We examine whether financial reporting frequency affects the speed with which accounting information is reflected in security prices. For a sample of 28,824 reporting-frequency observations from 1950 to 1973, we find little evidence of differences in timeliness between firms reporting quarterly and those reporting semiannually, even after controlling for self-selection. However, firms that voluntarily increased reporting frequency from semiannual to quarterly experienced increased timeliness, while firms whose increase was mandated by the SEC did not. We conclude that there is little evidence to support the claim that regulation forcing firms to report more frequently improves earnings timeliness.

In his comment on our paper (1976) McCulloch makes two main points. First, he argues that we have set up our spline function in the wrong way. Second, he argues that our computations are seriously in error. McCulloch also makes one minor point about the placing of knot points. In this reply, we will show that none of these comments in way affect our findings. The first point concerns the way in which we set up our spline As McCulloch correctly points out, we treat M/ Y as spline function of r. The reason for this particular setup, of course, is that we do indeed regard M/ Y as being causally function of r. McCulloch argues, however, that to detect trap one should treat r as spline function of M/ Y. The reasonableness of this argument depends in part on the definition of liquidity According to McCulloch, a trap consists of horizontal section of the demand for money function, or at least horizontal asymptote under the demand for money function, when the interest rate r is placed on the vertical axis and money (or money divided by income, M/ Y) on the horizontal axis. Clearly, by treating M/ Y as spline function of r, we were able to test whether or not the interest elasticity of the money demand function approached infinity at some low interest rate. Furthermore, we were able to test this definition of trap without entailing bias in the coefficients. McCulloch's point, then, concerns only the other definition of trap. More specifically, he argues that our setup did not permit us to determine whether the interest elasticity of the money demand function was infinite at some low interest rate. The reason, according to McCulloch, is that while spline can fit horizontal segment, it cannot fit vertical segment, since it is piecewise polynomial. Apparently, McCulloch is arguing that spline can estimate zero slope coefficient but not an infinite slope coefficient. We have no quarrel with this argument. However, if one were to obtain zero slope coefficient by treating r as spline function of M/ Y, it seems reasonable to assume that one would obtain very large slope coefficient (if the spline program generated output at all) by treating M/ Y as spline function of r. Since we obtained relatively small slope coefficient, we felt justified in concluding that our empirical results did not provide any evidence of horizontal segment to the money demand function. In event, we have re-run our equations treating r as spline function of M/ Y as McCulloch suggests. As we suspected, the results indicate that our finding that there is no evidence of horizontal segment to the money demand function remains intact. Moreover, these results are consistent with our finding that the interest elasticity of the demand for money tended to decline as the interest rate became small, finding that is not unique to our study, as we reported in our paper. The second point concerns the relationship between the estimated parameters and continuity. McCulloch calculates the functional value at the second knot forj= 0 using our estimated parameters for the 1920-1970 period. He finds that for j=0 the value is 2.482, whereas the value for j =1 is + 0.322. McCulloch considers this to be discontinuity and therefore questions the elasticities calculated from these parameters. We agree with McCulloch that this is considerable discontinuity. However, the computations are not seriously in error. The problem is that the decimal point was misplaced. Unfortunately, when our figures were copied from the printouts, the symbol D and the accompanying numbers were completely ignored. The D and the numbers, however, indicate the correct placement of the decimal point. After correctly placing the decimal point, one finds that using the parameters for j=0 for the 1920-1970 period to calculate the functional value for the second knot (XI = 2.286) gives SJ(2.286 -) = .391 -.0477h

LMOST all discussions concerning the imA portance of money in affecting economic activity make reference to the liquidity-trap hypothesis. This important hypothesis states that the elasticity of the demand for money with respect to the rate of becomes infinite at low rates. As J. M. Keynes himself expresses it, after the rate of has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost anyone prefers cash to holding a debt which yields so low a rate of interest (1936, p. 207). Studies by Bronfenbrenner and Mayer (1960), Konstas and Khouja (1969), Laidler (1966), Meltzer (1963) and White (1972), among others, have attempted to confirm or disconfirm this hypothesis by testing whether the elasticity of the demand for money increases as the rate of falls, on the basis that this is the only way it can pass from a finite to an infinite value. Thus far, the evidence mainly disconfirms the liquidity-trap hypothesis. This evidence, however, has generally been obtained by employing ordinary least squares regression methods. Yet, as David Laidler points out, it is not possible to fit directly by regression analysis a function which has a negative slope over part of its range and no slope at all over another part . (1969, p. 97). Past studies, therefore, have not been directly able to determine whether the elasticity becomes infinite at low rates. The purpose of this paper is to test the liquidity-trap hypothesis by employing spline functions. Briefly, these functions represent a special class of approximating functions which allow the dependent variable in a regression to take on different functional relationships with respect to the independent variable in various subintervals of the domain of the independent variable in a continuous fashion. In this way, the problem inherent in previous studies using ordinary least squares techniques can be avoided, permitting a more direct test of the liquidity-trap hypothesis. In short, this paper will provide new and more direct evidence bearing on the issue of an infinitely elastic demand for money function as well as the way in which the important but relatively unknown spline functions may be used to capture various empirical economic relationships. The plan of the remainder of the paper is as follows. The next section contains a discussion of spline theory, followed by a section containing the empirical results obtained by using spline functions. The summary and conclusions are then reported in the last section.

Numerous accounting studies claim that investors fail to rationally price accrual‐related information and that investors are functionally fixated. This study documents the importance of performing robustness tests when testing economic or behavioral explanations for apparent accounting‐related security mispricing. We find that performing robustness tests that exclude a small number of firm‐year observations (approximately 200 firm‐year observations or about 1% of the entire sample) reveals an inverted U‐shaped relation between buy‐and‐hold abnormal returns and total accruals. An inverted U‐shaped relation is inconsistent with the functional fixation (earnings fixation) hypothesis. We conduct similar robustness tests for the abnormal accrual anomaly and the net operating assets anomaly proposed by other investigators, and also find an inverted U‐shaped relation between buy‐and‐hold abnormal returns and abnormal accruals and net operating assets. These findings are inconsistent with the explanations put forth by those investigators. Such evidence leads us to conclude that the accrual‐related anomalies are unlikely to be due to investors' inability to process accounting information, as suggested by the functional fixation hypotheses tested.

The test developed in Mishkin [1983] (hereafter, MT) is widely used to test the rational pricing of accounting numbers. However, contrary to the perception in the accounting literature, the exclusion of variables from the MT's forecasting and pricing equations leads to an omitted variables problem that affects inferences about the rational pricing of accounting variables. Only if the omitted variables are rationally priced is their exclusion irrelevant. Failure to recognize this issue leads accounting researchers to employ the MT without appreciating how omitted variables affect the inferences they draw. We demonstrate that when additional explanatory variables are included in the MT, the rational pricing of accruals is not rejected. That is, the accrual anomaly documented in Sloan [1996] vanishes when additional explanatory variables are incorporated into the MT. We also show that in accounting research settings, where samples are large, ordinary least squares (OLS) is equivalent to the MT. As a result, accounting researchers should consider using OLS or be more explicit about the exact advantages of the MT over OLS in their research setting.

Using the transition of U.S. firms from annual reporting to semi-annual reporting and then to quarterly reporting over the period 1950–1970, we provide evidence on the effects of increased reporting frequency on firms' investment decisions. Estimates from difference-in-differences specifications indicate that increased reporting frequency is associated with an economically large decline in investments. Additional analyses reveal that the decline in investments is most consistent with frequent financial reporting inducing myopic management behavior. Our evidence informs the recent controversial debate about eliminating quarterly reporting for U.S. corporations.