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.

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

In an experimental setting when outcomes are stochastically related to actions, predictions of equilibrium behavior depend not only on the participants' preference orderings of outcomes, but also on their orderings of lotteries on outcomes as well. We introduce and test a reward structure that can be utilized in any experimental setting to allow the experimenter to decree beforehand the subjects' preferences for lotteries on experimental outcomes. We show analytically that the proposed reward structure can induce subjects to behave as if they have the decreed preference function defined on experimental outcomes. Empirical tests using two different choice settings provide evidence to support this ability to control preferences.

Abstract ABSTRACT: 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.