Knowledge that Transforms

[The sequential treatment adopted in many multiple signal studies is consistent with a simultaneous treatment and with other apparently diverse sequential approaches. More importantly, the conventional residual security return research design, which is also a sequential approach, can lead to downward-biased estimates of the incremental explanatory power of the accounting variables introduced at the second stage. This finding is striking in that it implies that the most pervasive use of a sequential approach is likely to lead to biased results.]

[This paper presents a replication and correction of a 1978 paper concerning the security market reaction to discretionary accounting changes (a switch to LIFO). The paper contains a flaw in the experimental design. Once the design is corrected, some of the conclusions reached in the original paper must be revised. However, the corrected results do not negate the finding that the security market reaction to a LIFO adoption is conditional on earnings.]

[This study investigates the influence of both the state corporate income tax rate and the form of the income tax base structure on foreign investment in manufacturing assets. An econometric model of foreign investment is derived from a supply-oriented theory of regional investment. That is, the decision to develop productive capacity in one region as opposed to another is due to regional advantages. Empirical results suggest that tax structures that use the unitary method of accounting have a substantial impact on the amounts of foreign investment. On the other hand, business income tax rates appear to have little impact.]

[Previous market-based research has generally failed to detect significantly negative market price reaction to the issuance of SFAS No. 8. Using standardized abnormal returns, this study re-examines the issue. Reaction to events culminating in the issuance of SFAS No. 52 is also studied. Finally, since the accounting method used prior to SFAS No. 8 may be related to the costs imposed by SFAS No. 8, the method is determined and its effect on the observed market reactions is investigated. Our results indicate an overall negative reaction to SFAS No. 8, with a positive reaction to SFAS No. 52. In addition, the pre-SFAS No. 8 method of accounting for foreign currency translation is found to be related to the market reactions to SFAS No. 8 and SFAS No. 52 in mixed and unpredictable ways.]

[Critics allege that audit committees often fail to mitigate management pressure on auditors when disputes arise during an audit. The objective of this study is to investigate factors that may affect the likelihood that audit committees will support auditors, rather than management, in audit disputes. A repeated measures experiment was conducted using 179 audit committee members as subjects. Analysis of variance results show that backgrounds of audit committee members may be predictive of their willingness to support auditors involved in disputes with client management. Also, two contextual variables seem important-whether the relevant professional standards are objective and the relative financial condition of the audited firm.]

[The Financial Accounting Standards Board (FASB) is soliciting empirical evidence on the accuracy of price indexes for estimating the current cost of machinery and equipment in compliance with Statement #33. Recent studies indicated that measurement errors in current cost data appear to dominate the potential information content of the Statement #33 disclosures. This study investigates the sign, magnitude, and sources of the potential measurement error in the estimates of current cost generated by alternative levels of specificity of the Producer Price Indexes (PPI). The research method consists of statistical analyses to examine the distributional properties of the PPI estimates compared to the criterion variable of the actual current order price of the assets. The results indicate that, in general, the measurement error tends to be an overstatement of new current cost. The major sources of measurement error appear to be product mix errors, pricing errors, and inadequate adjustments for quality change. Product mix errors seem to be the dominant factor for Electrical and Miscellaneous Equipment, pricing errors for General Purpose Equipment, and inadequate quality change adjustments for Machine Tools and Special Industry Equipment.]

[The primary objective of this study is to illustrate why an adequate historical inquiry should be considered an integral part of all "events" studies. We examine a recent events study that attempted to test the impact of the Securities Act of 1933. Our examination of the historical record results in three major criticisms of the author's research design: (1) lack of a control group, (2) an unsubstantiated test period, and (3) apparent misclassification of events (favorable/unfavorable/control) during the test period. We believe that these problems invalidate the conclusion that the Securities Act of 1933 had an adverse impact on stockholders' wealth.]

[This paper re-examines Basu's [1978] finding that earnings yields are related to the unexpected earnings-security returns association in a manner consistent with biased investor expectations of earnings. The results indicate that those early findings were due to (1) a classification bias inherent in the market index earnings expectation model used, and (2) failure of the returns conditioning model to incorporate a share price effect on security returns. Both factors in the research design have implications for contemporary studies of the unexpected earnings-security returns association.]

[This paper examines the effects of outcome information on managerial decision evaluations. Specifically, based on cognitive considerations, hypotheses are developed about a base-line effect of outcome information and attenuation of that effect by: (1) the evaluator's prior involvement with the evaluatee's decision process, and (2) the extent to which reported outcomes imply evaluatee responsibility for anticipating such outcomes. The hypotheses are confirmed by the results of an experiment set within the context of capital budgeting. Implications of these results are discussed in terms of information system design and the process of generalizing psychological research into accounting contexts.]