richard

Vol 12, Issue 1-3, 37-44 (1990)

In the preceding paper Christie provides three tests to facilitate formal references in survey papers that examine related empirical studies Those tests reinforce the view that accounting technique choice is related to variables that may proxy for contracting and monitoring costs in the market and political processes However, the contribution of the tests is bruited because the fundamental question of the relation between the empirical regularities and the theory remains unexamined [ABSTRACT FROM AUTHOR]

Structural Changes and the Forecasting of Quarterly Accounting Earnings in the Utility Industry

Lee, Chi-Wen Jevons, Chen, Chung

Vol 13, Issue 2, 93-122 (1990)

This paper presents a statistical procedure to identify effects of three potential structural changes on accounting earnings -- temporary, short-run, and long-run The procedure is applied to quarterly accounting earnings of 39 utility companies Structural changes are round to be commonplace Statistical forecasting models that explicitly incorporate structural change effects are found to generate more accurate forecasts than other statistical models tn the literature Although no statistical model significantly dominates Value Line, a firm-specific model with structural change adjustment forecasts as well as Value Line Moreover, all statistical models examined have significant marginal forecasting power to complement Value Line forecasts [ABSTRACT FROM AUTHOR]

Earnings news and small traders

Lee, Charles M. C.

Vol 15, Issue 2/3, 265-302 (1992)

This study separates trading volume into buyer- and seller-initiated activities and examines the directional volume reaction in small and large trades to different types of earnings news 'Good' ('bad') news triggers brief, but intense, buying (selling) in the large trades However, a persistent period of unusually high buying activity is observed in the small trades irrespective of the news This anomalous proclivity of small traders to buy is robust across firm size, trading volume, and different earnings expectation models Several explanations are discussed, although the behavior does not seem fully explained by existing theories [ABSTRACT FROM AUTHOR]

Non-discretionary conservatism: Evidence and implications

Lawrence, Alastair, Sloan, Richard, Sun, Yuan

Vol 56, Issue NA, 112-NA (2013)

Abstract: A large body of accounting research finds that various contracting incentives lead managers to engage in conservative accounting practices. We extend existing research by modeling the impact of extant accounting rules on conservative accounting. Accounting rules typically require assets to be written down when their fair values drop sufficiently below their book values. We document evidence of the resulting non-discretionary conservatism and show that it appears to explain some of the results from previous research on contracting incentives. [Copyright &y& Elsevier]

The Association between Performance Plan Adoption and Corporate Capital Investment

Larcker, David F.

Vol 5, Issue 1, 3-30 (1983)

Examines the association between performance plan adoption and corporate capital investment. Growth in capital expenditures; Motivations for contracting between owner and manager; Correlation between the changes on the executive compensation contracts and the managerial decision changes.

Stock Price Reactions as Surrogates for the Net Cash Flow Effects of Corporate Policy Decisions

Lanen, William N., Thompson, Rex

Vol 10, Issue 4, 311-334 (1988)

Tins paper adopts a rational market structure to examine the link between the cash flow effects of management policy decisions and the resulting stock price reactions. The focus is on testing cross-sectional associations between cash flow effects and the underlying characteristics of affected firms We find that it is not possible to refer the sign of association between the stock price reaction and any characteristics of the firm that are observable before management announces its decision Our methodological suggestions revolve exploiting either a prior assumptions or sample reformation about the probability distribution of unobservable decision variables underlying the management decision process [ABSTRACT FROM AUTHOR]

Golden Parachutes, Executive Decision-Making, and Shareholder Wealth

Lambert, Richard A., Larcher, David F.

Vol 7, Issue 1/2/3, 179-203 (1985)

Focuses on the changes in executive decision making and shareholder wealth in the United States. Adoption on executive termination agreements; Provision of contract on the control of computation; Willingness to taker overbids.

The use of accounting and security price measures of performance in managerial compensation contracts

Lambert, Richard A.

Vol 16, Issue 1-3, 55-100 (1993)

It is commonly observed that the compensation paid to senior level executives depends on both accounting and security price measures of performance. The articles by Kim and Suh, Bushman and Indjejikian, and Sloan, which I have been invited to discuss, examine the issue of how much weight to place on these two measures in the contract. The first two papers analyze the role that earnings can play in removing the 'noise' in stock price in a rational expectations pricing model. The Sloan paper analytically and empirically examines the role that earnings can play in removing macroeconomic factors from stock price. [ABSTRACT FROM AUTHOR]

A test of risk clientele effects via an examination of trading volume response to earnings announcements

Kross, William, Gook-Lak Ha, William, Heflin, Frank

Vol 18, Issue 1, 67-87 (1994)

This research investigates whether volume reactions to a public announcement are related to changes in the risk of securities (i.e., investors undertake portfolio rebalancing when the risk of their portfolio becomes misaligned with their respective risk preferences). Our results document that an average (40 percent) change in beta is associated with a 0.10 percent increase in the number of shares traded in a ten-day period around the earnings announcement. Although risk clientele effects are less important than information effects, they are empirically significant. [ABSTRACT FROM AUTHOR]

Price and return models

Kothari, S. P., Zimmerman, Jerold L.

Vol 20, Issue 2, 155-192 (1995)

Return models (returns regressed on scaled earnings variables) are commonly preferred to price models (stock price regressed on earnings per share). We provide a framework for choosing between these models. An economically intuitive rationale suggests that price models are better specified in that the estimated slope coefficients from price models, but not return models, are unbiased. Our empirical results confirm that price models' earnings response coefficients are less biased. However, return models have less serious econometric problems than price models. In some research contexts the combined use of both price and return models may be useful. [ABSTRACT FROM AUTHOR]

Information in prices about future earnings

Kothan, S. P., Sloan, Richard G.

Vol 15, Issue 2/3, 143-171 (1992)

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 [ABSTRACT FROM AUTHOR]

Price-earnings regressions in the presence of prices leading earnings

Kothan, S. P.

Vol 15, Issue 2/3, 173-202 (1992)

The paper analytically evaluates alternative specifications of price--earnings regressions when prices lead earnings, ie, reflect information about future earnings that is not reflected in the past time series of earnings Because prices lead earnings, the specification using the earnings-level-deflated-by-price variable in a price-earnings regression is better, in terms of bias in the estimated earnings response coefficient and explanatory power, than specifications using earnings-change-deflated-by-price and earnings-deflated-by-lagged-earnings variables An accurate proxy for unexpected earnings, however, outperforms the earnings-level- and earnings-change-deflated-by-price specifications [ABSTRACT FROM AUTHOR]

A Direct Test of the Cognitive Bias Theory of Share Price Reversals

Klein, April

Vol 13, Issue 2, 155-166 (1990)

The cognitive bias theory of share price reversals predicts that the market forms overly optimistic (pessimistic) earnings expectations for firms that experienced high (low) stock returns This paper finds evidence inconsistent with this theory Analysts do not underpredict earnings following large stock price declines, instead, they remain overly optimistic about future earnings Similarly, analysts do not overpredict earnings for firms after periods of extreme price rises It appears, then that other factors are responsible for the observed mean reversions m share prices [ABSTRACT FROM AUTHOR]



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