Previous studies by Beaver et al. [1970] and Eskew [1979] indicate that the inclusion of accounting-based risk measures in models used to predict the systematic risk of equity securities enables better predictions than security-market-based models which exclude accounting risk measures. This study finds that accounting risk measures do not improve upon market-based systematic risk predictions. The earlier findings of superior predictive ability for accounting-based forecasts are reinterpreted as due to the instability over time of systematic risk, coupled with a fortuitous "shrinking effect" of the ordinary least-squares regression model. Replications of the analysis using portfolios, risk levels, and contemporary values of the accounting risk variables fail to reveal any advantage for accounting-based predictions. Additional tests for the stability of the relationship between accounting and market-based risk measures indicate instability over time and across groups of companies.

The ability of accounting risk measures to aid in explanations and predictions of systematic risk (β) has been studied extensively, and successive studies have reached conflicting conclusions. An element of research design that has varied across studies is the selection of a security market index to serve as a proxy for the unobservable "market portfolio" defined by the underlying capital asset pricing theory. This paper demonstrates empirically that the choice of a market index can have a substantial effect upon the research findings, and offers a partial reconcilation of the apparently contradictory results of earlier studies.

Reviews the book "Financial Reporting: An Accounting Revolution," by William H. Beaver.

[This study evaluates the relation between security returns and funds-based earnings components. We document that proxies for market expectations of the components that are based on measures of historical serial-and cross-dependencies are substantially more accurate than random-walk proxies. Moreover, we detect significantly higher valuations of the operating cash flow component of earnings, relative to current accruals, when market expectations are represented using the dependency-based predictions. Such differential valuation is not detectable for random-walk representations. Contrary to results in Ali (1994), we find incremental information in unexpected cash flows over the whole spectrum (moderate and extreme) of unexpected cash flow realizations.]

This paper documents that the weighting of analysts' annual earnings forecasts implicit in security prices is lower than the historical relation between financial analysts' forecasts and realized earnings. Short positions in securities in the bottom decile and long positions in the top decile of the crosssectional distribution of analysts' early-in-the-year earnings forecasts generate significant hedge-portfolio returns in the year after portfolio formation. This delayed price response is more pronounced for firms with relatively low analyst coverage, consistent with the premise that low financial analyst coverage is associated with a variety of factors that impede the information efficiency of the security market. The hedge-portfolio returns concentrate in the months of subsequent quarterly earnings announcements, suggesting that the delayed security price adjustments reflect the market's failure to incorporate information in analysts' forecasts about future earnings, rather than deficiencies in our conditional expectations of security returns.

This study evaluates the relation between security returns and funds-based earnings components. We document that proxies for market expectations of the components that are based on measures of historical serial- and cross-dependencies are substantially more accurate than random-walk proxies. Moreover, we detect significantly higher valuations of the operating cash flow component of earnings, relative to current accruals, when market expectations are represented using the dependency-based predictions. Such differential valuation is not detectable for random-walk representations. Contrary to results in Ali (1994), we find incremental information in unexpected cash flows over the whole spectrum (moderate and extreme) of unexpected cash flow realizations.