This study distinguishes between the information in the Ou and Penman (1989a) Pr measure and that in analysts' forecasts of earnings. For cases where analysts' forecasts are available, trading on Pr produces abnormal returns only when the predictions of Pr and those of analysts' forecasts disagree. This is consistent with Pr capturing some information not impounded in market prices. However, abnormal returns to this trading strategy continue for up to 72 months after the release of the data necessary to compute Pr. This is consistent with Pr proxying for the effects of omitted risk factors.

In 1981 the FASB issued a new standard for accounting for foreign currency translation, SFAS 52. The standard provided a gradual transition period, allowing firms to select from several possible adoption dates. This study extends the research on the positive theory of accounting choice to examine the factors associated with a management's choice of adoption date. The comparison reveals that early adopters were smaller, typically decreased in pre-charge earnings the year before adoption, had less stock owned by directors and officers, and were more constrained on dividend payouts and interest coverage ratios than later adopters.

Provisions in the securities acts provide incentives to purchasers of common stocks to initiate class action lawsuits when stock prices decline at and preceding announcements that directly reduce, or imply a reduction in, previously reported accounting book values. Reported common stock returns associated with alleged misrepresentations in financial statements are consistent with incentives provided by the law. Classification of misrepresentations based on hypothesized relations between announcements and security returns results in observed differences in the association between litigated accounting announcements and common stock returns.

In this paper we critically evaluate the standard-setting inferences that can be drawn from value relevance research studies that are motivated by standard setting. Our evaluation concentrates on the theories of accounting, standard setting and valuation that underlie those inferences. Unless those underlying theories are descriptive of accounting, standard setting and valuation, the value-relevance literature's reported associations between accounting numbers and common equity valuations have limited implications or inferences for standard setting; they are mere associations. We argue that the underlying theories are not descriptive and hence drawing standard-setting inferences is difficult.

Contrary to previous studies, we find managers change depreciation policies in predictable ways. We identify three dimensions of depreciation-policy changes: whether it is a method change or an estimate revision; whether it is income-increasing or decreasing; and whether it applies to new assets only or both new and existing assets. This disaggregation leads to three findings: First, a 1981 tax law altered the frequency of estimate revisions and method changes. Second, firms adopting income-increasing method changes for all assets experience worse performance than those adopting such changes only for new assets. Finally, non-income-increasing policy changes are associated with changes in investment opportunities.

We provide a positive analysis of a firm's decision to report the operations of a financial subsidiary on a consolidated versus an unconsolidated basis. Our evidence indicates that the firm is more likely to choose consolidated reporting the greater the operating, financial, and informational interdependencies between parent and subsidiary. Moreover, our evidence offers no support for the FASB hypothesis that firms use unconsolidated financial subsidíaries to understate the fixed claims on their balance sheets.

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.