Knowledge that Transforms

We investigate whether announcements of ‘subject to’ audit opinions and disclaimers of opinions affect stock prices. The results indicate that many firms experience negative abnormal performance prior to the release of qualified opinions, and that the magnitude of prior abnormal performance differs across types of qualifications. However, there is little evidence of a stock price effect when qualifications are disclosed publicly. It is difficult to construct powerful tests of the announcement effect of a qualified opinion for three reasons. First, the announcement date of the qualification is not easily identified. Second, measuring the unanticipated component of the announcement requires a model of market expectations. Third, controls must be employed for concurrent disclosures. The problems concerning event date identification have ramifications for other accounting event studies, particularly studies of disclosures typically contained in the annual report or 10-K.

This paper examines bond-for-bond refundings and their effects on stock returns. Refundings can affect the reported income, cash flows (including taxes), dividend constraints and financial ratios of firms. For a sample of 36 NYSE and ASE firms that performed refundings between 1971 and 1980, stock returns were significantly higher than predicted (only) around the release of the quarterly earnings announcement that included the refunding's effects. While the refundings were found to have many characteristics that were hypothesized to benefit shareholders, only the change in earnings per share was found to be associated with the prediction errors. Further, there appears to be no refunding-related information released in the quarterly earnings announcement, except for the refunding gain. These results imply that a portfolio of refunding firms can be created in advance of the quarterly earnings announcement that will generate abnormal returns around the earnings announcement. Because trading rules are inconsistent with the concept of an efficient capital market, these results constitute an anomaly.

The study investigates the information content of the foreign sensitive payment disclosures made during the Securities and Exchange Commission's ‘voluntary’ disclosure program. The results of the information content tests and the tests of the relationship between payment size and abnormal security returns imply that investors may have been reacting to the expectation of the loss of future business or to the possibility of future government sanctions.

This paper adds to recent evidence on market inefficiency in processing information in earnings reports. It documents that short positions taken in sample stocks which did not report earnings by the date expected during the sample period, 1971–1976, would have been abnormally profitable, before transaction costs. This is because late reports, on average, revealed bad news which was not anticipated in market prices prior to the report date. The magnitude of the average abnormal returns is in the order of 1.0% over 20 days but is larger for smaller firms in the sample and positively related to the length of the reporting delay. The paper also documents that long positions taken in stocks reporting early with good news would have generated abnormal returns of approximately 1.0% on average over a 20-day holding period.

Accounting Research, Cross-correlated returns, Industry concentration, GLS

Bankruptcy, Bankruptcy prediction models, Multiple discriminant analysis

Mark E. Zmijewski, Methodological Issues Related to the Estimation of Financial Distress Prediction Models, Journal of Accounting Research, Vol. 22, Studies on Current Econometric Issues in Accounting Research (1984), pp. 59-82

Thomas Dyckman, Donna Philbrick, Jens Stephan, A Comparison of Event Study Methodologies Using Daily Stock Returns: A Simulation Approach, Journal of Accounting Research, Vol. 22, Studies on Current Econometric Issues in Accounting Research (1984), pp. 1-30

Exchange valuation rules, Accuracy, Asset valuation, Price-level adjusted accounting

Disclosures, Municipal bonds, Net interest cost, Auditing