Knowledge that Transforms

Two essentially opposite accounting policy decisions were the FASB proposal to eliminate full cost (FC) accounting and the SEC proposal 13 months later to allow FC accounting while reserve recognition accounting was developed. The SEC's reversal of the FASB decision provides an opportunity to develop additional evidence concerning the market consequences of accounting policy decisions. The authors test whether the SEC proposal had a significant effect on the valuation of FC firms and whether its pricing effect was opposite to that observed at the time of the FASB proposal. A generalized least-squares procedure that takes account of contemporaneous correlation in abnormal return data is employed. The procedure and tests are completely general and appropriate for investigating the market effects of a variety of accounting policy decisions in which cross-sectional correlation of the data is a problem. Evidence is presented that the FC firms had significantly higher returns in the SEC period than the successful efforts firms. Furthermore, within the FC sample, a negative relationship is found between the abnormal returns of individual firms at the times of the FASB and SEC proposals.

This paper evaluates whether the primary and secondary dissemination of earnings forecast revisions by security analysts is reflected in security prices. Security prices were used to determine the profitability (before the cost of search) of trading strategies based on the nonpublic knowledge of forecast revisions. For a sample of 288 weekly earnings forecast revisions, the results were consistent with the hypothesis that early knowledge of forecast revisions could be used to form profitable trading strategies. Furthermore, the secondary dissemination of forecasts continued to have information content at the point of disclosure. These results are inconsistent with the strong form, but consistent with the semi-strong form, of market efficiency. Furthermore, the information contemporaneously available from public sources did not generate equivalently profitable trading rules, indicating that forecast revisions were not deducible from other publicly available information. Finally, some general public policy implications concerning mandatory disclosure of forecasts were drawn.

The results of this field study are generally consistent with those from a previous laboratory experiment which showed that the relationship between budgetary participation and performance is moderated by the personality variable internal-external locus of control. Internals (individuals who feel that they are in control of their own destinies) appear more job-satisfied and perform better under conditions of high participation. By contrast, externals (individuals who attribute the results of their actions to chance, luck, or fate) are more job-satisfied and perform better under conditions of low participation. The complementary findings of the two studies are considered and the implications of the results in the areas of personnel management and control system design are discussed.