Knowledge that Transforms

Abstract Using a sample of publicly traded savings and loan associations (S&Ls), this paper provides evidence that off-balance-sheet derivatives activities are positively associated with tower stock-price interest rate sensitivity. Similar to the results for derivatives, on-balance-sheet exposures to interest rate changes, as measured by the maturity mismatch of institutions' assets and liabilities, are also value relevant. Currently, the measures of on-balance-sheet interest rate risk and the corresponding impact of derivatives used in this study are not required annual report disclosures. Rather, these data are obtained from regulatory filings. The reporting of the impact of derivatives on the corresponding measure of on-balance- sheet risk is analogous to the concept of "at-risk" disclosures for derivatives which have been encouraged by the FASB and SEC. Therefore, the results suggest that the proposed disclosures will provide value-relevant information about interest rate risk for S&Ls.

Abstract The paper demonstrates empirically that earnings prepared according to Generally Accepted Accounting Principles (GAAP earnings) have properties necessary to serve as a substitute for dividends in equity valuation analysis. Dividends reduce subsequent GAAP earnings, and "intrinsic" equity prices calculated by forecasting earnings are thus reduced by current dividends. This behavior is in accordance with the Miller and Modigliani principle-the displacement property-which states that the payment of dividends reduces prices, dollar for dollar. Further, the paper demonstrates that it this displacement is accommodated in calculating equity prices from forecasted GAAP earnings, those prices exhibit the dividend irrelevance property, that is, calculated prices are insensitive to future dividends. Forecasted GAAP earnings cannot be substituted for dividends, dollar for dollar, but the two are substitutes in the sense that the replacement value of expected dividends reduces forecasted earnings, dollar for dollar.

Abstract Reviews the book "Theory of Accounting and Control," by Shyam Sunder.

Abstract Reviews the book "Accounting for Overheads: Critique and Reforms," by Michael Bromwich.

Abstract This study shows that subjects acting as auditors in laboratory experiments have more trouble assessing fraud risk when their optimal strategies are highly sensitive to those assessments. Interestingly, risk assessment is particularly difficult when the auditor faces high legal liability for audit failure and audits a firm with strong internal controls. The results have practical implications for auditors, who must assess fraud risk accurately in order to be cost competitive while avoiding audit failures that might result in legal liability. The results also have implications for auditing research, because they indicate settings in which traditional equilibrium analyses (which assume accurate fraud risk assessment) are likely to have low predictive power.

Abstract Reviews the book "Financial Warnings," by Charles W. Mulford and Eugene E. Comiskey.

Abstract Prior research indicates that analysts' forecasts of earnings tend to be optimistic. Analysts' optimism may be attributed to experience, cognitive information search strategies, motivational incentives or some combination thereof. In this study, we conduct an experiment that uses a computerized eye-movement retinal imaging system to capture the cognitive search strategy of 60 professional financial analysts. We find that, within the experiment, more accurate analysts employ a directive information search strategy, whereas less accurate analysts employ a sequential search strategy. Experimental results also indicate that motivational incentives intensify the analysts' tendency to provide optimistic earnings forecasts. We also conduct an examination of the analysts' predictive accuracy outside the experimental setting. We find a significant relation between historical accuracy and the analysts' cognitive search strategy observed in the experiment. Post-experiment survey results provide insight into the linkage between specific accounting information used by the analysts and the accuracy of their forecasts.

Abstract Reviews the book "Japanese Accounting: A Historical Approach," by Kyojiro Someya.

Abstract Reviews the book "Changing America's Tax System: A Guide to the Debate," by Martin Sullivan.

Abstract Reviews the book "Management Accounting and Control Systems," by Norman B. Macintosh.