Knowledge that Transforms

I examine three composite analyst forecast of earnings per share as proxies for expected earnings. The most current forecast weakly dominates the mean and median forecasts in accuracy. This is evidence that forecast dates are more relevant for determining accuracy than individual error. Consistent with previous research, I find analysts more accurate than time-series models. However prior knowledge of forecast errors from a quarterly autoregressive model predicts excess stock returns better than prior knowledge of analysts' errors. This is inconsistent with previous research, and is anomalous given analysts' greater accuracy.

In this paper we present and estimate a model of economic depreciation consistent with producer's optimization. The estimated economic depreciation, which is a function of the rate of utilization and level of maintenance, is about half of that used according to tax (accounting) depreciation. The difference between the economic and tax rates of depreciation results in a subsidy and earlier capital replacement. The implicit maximum net tax subsidy expressed as a proportion of the acquisition price of the asset is 13.3% for a sample of Canadian trucking firms.

We examine capital structure changes to investigate the impact of SFAS No. 13 on lessees. While this accounting standard essentially rearranged capital lease disclosures (from footnotes to the balance sheet), mandated capitalization substantially altered key accounting ratios. Our results document a systematic substitution from capital leases to operating leases and nonleases sources of financing. In addition, lessees appear to reduce book leverage by increasing equity and reducing conventional debt. The magnitudes of these responses are cross-sectionally related to preadoption levels of footnoted capital leases.