[The American Institute of Certified Public Accountants (AICPA) and its affiliated state societies promote restrictive accountancy laws that limit both the right to express opinions on financial statements and the use of certain occupational titles to licensed public accountants. Although occupational licensing, like other forms of government regulation, is justified as being in the "public interest," critics (e.g., Stigler 1971; Peltzman 1976) suggest that licensing arises because of the professional groups' interest in using the coercive power of government for their own economic advantage. Until 1979, CPAs were content to limit state regulation to the audit function, permitting unlicensed accountants to perform other accounting tasks. With the growing importance of review and compilation services, however, CPAs have sought to restrict the performance of these services too. In addition, the AICPA and state CPA societies have used their influence with state legislatures and licensing boards to impose limitations on the use of professional titles such as "public accountant," "accountant," and "auditor." Whereas some states have adopted relatively permissive licensing laws, others restrict all analytical work and professional titles to licensees. This study explains why some states have adopted more restrictive licensing regimes than others. Hypotheses are developed to test the power of interest groups, political systems, and socioeconomic variables in explaining such differences. The evidence, based on both univariate and multivariate techniques, supports the following general conclusions. Restrictive licensing regimes are more likely in states where the interest-group strength of CPAs is high, as measured by their numbers relative to public accountants who are not CPAs. Restrictiveness is inversely related to statewide competition between Republicans and Democrats and is slightly related to legislative turnover.]

Reviews the methodology of models involving qualitative and limited-dependent variables and their application in accounting research. Logit and probit models and discriminant analysis; Tobit model and the truncated regression model; Models involving sample selection bias; Models involving self-selectivity; Prediction of the effects of mandated accounting changes.

Explains why some states in the United States have adopted relatively permissive licensing laws for public accountants. Use of hypotheses to test the power of interest groups, political systems and socioeconomic variables in explaining differences in licensing requirements; Role of the American Institute of Certified Public Accountants.

Presents a linear aggregation model of valuation of assets to help understand how the minimum mean squared error valuation rule is affected by various parameters that characterize the economy and the circumstances under which historical-cost valuation rule yields a statistically more precise estimate of the unobserved economic value of firms' assets than the current valuation rule.

[Errors arise in measuring changes in prices of assets due to imperfection and incompleteness of asset markets. Furthermore, the rates of price-change, and the magnitudes of errors of measurement vary and are often correlated across assets. Suppose we characterize an economy by means and variances of price changes for individual goods and of measurement errors in these changes as well as by the degree of diversification in the asset portfolios held by individual firms. In such an economy, the linear valuation rule that yields the most efficient estimate of change in the economic value of these asset portfolios is the one that minimizes the mean squared error (MSE). This paper presents a linear aggregation model of valuation to help understand how the minimum MSE valuation rule is affected by various parameters that characterize the economy, and the circumstances under which historical-cost valuation rule yields a (statistically) more precise estimate of the unobserved economic value of firms' assets than the current valuation rule. The analytical findings of the paper are consistent with the reluctance of accountants to depart from historical cost in spite of the existence of low inflation, and in spite of scholarly critiques of this valuation rule by Chambers (1966), Edwards and Bell (1961), Sterling (1970) and others. They are also consistent with the use of specific price indexes by most firms to prepare SFAS 33 disclosures. Several testable implicatons of the results are provided. A direct comparison of the characteristics of valuation rules is complicated by the heterogeneity of the decision contexts in which accounting numbers are used. We use the mean squared error (MSE) between the principal value and its various estimators to rank the latter. Using this criterion, previous simpler models that ignore the presence of measurement errors in price changes have shown that the use of increasingly detailed price indexes yields more precise valuation; current valuation is the most precise valuation rule because it uses the most detailed set of indexes (Sunder 1978). We show that this basic result does not hold when the measurement of price changes is subject to errors. As the magnitude of these measurement errors increases relative to the magnitude of price changes, the most accurate valuation rule requires a less detailed set of price indexes. A key implication of this result is that the existence of inflation or deflation is not sufficient for general-price-level valuation, specific-price-index valuation, or current valuation to dominate historical-cost valuation as an estimator of the economic value of firms' assets. Historical-cost valuation is dominated by others only when the magnitude of price changes are large relative to the errors of measurement in price changes.]

