[This study examines the effect of the uncertainty in analysts' earnings forecasts on the relation between unexpected returns and unexpected earnings. Numerous theorists have considered the effect of uncertainty on firm value, with particular interest in the uncertainty in a firm's future cash flows that underpin firm value. Since accrual accounting earnings represent a theoretical proxy for future cash flows, the effect of earnings uncertainty on firm value is also of considerable interest. However, observed uncertainty in accounting earnings may be attributable to noise (garbling) in the earnings signal or to the fundamental uncertainty of expected future cash flows, or both. Moreover, theory suggests these different forms of uncertainty may have differing effects on firm value. To date, there is little empirical evidence concerning the effect of uncertainty in earnings on firm value. We investigate the effect of ex ante earnings uncertainty by using the familiar linear relation between unexpected stock returns (UR) and unexpected earnings (UE), with 3,167 firm-year observations collected over the six-year period 1979-84. The variance in analysts' earnings forecasts just prior to a firm's annual earnings announcement is employed as our firm-specific proxy for ex ante uncertainty. Our results indicate a systematic relation between ex ante uncertainty and the information content of earnings. A given unit of earnings news has a greater effect on unexpected stock price change as the amount of pre-earnings-announcement uncertainty decreases. Firms with relatively high ex ante uncertainty exhibit little or no systematic price change at the time earnings are announced. Sensitivity tests reveal our results to be robust over numerous alternative specifications of the variables and models employed. Sensitivity tests also suggest that our results are not driven by either firm size or the amount of information available about the firm. In addition, we develop and report results of a model that controls for the effects of uncertainty. This results imply that the dispersion (disagreement) in analysts'earnings forecasts is more likely to be a proxy for noise in the financial reporting system than a proxy for fundamental uncertainty in a firm's future cash flows.]

[This study investigates the incremental information in alternative measures of constant dollar and current cost operating income reported under SFAS No. 33 over historical cost income and its cash and accural components. To do so, it examines contemporaneous associations between unexpected returns at the time of release of the annual report or 10-K report and variables measuring the unexpected components of these alternative income measures. The research design exploits the difference in timing of the release of historical cost income and of SFAS No. 33 income. The empirical analysis indicates that current cost and constant dollar operating income measures have incremental information over historical cost income and its cash and accural components. The results also indicate that there is incremental information in cash flow over that conveyed by alternative measures of constant dollar and current cost operating income. However, incremental information in SFAS No. 33 measures and of cash flow is observed only for a subset of the industries examined.]

Examines the effect of the uncertainty in analysts' earnings forecasts on the relation between unexpected returns (UR) and unexpected earnings (UE). Review of related research; Description of measures and research methodology; Model for controlling ex ante uncertainty; Implications of the study.

This study Investigates the Incremental information in alternative measures of constant dollar and current cost operating income reported under SFAS No. 33 over historical cost income and its cash and accrual components. To do so, it examines contemporaneous associations between unexpected returns at the time of release of the annual report or 10-K report and variables measuring the unexpected components of these alternative income measures. The research design exploits the difference in timing of the release of historical cost income and of SFAS No. 33 income. The empirical analysis indicates that current cost and constant dollar operating income measures have Incremental information over historical cost income and its cash and accrual components. The results also indicate that there is Incremental information in cash flow over that conveyed by alternative measures of constant dollar and current cost operating income. However, Incremental Information in SFAS No. 33 measures and of cash flow is observed only for a subset of the industries examined.

We identify two research design issues that explain the inconsistency between the theoretically predicted negative relation between audit effort and misstatements (measured using restatements) and empirical findings. First, auditor risk adjustment behavior induces an upward bias in the association between audit effort and restatements. Second, the theoretical prediction applies only to audited financial reports (i.e., annual reports) and not to unaudited reports (i.e., interim quarterly reports). Comingling restatements of audited with unaudited reports introduces an additional upward bias in the association between audit effort and restatements. After correcting for these two sources of bias, we find a robust negative association between audit effort and annual report restatements. JEL Classification: M49. Data Availability: Data used in this study are available from public sources.

