Abstract. This paper examines the degree to which managerial discretion over accruals relating to loan losses in the Canadian banking industry during 1977–87 may have been utilized to manage regulatory capital, taxable income, and reported earnings. These years reflect a unique period in which accounting and regulatory practices differed significantly from the post‐1987 period. These prior practices created different types of incentives and highlighted different policy issues such as the role of tax benefits in loan loss accrual decisions. We model a three‐equation, simultaneous system around three annual discretionary choices: the amount of loan loss experience accrued (based on specific provisions), the size of reserve transfers to the Appropriation for Contingencies (based on general provisions), and the extent of external regulatory capital raised. Results indicate strong support for the capital maintenance predictions and weaker, but significant, support for the tax management predictions. Results do not support the predictions of the earnings management hypothesis. Résumé. Les auteurs examinent la mesure dans laquelle la discrétion dont jouissait la direction dans la présentation des montants cumulatifs des pertes sur prêts, dans le secteur bancaire canadien entre 1977 et 1987, pourrait avoir été mise à profit dans la gestion du capital réglementaire, du revenu imposable et des bénéfices publiés. Cette décennie est unique puisqu'elle se caractérise par le fait que les méthodes comptables et réglementaires présentaient des différences significatives par rapport à celles de la période postérieure à 1987. Les méthodes initiales ont donné naissance à différents types d'incitatifs et mis en relief des questions différentes relatives aux politiques, telles que le rôle des avantages fiscaux dans les décisions touchant les pertes sur prêts cumulatives. Les auteurs créent un modèle à partir d'un système de trois équations concomitantes, autour de trois choix annuels discrétionnaires: le montant cumulatif des pertes sur prêts qui sont subies (basé sur des dispositions précises), l'importance des transferts de réserves aux provisions pour éventualités (basée sur des dispositions générales), et l'importance du capital réglementaire externe recueilli. Les résultats confirment éloquemment les prédictions relatives au maintien du capital et de façon plus tempérée, mais néanmoins significative, les prédictions relatives à la gestion fiscale. Ils ne confirment cependant pas les prédictions relatives à la gestion des bénéfices.

Abstract Reviews the book "Towards a Theory and Practice of Cash Flow Accounting," by T.A. Lee.

Until 1974, firms could capitalize or expense all or part of their research and development (R&D) costs. Managerial choice between these two alternatives is hypothesized to be affected by the existence of debt covenants which employ accounting numbers relating to leverage, interest coverage, and ability to pay dividends. In addition, the use of public versus private debt is hypothesized to affect the accounting choice due to differential renegotiation costs. Lastly, a political cost hypothesis is tested. This study uses a multivariate statistical technique, the generalized jackknife. The results suggest that firms which capitalized R&D costs were more highly levered, used more public debt, were closer to dividend restrictions, and were smaller than firms which expensed R&D costs.

We test a prediction from the corporate focus literature that cross-industry spinoff distributions, where the continuing and spunoff units belong to different two-digit Standard Industry Classification codes, create more value than own-industry spinoffs. Our results indicate significant value creation around the announcement of cross-industry spinoffs only. We then provide evidence on whether the value creation comes from operating performance improvements, or bonding benefits, or both, where bonding refers to a pre-commitment by managers to avoid cross-subsidizing relatively poor performing units within the firm. We find a significant improvement in operating performance for cross-industry spinoffs, and none for own-industry cases. We do not find strong evidence of bonding to explain spinoff-related value creation. Further, the operating performance improvement is associated with the continuing rather than the spunoff entity, consistent with the hypothesis that spinoffs create value by removing unrelated businesses and allowing managers to focus attention on the core operations they are best suited to manage.

