Knowledge that Transforms

Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Share Icon Share Facebook Twitter LinkedIn Email Tools Icon Tools Get Permissions Search Site Cite View This Citation Add to Citation Manager Citation Steven J. Kachelmeier; Annual Report and Editorial Commentary for The Accounting Review. The Accounting Review 1 November 2009; 84 (6): 2047–2075. https://doi.org/10.2308/accr.2009.84.6.2047 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentThe Accounting Review Search Advanced Search

ABSTRACT: Accounting and finance researchers show semi-strong form efficiency or lack thereof by using sequences of prices from Center for Research in Security Prices (CRSP) and Compustat data for which there is no model for how these prices arise from individual decisions. One needs a setting in which prices (including bids and asks) as well as information about individuals making the choices are both available. To begin to bridge the gap between theory and data, we extend work done by experimental economists on the double auction and model price formation that is or is not semi-strong efficient. Agents in the model uncover prices in a manner consistent with Hayek's notion of price discovery (Hayek 1948).

ABSTRACT: This study explores causes and effects of business combinations disclosure level. Investigating the association between disclosure level on business combination and acquirers' future performance, I find that acquirers' future performance as measured by the change in ROA and by abnormal stock returns increases with abnormal levels of disclosure on business combinations. Investigating the determinants of business combination disclosure, I find that the disclosure level on business combinations decreases with abnormal levels of the purchase price allocated to goodwill. Both results provide evidence consistent with disclosure theory and suggest that acquirers tend to provide less forthcoming disclosure on less favorable acquisitions (“bad news”). I also provide evidence consistent with investors failing to immediately incorporate the information content of business combination disclosure level into their information set and evidence that investors are quicker to react to firms with negative abnormal disclosure.

ABSTRACT: We examine the optimal choice of hurdle rates in a capital budgeting setting in which a manager receives superior information regarding the profitability of an investment project. Unlike the prior capital budgeting literature that treats the distribution of investment returns as exogenous, we consider a scenario in which the manager can engage in upfront project development activities to improve the quality of investment opportunity. To motivate the project development effort while ensuring truthful information flow, the optimal hurdle rate is always lower than what it would be if the manager's project development effort were directly observable. We show that the optimal hurdle rate can even be below the firm's cost of capital under plausible circumstances. We also examine how the optimal hurdle rate varies with the ex ante quality of the firm's investment opportunities, and find that optimal hurdle rates will be higher in firms whose investment opportunities are relatively good or relatively poor than in firms with investment opportunities of intermediate quality.

ABSTRACT: In an internal control audit, the consequences and assessment subjectivity of control problems motivate managers to try to persuade auditors to lower the assessed severity of an observed control deviation. We report an experiment in which 106 audit seniors evaluate either information technology (IT) or manual control deviations that are potentially indicative of significant deficiencies, after exposure to persuasion tactics based in either concession or denial. For IT control deviations, we find that auditors assess the significance of deficiency lower and the perceived adequacy of management's explanation higher for concessions than for denials. For manual control deviations, we find no differences between concessions and denials. Our results provide evidence of a systematic bias in auditor judgment and indicate a rationale for the ubiquity of management persuasion attempts around control deviations—sometimes they work.

ABSTRACT: This study compares the performance of sell-side equity analysts with and without a Chartered Financial Analyst® (CFA) designation. Using a large sample of forecasts, our tests indicate that CFA charterholders issue forecasts that are timelier than those of non-charterholders. The results for accuracy are mixed. We establish that while charterholders perform at statistically significant higher levels than non-charterholders in some tests, the economic significance of these differences is questionable. For a subsample of analysts, we find evidence that charterholders improve along the dimension of timeliness after they receive their CFA charter. This result provides support for a human-capital explanation in which charterholders improve their productivity during the CFA program. Finally, we show that the market reaction for smaller firms is stronger for charterholders than non-charterholders after controlling for timeliness, boldness, accuracy, and optimism. This result provides evidence consistent with “credentialism,” a variant of signaling theory in which a professional's education level provides a signal about the professional's quality to his or her clients.

ABSTRACT: We develop a model to show that transparent accounting can worsen the asset substitution effect of debt. This negative effect can outweigh the usual positive effect of transparency. We demonstrate this point by comparing pure historical cost accounting to the conservatively skewed accounting regime of lower-of-cost-or-market (LCM). In a market with asymmetric information, the two regimes lead to different degrees of transparency. The more transparent LCM regime produces more efficient results for firms with lower debt levels, while the opaque rule of pure historical cost accounting is preferable for higher debt levels. We explore the implications of this result for the firm's optimal capital structure.