This paper is an empirical examination of the nature of information conveyed by open-market stock repurchase announcements. The findings weakly indicate that: (1) there are positive unexpected annual earnings in the repurchase announcement year and positive revisions of earnings forecasts by analysts around announcement dates, and that (2) repurchase announcements are followed by declines in the repurchasing firms' common-stock risk. In addition, a regression analysis shows that repurchase announcement returns are positively (negatively) correlated with the earnings (risk) changes conveyed by repurchase announcements.

This study presents an empirical examination of whether managers manipulate earnings through the timing of income recognition from disposal of long-lived assets and investments (hereafter assets). Since managers can often choose the period during which an asset will be sold, and since the principle of acquisition cost underlying the accounting valuation of assets implies that changes in the market value of an asset between acquisition and sale are reported in the period of sale. It follows that there are opportunities for managers to manipulate earnings through the timing of asset sales at relatively low cost. Two common explanations for earnings manipulations are examined: the earnings-smoothing and the debt-equity hypotheses. The earnings-smoothing hypothesis predicts that earnings are manipulated to reduce fluctuations around some level that is considered normal for the firm (see, e.g., Ronen and Sadan 1981, 6). The debt-equity hypothesis suggests a positive relation between a firm's debt-equity ratio and managers' choice of earnings-enhancing activities (see, e.g.. Watts and Zimmerman 1986, 200-21). The findings are consistent with the timing of asset sales by managers so that the recognized income from these sales smooths intemporal earnings changes and mitigates accounting-based restrictions in bond covenants. The results also show that the earnings-smoothing and the debt-equity effects are incremental; after controlling for one effect the other still exists. Finally, sensitivity analysis showing that these results are robust to specifications that consider asset sale levels, bonus plans, possible tax effects, and financial soundness suggests that the findings are not attributable to misspecified statistical tests. The results of this study may be relevant to the ongoing debate about dropping the principle of acquisition cost underlying the accounting valuation of assets in favor of the principle of current cost (see, e.g.. The Wall Street Journal 1990b). While the former is considered reliable, the latter is said to be vulnerable to earnings manipulations because net income is materially affected by management opinion on the sale values of the assets involved (see, e.g., Kieso and Weygandt 1987, 35). The evidence in this study suggests that, despite its reliability, managers take advantage of the acquisition-cost principle to manipulate earnings. This should be considered when evaluating the advantages and disadvantages of acquisition-cost accounting relative to current-cost accounting.

This article presents an empirical exploration of a specific market-inefficiency explanation for the observed post-earnings-announcement drift In stock prices. The research question Is whether or not the observed relation between unexpected earnings in quarter t and stock-price changes in quarter t+1 represents a failure of the market to characterize the time-series properties of earnings correctly. The article contributes to the existing literature in two ways. First, it provides corroborating evidence of the failure of the market to characterize the properties of the process underlying earnings correctly. Second, and more importantly. It directly tests the conjecture that this failure explains the post-announcement drift. Corroborating evidence of the market's failure to characterize the properties of the process underlying earnings correctly is derived from a distributed lag model; a LOGIT model is employed to regress unexpected earnings on their four most recent past realizations. The results indicate that the probability of positive unexpected earnings in quarter t+1 is increasing in its (lagged) values for quarters t through t-2 and decreasing In its (lagged) value for quarter t-3 . The ability of the model to predict future earnings changes and stock returns outside of the estimation period was examined as well. The results show that the model robustly predicts both one-quarter-ahead earnings changes and future (abnormal) stock returns. Furthermore, future stock returns remain predictable even after current unexpected earnings are controlled. This last relation further corroborates the incremental explanatory power of the lagged unexpected earnings over the unexpected earnings of the current quarter with respect to the post-announcement drift in stock prices. Although this predictability of future earnings changes and stock returns is consistent with the results of prior research (see, e.g., Foster 1977; Griffin 1977; Foster et al. 1984, table 1; Bernard and Thomas 1990, tables 1 and 5), there is an important difference between previous and present methodology. The tests here involve predicting future earnings changes and stock returns by using data from a holdout period, rather than by documenting correlations in the sample. Thus, the tests used here increase the confidence that the results are not driven by modeling or sampling errors. Evidence from this study and prior research is consistent with the conjecture that the market systematically errs in predicting one-quarter-ahead (quarter t+1) earnings and stock prices. Such an error implies that a drift would be observed during quarter t + 1 , as the market uses pre disclosure information to update expectations for earnings in quarter t+1. To my knowledge, the extent to which this error explains post-announcement drift has not been directly tested. I formally test the extent to which this systematic error in predicting future earnings explains the drift by exploring the relation between the drift In stock prices observed in quarter t+1 and unexpected earnings in quarter t, while controlling for the implications of past earnings for future earnings. In particular, cumulative abnormal returns (CARs) for the period commencing three days after the earnings announcements of quarter t and ending one day following earnings announcements for quarter t+1 were computed for four portfolios that were constructed on the basis of unexpected earnings in quarter t. Once the implications of past earnings for future earnings are controlled, the positive relation between unexpected earnings in quarter t and the drift in stock prices observed in quarter t+1 no longer exists. This finding suggests that the observed relation between unexpected earnings in quarter t and stock price changes in quarter t +1 is fully explained by a systematic error in forecasting earnings.

