The earnings ‘time-series literature’ in accounting focuses on the statistical characteristics of the processes which generate corporate earnings. In order to further our understanding of earnings behavior, this study investigates the question whether inter-firm differences in these statistical characteristics (autocorrelations and variances of earnings changes) can be explained by economic factors. Various relationships between economic factors and earnings behavior are derived from the economic literature and examined empirically in this study. Findings indicate that autocorrelations and variability of annual earnings and earnings over equity changes are systematically associated with the following factors: the type of product, the height of industry barriers-to-entry (a surrogate for degree of competition), the degree of capital intensity (‘operating leverage’), and the firm size.

Baruch Lev, On the Usefulness of Earnings and Earnings Research: Lessons and Directions from Two Decades of Empirical Research, Journal of Accounting Research, Vol. 27, Current Studies on The Information Content of Accounting Earnings (1989), pp. 153-192

Auditing, Analytical review, Substantive test, Variations

Financial statement consolidation, Aggregation, Informational approach, Information loss

This paper reports an empirical test of the usefulness of a prediction method for multivariate budgets suggested by Theil.' The method, based on information theory concepts, is described in the first three sections, and results of the test are presented in the remaining sections. These results show that the suggested prediction method outperforms both the actual forecasts made by the firms who provided the data and two naive forecasts.

Financial ratios, Industry average financial ratios, Earnings smoothing

Financial statement consolidation, Aggregation, Informational approach, Materiality

A link between the firm's operating decisions and the riskiness of its stocks was established. Differences in the production process affecting the relative shares of fixed and variable costs (i.e., the operating leverage) were found, both analytically and empirically, to be associated with risk differentials. Specifically, other things equal, the higher the operating leverage (i.e., the lower the unit variable costs) the larger the overall and systematic risk of the stocks.Various practical implications are suggested by these findings. On the firm level, it can be expected that large capital expenditures associated with an operating leverage increase will increase stock riskiness. In these cases, the cut-off rate used for the capital budgeting decision (i.e., the cost of capital) should allow for the increased risk. The use of the current cost of capital as the cut-off rate would probably result in a decrease in stock prices, adversely affecting stockholders' wealth. On the investor level, these findings might assist in the estimation of common stocks' risk given expected changes in the firm's operating leverage. Specifically, they suggest that, if a firm will experience a significant operating leverage change, the estimation of risk measures based exclusively on historical returns would be inappropriate.

The Value Relevance of Intangibles: The Case of Software Capitalization Author(s): David Aboody and Baruch Lev Source: Journal of Accounting Research, Vol. 36, Studies on Enhancing the Financial Reporting Model (1998), pp. 161-191 Published by: Blackwell Publishing on behalf of Accounting Research Center, Booth School of Business, University of Chicago Stable URL: http://www.jstor.org/stable/2491312 Accessed: 14/09/2010 16:12

Human resources, Human capital, Investments