[Inequity in capital markets, defined here as inequality of opportunity or the existence of systematic and significant information asymmetries across investors, leads to adverse private and social consequences: high transaction costs, thin markets, lower liquidity of securities, and in general, decreased gains from trade. Such adverse consequences of inequity can be mitigated by a public policy mandating the disclosure of financial information in order to reduce information asymmetries. The equity-orientation of disclosure regulation advanced here differs markedly from the traditional, moralistic concepts of equity in accounting, which are generally phrased in terms of maintaining fairness, eliminating fraud, and protecting the uninformed investors against exploitation by insiders. In contrast to such vague, anachronistic, and unattractive notions, the equity concept advanced here is state of the art and operational, being linked directly to recent theoretical developments in economics and finance. As such it provides an economically sound justification for disclosure regulation, and furthermore, it offers accounting policymakers an operational "public interest" criterion for disclosure choices and opens up to researchers a rich agenda for evaluating regulation consequences.]
[We examined management's discretionary disclosures prior to a special, yet important, event-a large earnings surprise. In what ways do managers alert investors to the surprise, and what is investors' reaction to such warnings? To address these questions, we analyzed all managerial disclosures prior to the surprising earnings release. Less than ten percent of our large-surprise firms published quantitative earnings or sales forecasts, while 50 percent of the firms kept silent. Firms facing earnings disappointments were more likely to make a disclosure, and larger disappointments were preceded more often by "harder" (more quantitative and earnings-related) warnings. We found the likelihood of warnings to be positively associated with firm size, the existence of a previous forecast, and membership in a high technology industry. Finally, warnings tend to be issued for permanent earnings disappointments, while transitory disappointments are more likely to occur without prior warning.]
[A multi-year adoption period now appears to be the norm for new accounting standards issued by the Financial Accounting Standards Board (FASB). For example, FAS No. 52, which pertained to foreign currency, was issued in December 1981 and became effective in 1983, a three-year adoption period. FAS No. 71, which concerned regulation, was issued in December 1982, but became effective in 1984. FAS No. 87 on pensions was issued in December 1985 and became effective in 1987, but a key provision of this statement-the recognition of a "minimum liability"-became effective only in 1989, thereby allowing a five-year adoption period. FAS No. 96 on income taxes was issued in December 1987, but amendments under FAS Nos. 100 and 103 extended its adoption to 1990 and then to 1992, a six-year adoption period (ultimately, FAS No. 109 substantially changed FAS No. 96 and its successors). Although several early statements (e.g., FAS Nos. 2 and 8) issued late in the calendar year allowed adoption over that year and the following one, practically all FASB statements issued in the 1970s became effective on a uniform date close to their issuance. Thus, it appears that the FASB changed its adoption policy in the 1980s. The Board's main justification for an extended adoption period is to alleviate firms' implementation costs, particularly the costs of renegotiating agreements with lenders and suppliers (see, e.g., FAS No. 52, par. 147-48, and FAS No. 87 par. 259-60). Interestingly, no justification was offered for the extended adoption period of FAS No. 96 (Income Taxes), perhaps an indication that a three-year adoption period had become a norm. However, when a fourth year was added under FAS No. 100, the following rationale was given (FASB 1988, par. 8): The Board believes that the disadvantages to prepares from not having a deferral of the effective date outweigh the disadvantages to users from a one-year delay in the required adoption of Statement 96, including diversity in financial reporting from the continued application of Opinion 11 by some enterprises. Given the obvious costs imposed by an extended adoption period on financial statement users, because of reduced cross-company comparability, the FASB's policy warrants scrutiny. This is the objective of the current study which focuses on FAS No. 87 (FASB 1985a) and the related FAS No. 88 (FASB 1985b). Specifically, we consider various possible managerial motives for choosing the timing of adoption of FAS No. 87 within the allowed period, and classify these motives as involving either compliance costs (the FASB's express justification for an extended adoption period) or investor perceptions (managers' attempts to change investor expectations). We then identify the adoption timing motives that are consistent with the data derived from samples of early (1986) and late (1987) adopters. The FASB's case for extending adoption periods will obviously be supported if compliance costs figure predominantly in firms' adoption-timing decisions. Of the eight proxies for adoption-timing motives examined by us, only one-increasing reported earnings-consistently discriminates between early and late adopters. This holds for interyear (1986 vs. 1987) as well as intrayear adoptions (first three quarters of 1986 vs. fourth quarter). Of the compliance-cost motives examined, company size and the number of outstanding loans were associated with the adoption-timing decision in some cases. Overall, our analysis does not provide compelling support for the FASB's cost-reduction justification for a multiyear adoption period for FAS No. 87.]
The earnings ‘time-series literature’ in accounting focuses on the statistical characteristics of the processes which generate corporate earnings. In order to further our understanding of earnings behavior, this study investigates the question whether inter-firm differences in these statistical characteristics (autocorrelations and variances of earnings changes) can be explained by economic factors. Various relationships between economic factors and earnings behavior are derived from the economic literature and examined empirically in this study. Findings indicate that autocorrelations and variability of annual earnings and earnings over equity changes are systematically associated with the following factors: the type of product, the height of industry barriers-to-entry (a surrogate for degree of competition), the degree of capital intensity (‘operating leverage’), and the firm size.
Baruch Lev, On the Usefulness of Earnings and Earnings Research: Lessons and Directions from Two Decades of Empirical Research, Journal of Accounting Research, Vol. 27, Current Studies on The Information Content of Accounting Earnings (1989), pp. 153-192
This paper reports an empirical test of the usefulness of a prediction method for multivariate budgets suggested by Theil.' The method, based on information theory concepts, is described in the first three sections, and results of the test are presented in the remaining sections. These results show that the suggested prediction method outperforms both the actual forecasts made by the firms who provided the data and two naive forecasts.