This paper evaluates the information content of the treasury stock method for computing diluted earnings per share (EPS). We demonstrate that the treasury stock method decreases the annual association between earnings changes and stock returns and explain why this is the case. Further, we show that the treasury stock method leads to a dilutive adjustment that biases the random walk model of annual earnings in a predictable direction. Finally, we demonstrate that using the treasury stock method appears to confuse both analysts and investors: analysts' forecast errors increase with the size of the dilutive adjustment, and the association between unexpected earnings and stock returns at the earnings announcement date weakens as the dilutive adjustment increases.

Abstract Graphs in corporate annual reports form part of a powerfully designed annual report package that offers considerable potential for “impression management.” The primary purpose of this paper is to determine whether graph use depends on corporate performance. Time‐series analysis, not previously used in the financial graphs literature, allows discretionary changes in graph use by companies to be identified and related to changes in individual companies' corporate performance over time. Based on the prior financial graphs and accounting choice literature, we develop two hypotheses that relate changes in graph use to changes in corporate performance. These hypotheses focus on the aggregate and individual company levels. We base our analysis on the corporate annual reports of 137 top UK companies that were in continued existence during the five‐year period from 1988 to 1992. At both the aggregate and individual company levels, we find the decision to use key financial variable (KFV) graphs, the primary graphical choice, to be associated positively with corporate performance measures. This finding is consistent with the manipulation hypothesis ‐ that is, that financial graphs in corporate annual reports are used to “manage” favorably the reader's impression of company performance, and hence that there is a reporting bias.

Abstract This paper evaluates the information content of the treasury stock method for computing diluted earnings per share (EPS). We demonstrate that the treasury stock method decreases the annual association between earnings changes and stock returns and explain why this is the case. Further, we show that the treasury stock method leads to a dilutive adjustment that biases the random walk model of annual earnings in a predictable direction. Finally, we demonstrate that using the treasury stock method appears to confuse both analysts and investors: analysts' forecast errors increase with the size of the dilutive adjustment, and the association between unexpected earnings and stock returns at the earnings announcement date weakens as the dilutive adjustment increases.

Abstract In this paper, we embed the double entry accounting structure in a simple belief revision (estimation) problem. We ask the following question: Presented with a set of financial statements (and priors), what is the reader's “best guess” of the underlying transactions that generated these statements? Two properties of accounting information facilitate a particularly simple closed form solution to this estimation problem. First, accounting information is the outcome of a linear aggregation process. Second, the aggregation rule is double entry.

In this paper, we embed the double entry accounting structure in a simple belief revision (estimation) problem. We ask the following question: Presented with a set of financial statements (and priors), what is the reader's “best guess” of the underlying transactions that generated these statements? Two properties of accounting information facilitate a particularly simple closed form solution to this estimation problem. First, accounting information is the outcome of a linear aggregation process. Second, the aggregation rule is double entry.