[We examine risk, return, and abnormal return behavior in the days around quarterly earnings announcements, using a research design that allows risk to vary daily in event time. We test several hypotheses concerning the effect on security prices of earnings announcements per se (i.e., ignoring both the sign and the magnitude of earnings). The first hypothesis concerns the resolution of uncertainty over time. By conveying information about firms' activities, earnings announcements resolve some uncertainty about future cash flows, but the concurrent price reactions increase the variability and covariability of securities' returns during the announcements. Thus, it is hypothesized that return variances and betas, and therefore expected returns, increase during earnings announcement periods (Stapleton and Subrahmanyam 1979; Epstein and Turnbull 1980; Choi and Salamon 1989). Previous research has demonstrated anomalous positive abnormal returns during earnings announcements (Chambers and Penman 1984; Penman 1984, 1987; Chari et al. 1988). Because risk was not allowed to vary in event time in this research, it does not adequately distinguish between increased expected returns and true abnormal returns. We report that abnormal returns remain after controlling for risk increases at earnings announcements. The abnormal returns are not related to any over- or under-reaction by the market to earnings news (see, e.g., DeBondt and Thaler 1985, 1987; Bernard and Thomas 1989) because we do not condition on the earnings realization. The second hypothesis (the information hypothesis) is that the timing of an earnings announcement is informative because managers systematically announce good news early and bad news late (Givoly and Palmon 1982; Chambers and Penman 1984; Kross and Schroeder 1984). The hypothesis predicts that average abnornal returns: (1) are positive at the earnings announcement, (2) are negative prior to the announcement, and (3) cumulate to zero by the end of the announcement period. Our tests extend those of Chari et al. (1988), Kross and Schroeder (1984) and Chambers and Penman (1984) by examining the pattern of returns around earnings announcements for the population of stocks. The pattern we observe is not as predicted by the information hypothesis. Finally, we investigate whether cross-sectional variation in announcement-period risks and returns is a function of firm size, which is a proxy for the increase in information arrival during earnings announcement periods. The evidence reveals that, after controlling for risk increases, abnormal returns generally are positive and decreasing in firm size. For the smallest size decile, abnormal returns in the ten days up to and including the earnings announcement are approximately 1.75 percent in the average quarter, or approximately 7 percent over only 40 trading days per year. This adds to an impressive body of size-related anomalies. We use these results to reexamine Hand's (1990) reinterpretation of the functional fixation hypothesis. Hand investigated quarterly earnings that included previously announced book gains from debt-equity swaps. He distinguished between "sophisticated" and "unsophisticated" investors, hypothesizing that only the former correctly comprehend the different implications of swap gains and other components of earnings. He found that abnormal returns increase in a variable representing the interaction between the swap gain and a proxy for the probability that the marginal investor is unsophisticated. We are skeptical about both the hypothesis and whether it predicts the observed result. We interpret Hand's result as similar to the puzzling but typical size effect around earnings announcements. It seems unlikely to be due to swap gains, to the sign or magnitude of earnings information released at the time, to errors in measuring the earnings information released, or to functional fixation.]

