This study develops and tests the proposition that corporate merger transactions give rise to changes in the association between firm accounting earnings and security returns. A model of the effect of merger transactions on stock price responses to information releases suggests that the earnings response coefficient of a postmerger entity is a weighted average of the earnings response coefficients of the combining firms, with the weights depending on relative earnings variability of the combining firms. Empirical results, based on a sample of 90 mergers completed over a 12‐year period, are consistent with the model. Résumé. L'auteur élabore et vérifie une proposition selon laquelle les opérations de fusion donnent lieu à des changements dans la relation entre les bénéfices comptables de l'entreprise et le rendement de ses titres. Selon le modèle de l'incidence des opérations de fusion sur la réaction du cours des valeurs mobilières à la communication d'information, le coefficient de réaction des bénéfices d'une entité résultant d'une fusion est la moyenne pondérée des coefficients de réaction des bénéfices des entreprises qui fusionnent, les pondérations dépendant de la variabilité relative des bénéfices des entreprises constituantes. Les résultats empiriques, fondés sur un échantillon de 90 fusions s'échelonnant sur une période de plus de 12 ans, confirment la validité du modèle.

Presents the author's reply to the comments of Paul F. Williams et al on the 1989 article `Accounting Method Choice in the Software Industry,' in the October 1990 issue of `The Accounting Review.' Sample characteristics; Auditor preference and accounting choice; Size and accounting choice.

ABSTRACT: This paper extends accounting choice research to the software industry. Because firms in this previously unexplored industry are small, the research provides Insight into determinants of accounting choices of small firms. Hypotheses about the effects of firm size and auditor preference on SFAS No. 86 adoption decisions are developed and tested. The results Indicate that early adoption decisions are strongly associated with firms having small size and auditors who expressed support for SFAS No. 86 while it was in the exposure draft stage.

[This paper extends accounting choice research to the software industry. Because firms in this previously unexplored industry are small, the research provides insight into determinants of accounting choices of small firms. Hypotheses about the effects of firm size and auditor preference on SFAS No. 86 adoption decisions are developed and tested. The results indicate that early adoption decisions are strongly associated with firms having small size and auditors who expressed support for SFAS No. 86 while it was in the exposure draft stage.]

A valuation approach is used to examine the effect of the LIFO inventory method on the relation between the market value of a firm's stock and the book value of equity. The paper develops three competing hypotheses that have different predictions regarding the relation between the LIFO reserve and the market value of equity. Results indicate a significant negative relation between the LIFO reserve and the value of equity, inconsistent with the pricing of LIFO reserves as unbooked assets, but consistent with a model that views the LIFO reserve as a measure of the effect of increases in factor input prices on firm value. Résumé. Les auteurs ont recours à une évaluation pour examiner l'incidence de la méthode DEPS de détermination du coût des stocks sur la relation entre le cours de l'action d'une société et sa valeur comptable. Ils élaborent trois hypothèses concurrentes qui débouchent sur des prédictions différentes en ce qui a trait à la relation entre la réserve résultant de l'utilisation de la méthode DEPS et la valeur marchande de l'entreprise. Les résultats indiquent une relation négative significative entre cette réserve et la valeur comptable de l'entreprise, relation qui ne concorde pas avec le prix de ladite réserve que l'on voudrait assimiler à un actif non comptabilisé, mais qui cadre avec un modèle selon lequel la réserve résultant de l'utilisation de la méthode DEPS est considérée comme une mesure de l'incidence des hausses du prix des intrants sur la valeur de l'entreprise.

Lee (1988) finds that LIFO firms have higher earnings‐price (EP) ratios than non‐LIFO firms despite the income‐reducing effects of LIFO, a result contrary to economic intuition that Lee describes as a “puzzle.” This paper attempts to resolve this puzzle by introducing refined measures of variables that are related to both EP ratios and inventory costing method choices. The improved proxies are analysts' expectations of future growth rather than realized growth, beta computed using a procedure designed to reduce measurement error rather than the usual OLS beta, and leverage as a supplemental risk measure. Further, we control for expected earnings changes, since transitory earnings shocks that are not expected to persist in future earnings affect the numerator of the EP ratio. After controlling for these factors, we find that EP ratios for LIFO firms are actually lower than those of non‐LIFO firms, a result consistent with economic intuition and the result expected by Lee.

This paper shows that the book-to-market (B/M) effect is greater for stocks with higher idiosyncratic return volatility, higher transaction costs, and lower investor sophistication, consistent with the market-mispricing explanation for the anomaly. The B/M effect for high volatility stocks exceeds that for the low volatility stocks in 20 of the 22 sample years. Also, volatility exhibits significant incremental power beyond transaction costs and investor sophistication measures in explaining cross-sectional variation in the B/M effect. These findings are consistent with the Shleifer and Vishny (1997) thesis that risk associated with the volatility of arbitrage returns deters arbitrage activity and is an important reason why the B/M effect exists.

Frankel and Lee (1998) show that the value-to-price ratio (Vf/P) predicts future abnormal returns for up to three years, where Vf is an estimate of fundamental value based on a residual income valuation framework operationalized using analyst earnings forecasts. In this study, we examine whether the Vf/P effect is due to market mispricing or omitted risk factors. We find that the Vf/P effect is partially concentrated around the future earnings announcements, consistent with the mispricing explanation. On using an extensive set of risk proxies, suggested by Gebhardt et al. (2001) and Gode and Mohanram (2001), we also find that Vf/P is significantly related to some risk proxies. However, after controlling for these risk factors, Vf/P continues to exhibit a significant positive association with future returns suggesting that these risk factors are not responsible for the Vf/P effect. Overall, the results seem consistent with the mispricing explanation for the Vf/P effect.