This paper finds that firms that meet or beat current analysts’ earnings expectations (MBE) enjoy a higher return over the quarter than firms with similar quarterly earnings forecast errors that fail to meet these expectations. Further, such a premium to MBE, although somewhat smaller, exists in the cases where MBE is likely to have been achieved through earnings or expectations management. The findings also indicate that the premium to MBE is a leading indicator of future performance. This premium and its predictive ability are only marginally affected by whether the MBE is genuine or the result of earnings or expectations management.

Studies the information asymmetry perspective of corporate accounting choice. Effects of information asymmetry to transaction costs and liquidity for trading shares; Disclosure opportunity to decrease information asymmetry; Information asymmetry in the choice of functional currency by multinational firms.

Consistent with previous research, we fail to find a significant correlation between the abnormal returns of our sample firms with international activities and changes in the dollar. We investigate the possibility that this failure is due to mispricing. Lagged changes in the dollar are a significant variable in explaining current abnormal returns of our sample firms, suggesting that mispricing does occur. A simple trading strategy based upon these results generates significant abnormal returns. Corroborating evidence from returns around earnings announcements as well as errors in analysts' forecasts of earnings is also provided.

Consistent with previous research, we fail to find a significant correlation between the abnormal returns of our sample firms with international activities and changes in the dollar. We investigate the possibility that this failure is due to mispricing. Lagged changes in the dollar are a significant variable in explaining current abnormal returns of our sample firms, suggesting that mispricing does occur. A simple trading strategy based upon these results generates significant abnormal returns. Corroborating evidence from returns around earnings announcements as well as errors in analysts' forecasts of earnings is also provided.

We empirically investigate valuations of Internet firms at various stages of the initial public offering (IPO) from two perspectives. First, we examine the association between the valuation of Internet IPOs and a set of financial and nonfinancial variables, which prior anecdotal or empirical evidence suggests may serve as value drivers. Second, we document differences in IPO valuations between Internet and non‐Internet firms as well as across different stages in the IPO process—i.e., initial prospectus price, final offer price, and first trading day price—within each set of firms. Our primary two conclusions are as follows. First, there are noticeable differences between valuations of Internet and non‐Internet firms, especially at the prospectus and final IPO stage. Specifically, the valuation of non‐Internet firms generally follows the conventional wisdom regarding valuation: positive earnings and cash flows are priced, while negative earnings and negative cash flows are not. The valuation of Internet firms, however, departs from conventional wisdom, with earnings not being priced, and negative cash flows being priced perhaps because they are viewed as investments. This difference between the two classes of firms may be expected, given the age and unique nature of the Internet industry. Second, there are significant differences between the initial valuation of firms at the prospectus and IPO stage and their valuation by the stock market at the end of the first trading day. For non‐Internet firms, the difference is largely ascribed to the relative offering size. For Internet firms, however, the differences are with respect to positive cash flows, sales growth, R&D, and high‐risk warnings, in addition to the relative offering size.

Does accounting regime play a role in the well-documented phenomenon of overbidding in M&As? The 2001 regulatory change from a goodwill amortization to a non-amortization regime (SFAS 142) affords us a quasi-experimental setting for testing the consequences of M&A accounting rules for acquirers' bidding decisions. Relying on a novel approach to modeling optimal bidding, our primary finding indicates a significant increase in overbidding in the post-2001 period, suggesting that M&A accounting has real consequences for bidding decisions, and that this result is robust to a battery of sensitivity tests. In addition, supplementary tests show that overbidding is more pronounced in pooling versus purchase transactions, and that the accounting regime's implications for overbidding and acquisition premium are distinct. Overall, our findings shed light on the role accounting plays in shaping managerial decisions—and, ultimately, shareholder wealth—in an important corporate setting. They may thus inform researchers, corporate boards, and standards setters. Data Availability: Data are available from the public sources cited in the text.