[Using laboratory market data, this study demonstrates that consumers respond differently to a market event depending on the information reported about the event. Specifically, they respond more rapidly to an economically predicted price increase when they are informed that sellers' marginal costs have increased, but they resist price increases if they know that the sellers' profits have increased. These information effects are based on the principle of dual entitlements, which posits that purchase decisions are influenced not only by the direct economic utility of the purchase, but also by consumers' perceptions of the equity or fairness of a negotiated price. Survey evidence from prior studies indicates that consumers (buyers) justify price increases driven by increases in sellers' costs, but resist price increases that increase sellers' profits. This study goes beyond surveys to investigate these predictions in a market setting affected by an economic event that simultaneously increases both the marginal costs incurred and the profits earned by sellers. Specifically, we examine the combined effect of a change in the sellers' tax rate and tax base. Nine laboratory markets in three separate financial information structures were conducted to investigate the predicted information effects. Each market had ten traders (five buyers and five sellers), for a total of 90 subjects. In three markets, buyers were apprised of an increase in sellers' marginal tax costs. In three other markets, buyers were informed of an increase in sellers' after-tax profits. Finally, three control markets with no information disclosures served as a baseline. Subjects in each market were student volunteers who received their market profits in real cash, in conformance with the tenets of induced-value theory. The results have implications for the financial disclosures volunteered by firms or mandated by regulatory bodies. While the accounting literature has traditionally stressed information effects on investors (Lev 1989), the body of users affected by financial reporting is much larger and includes the consumers who purchase the goods and services of disclosing firms (Financial Accounting Standards Board 1978, par. 24). This study suggests that financial disclosures can influence consumer behavior in competitive markets for goods and services.]

[Tax law complexity and ambiguity may result in uncertainty about taxable income (Slemrod 1988) and are of concern to policy-making bodies such as the ABA, the AICPA, and the IRS (Sheppard and Evans 1990). Several studies have modeled the effects of uncertainty on taxpayer reporting and the role of tax practitioners in reducing uncertainty (Alm 1988; Shavell 1988; Beck and Jung 1989a, 1989b; Scotchmer 1989a, 1989b; and Scotchmer and Slemrod 1989). Empirical and experimental research, however, have not kept pace. This paper reports experimental tests of the effects of income uncertainty and other economic factors based on tax reporting models in Beck and Jung (1989a). Hypotheses were tested regarding the effects of changes in the uncertainty level, tax rate, penalty rate, and audit probability on reported taxable income. In addition, the explanatory power of the models was evaluated by comparing the taxable income reported by the subjects with model-based predictions. Subjects were endowed with a fictitious currency and were given a range of possible post-audit taxable incomes from which to report. A proportional tax was paid on reported income and, in the event of an audit, a monetary penalty was imposed when the actual taxable income was greater than the amount reported. Incentives were provided by making the subjects' post-experimental remuneration a function of the after-tax income retained from each experimental trial. Since previous theoretical research indicates that taxpayers' reporting decisions are sensitive to risk preferences, three seperate experiments were performed and the results were analyzed by repeated measures ANOVAs. In the first and second experiments, subjects' risk-taking attitudes were controlled by the Berg et al. (1986) mechanism. Risk-neutrality (risk-aversion) was induced in the first (second) experiment, while subjects' preferences in the third experiment were measured ex post, rather than controlled. Two measures of taxpayer reports were employed-the actual income reported by subjects and the corresponding reporting fractile. The experimental results provided support for risk-neutral predictions. First, risk-neutral subjects were found to report higher levels of income when penalty rates and audit probabilities increased. Second, the tax rate did not affect the reporting behavior of risk-neutral subjects. Third, income reports were affected by two interactions: audit probability with uncertainty and penalty rate with uncertainty. Specifically, a reduction in uncertainty led to higher (lower) levels of reported taxable income when penalty rates or audit probabilities were decreased (increased). In addition, the mean reporting fractile did not change with the uncertainty level and the deviation of mean observed reports from predicted levels was small. For the risk-averse model, the predicted tax rate effect was marginally significant for reports and insignificant for fractiles. Furthermore, only a small percentage of the variance was explained by the interaction of tax rate and uncertainty. Report fractiles, however, did increase significantly as predicted when uncertainty was elevated.]

Examines risk, return and abnormal return behavior in the days around quarterly earnings announcements, using a research design that allows risk to vary daily in event time. Result of the tests conducted on several hypotheses concerning the effect on security prices of earnings announcements; Investigation whether cross-sectional variation in announcement-period risks and returns is a function of firm size.