Knowledge that Transforms

Abstract ABSTRACT: 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.

Abstract ABSTRACT: Previous analytical work has shown that a firm's cash recovery rate (the ratio of cash recovery during a period to gross investments outstanding during the period) is related to the internal rate of return of firm projects in the event that the firm reinvests all of its cash flows. This paper extends the previous analytical work by establishing a link between a firm's cash recovery rate and the internal rate of return of firm projects in circumstances when the firm does not reinvest all of its cash flows. Additionally, this paper applies the extended model to a group of firms in order to obtain estimates of their internal rates of return. Work of this kind would seem to be of particular interest to economic researchers who are interested in theoretically defensible empirical measures of firm profitability.

Abstract ABSTRACT: 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.

Abstract ABSTRACT: This study reports the results of an experiment in which audit seniors made judgments in analytical review and compliance testing settings. In both settings, results consistent with the hypothesized use of the anchoring and adjustment heuristic were observed. With respect to analytical review, the study alerts auditors to the potential importance of forming expectations concerning a client's audited values without considering the recorded (book) values. With respect to compliance testing, a judgment procedure that mitigates the potentially dangerous consequences of anchoring when judgmental Inferences from sample information must be made is presented. Results of the compliance study were used by the Sampling Standards Task Force of the AICPA in developing Statement on Auditing Standards No. 39, entitled, "Audit Sampling."

Abstract ABSTRACT: This study examines firms' behavior with respect to the systematic intraday timing of earnings and dividend announcements. In particular, it tests the hypothesis that good news is more likely to be released when the security markets are open while bad news appears more frequently after the close of trading. Both endogenous (stock price change) and exogenous (comparison to the preceding period's earnings or dividends) classifications are used to distinguish good news from bad, and both forms support the "good news during, bad news after" hypothesis. An information content analysis using daily stock price data is then performed to illustrate how differences in disclosure timing may affect inferences about the magnitude of stock price response, announcement anticipation or news leakage, and the speed of price adjustment.

Abstract ABSTRACT: This paper proposes a generalized accounting framework designed to be used in a shared data environment where both accountants and non-accountants are interested in maintaining information about the same set of phenomena. This framework, called the REA accounting model, is developed using data modeling techniques, and its underlying structure is found to consist of sets representing economic resources, economic events, and economic agents plus relationships among those sets. Correspondence of REA elements with the accounting theories of Ijiri and Mattessich is discussed. Finally, practical use of the model in the database design phases of view modeling and view integration is presented, and some REA representations of accounting objects are reconciled with those representations found in conventional double-entry systems.

Abstract ABSTRACT: Timeliness of annual reports is an important determinant of their usefulness. This study examines several aspects of the timeliness of earnings announcements which have implications for regulatory actions as well as for research design. The results show a considerable shortening of the reporting lag over the years. This implies that the assumption conveniently made in many "event studies" that the announcement week or month is fixed over the years is inappropriate and tends to weaken the power of the tests. The reporting lag of individual companies appears to be more related to intra-industry patterns and tradition than to company attributes. The ability of most companies to report welt ahead of the filing deadline coupled with the finding that bad news tends to be delayed might be considered in assessing the adequacy of the length of the current filing period. The price reaction to the disclosure of early earnings announcements was significantly more pronounced than the reaction to late announcements suggesting a decrease in the information content as the reporting lag increases.

Abstract ABSTRACT: This study uses an agency theory framework to analyze firms' incentives to hire external auditing. It postulates that a major reason for firms to hire this service is to help control the conflict of interests among firm managers, shareholders, and bond-holders. Firm characteristics which affect the severity of this conflict or the marginal cost of external auditing are expected to influence a firm's demand for this service. Based on this analysis, leverage, firm size, and number of accounting-based debt covenants are predicted to increase the probability that a firm will voluntarily hire external auditing. The firm manager's ownership share is predicted to have the opposite effect. Univariate and multivariate tests were conducted on a sample of 165 NYSE and OTC firms from the year 1926. The results generally supported the hypothesized effects of leverage and accounting-based debt covenants, and moderately supported the predicted role of firm size. Manager ownership effects could not be tested due to data problems.

Abstract ABSTRACT: 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.

Abstract ABSTRACT: This study focuses on the influence of qualified opinions on auditor switches. Results from a random sample of SEC-registrants support the contention that firms switch auditors more frequently after receiving qualified opinions. However, it was not found that firms that have received qualified opinions switch systematically to audit firms with a history of rendering proportionally fewer qualified opinions. Also, limited results suggest that qualified firms which switch auditors do not tend subsequently to receive more clean opinions.