We provide evidence on the effects of SFAS 133 on the risk relevance of accounting measures of bank derivative exposures to bond markets. First, we find that interest rate derivatives classified as hedging are more negatively associated with fixed-rate bond spreads after SFAS 133. We also find that hedging derivatives offset non-trading positions to a greater extent after SFAS 133. Second, for the largest 25 banks, we find that interest and foreign exchange rate trading derivatives are more negatively associated with fixed-rate bond spreads after SFAS 133, consistent with more economic hedges being classified as trading after SFAS 133. For these banks, trading derivative exposures offset non-derivative trading exposures to a greater extent after SFAS 133. Our results suggest that, contrary to critics’ claims, SFAS 133 has increased the risk relevance of accounting measures of derivative exposures to bond investors and benefited banks in terms of reducing their cost of capital.

We provide evidence on how investor valuation of derivative financial instruments differs depending upon whether the fair value of these instruments is recognized or disclosed. Expanded disclosures and accounting practices prior to SFAS No. 133 and mandatory recognition of derivative fair values after SFAS No. 133 provide a natural setting for comparing the valuation implications of recognized and disclosed derivative fair value information. This unique setting mitigates many of the research design problems with recognition versus disclosure studies. Using a sample of banks that simultaneously hold recognized and disclosed derivatives prior to SFAS No. 133, we find that the valuation coefficients on recognized derivatives are significant, whereas the valuation coefficients on disclosed derivatives are not significant. Further, using a sample of banks that have only disclosed derivatives prior to SFAS No. 133, which are recognized after SFAS No.133, we find that while the valuation coefficients on disclosed derivatives are not significant, the valuation coefficients on recognized derivatives are significant. These results are consistent with the view that recognition and disclosure are not substitutes. Our findings suggest that SFAS No. 133 has increased the transparency of derivative financial instruments.

Seasonal fluctuations in a firm’s business activities can affect its balance sheet and give rise to seasonally predictable accruals. We find that seasonal patterns in accruals are associated with future stock returns. Specifically, we find that firms with historically lower (higher) accruals in a given fiscal quarter have higher (lower) stock returns in the months when those accruals are expected to be announced. Our results suggest that investors do not fully understand and price historical information on accruals seasonality. Additional analyses suggest that the emergence of this accruals seasonality anomaly is concentrated in the post-2001 period and driven by the effects of unsophisticated arbitrage against the accruals anomaly.

Despite the increased frequency of analyst forecasts during earnings announcements, empirical evidence on the interaction between the information in the earnings announcement and these forecasts is limited. We examine the implications of reinforcing and contradicting analyst forecast revisions issued during earnings announcements (days 0 and +1) on the market response to unexpected earnings. We classify forecast revisions as reinforcing (contradicting) when the sign of analyst forecast revisions agrees (disagrees) with the sign of unexpected earnings. We document larger (smaller) earnings response coefficients for announcements accompanied by reinforcing (contradicting) analyst forecast revisions. Analyses of management forecasts suggest that analyst revisions and management forecasts convey complementary information. Cross-sectional tests show that investors react more to earnings announcements accompanied by analyst forecast revisions when there is greater consensus among analysts (lower dispersion) and that better earnings quality (higher persistence) mitigates the negative impact of contradictory analyst forecast revisions.

This study examines the impact of mandatory IFRS adoption on IPO underpricing and the relative amount of IPO capital raised in foreign markets. Using a difference-in-differences design, we find a decrease in IPO underpricing and an increase in the relative proceeds from foreign markets following mandatory IFRS adoption. We also find that mandatory IFRS adoption has a greater impact on IPO underpricing and relative foreign proceeds for firms in countries with a larger number of accounting changes, and this relation is more pronounced among firms in countries with stronger implementation credibility. In addition, we find that the decrease in underpricing associated with mandatory IFRS adoption holds for both domestic IPOs and global IPOs, and this effect is more pronounced for global IPOs than for domestic IPOs. Overall, our study contributes to the literature by documenting the impact of changes in financial accounting standards on IPO underpricing and capital market globalization.