Earnings announcements, Block trades, Information asymmetry, Permanent price effects

[Current financial reporting practices have traditionally emphasized measures of accrual earnings. On the other hand, the link between future cash flows and firm value is well accepted by financial economists, and recently there has been increased interest in measures of cash flow. This paper provides evidence on the role of accrual (i.e., earnings and working capital from operations [WCFO]) and cash flow measures in an explanatory model of security prices. This issue is first examined by testing for an association between unexpected security returns and unexpected cash flows, after controlling for the relation between unexpected returns and unexpected earnings. We also examine the obverse issue by testing for an association between unexpected security returns and unexpected earnings, after controlling for the relation between unexpected returns and unexpected cash flows. We test these relations in two contexts: in results pooled over the entire ten-year time period studied and in year-by-year cross-sectional regressions. Results for our complete sample are generally consistent with: (1) cash flow data having incremental information content relative to that contained in earnings; (2) cash flow data having incremental information content in addition to that contained in earnings and WCFO; and (3) accrual data (i.e., earnings and WCFO) jointly and separately having incremental information content in addition to that contained in cash flow data. However, the results do not support the hypothesis that WCFO has incremental information content relative to that contained in earnings.]

[In recent years, there has been renewed interest in cash flows. This paper describes empirical relationships between signals provided by accrual earnings and various measures of "cash flow" (CF). We include among definitions of CF both "traditional" measures that include simple adjustments to earnings data (i.e., net income plus depreciation and amortization, and working capital from operations) as well as "alternative" measures that incorporate more extensive adjustments (defined in the paper). Evidence is presented on three issues. First, the correlations among various measures of CF are examined to determine whether the signal provided by a given CF measure differs from the signal provided by others. Second, various measures of CF are correlated with earnings to lend evidence on whether the CF and earnings signals are similar. Third, we provide evidence on the ability of earnings and cash flow measures to forecast one period and two period ahead cash flows and, in so doing, we examine the FASB's assertions that earnings are superior to CF in predicting future CF. Results can be summarized as follows. First, the observed correlations between traditional cash flow measures and alternative CF measures that incorporate more extensive adjustments are low. Second, the correlations between alternative measures of CF and earnings are low while the correlations between traditional measures of CF and earnings are high. These first two results are consistent with earnings and alternative measures of CF that incorporate more extensive adjustments conveying different signals. Finally, for four out of five cash flow variables, the results are consistent with the hypothesis that random walk models predict CF as well as (and often better than) models based on other flow variables. An exception to this general result is that net income plus depreciation and amortization and working capital from operations appear to be the best predictors of cash flow from operations. Overall, these results are not consistent with the FASB's statements that earnings numbers provide better forecasts of future cash flows than do cash flow numbers.]

Abstract ABSTRACT: This study investigates empirical relations that are consistent with the hypothesis that variance in analysts' forecasts of earnings (i.e., disagreement among analysts) is useful as an ex ante measure of the market's aggregate uncertainty regarding a future earnings signal. We hypothesize and test for a positive association between the variance of analysts' forecasts and (1) the ex post magnitude of unexpected earnings. (2) the ex post variance of returns around the actual earnings announcement date. and (3) the average variance of return to maturity implied by prices of options maturing after the earnings announcement date. Our results generally confirm that the disagreement among analysts' earnings forecasts Is a useful Indicator of the market's aggregate uncertainty regarding future earnings announcements.

[This study investigates empirical relations that are consistent with the hypothesis that variance in analysts' forecasts of earnings (i.e., disagreement among analysts) is useful as an ex ante measure of the market's aggregate uncertainty regarding a future earnings signal. We hypothesize and test for a positive association between the variance of analysts' forecasts and (1) the ex post magnitude of unexpected earnings, (2) the ex post variance of returns around the actual earnings announcement date, and (3) the average variance of return to maturity implied by prices of options maturing after the earnings announcement date. Our results generally confirm that the disagreement among analysts' earnings forecasts is a useful indicator of the market's aggregrate uncertainty regarding future earnings announcements.]

Robert M. Bowen, Richard P. Castanias, Lane A. Daley, Intra-Industry Effects of the Accident at Three Mile Island, The Journal of Financial and Quantitative Analysis, Vol. 18, No. 1 (Mar., 1983), pp. 87-111