Stock price reaction, Association studies, Abnormal performance index, Firm specific news

This paper examines the relation between revenue surprises and contemporaneous and future stock returns. It also investigates whether analysts update their earnings forecasts in response to revenue surprises in a timely and unbiased fashion. Stock price reaction on the earnings announcement date is significantly related to contemporaneous as well as past revenue surprises. After controlling for earnings surprises, we find significant abnormal returns in the post-announcement period for stocks that have large revenue surprises. Although analysts revise their forecasts of future earnings in response to revenue surprises, they are slow to incorporate fully the information in revenue surprises.

Post–earnings announcement drift is the tendency for a stock's cumulative abnormal returns to drift in the direction of an earnings surprise for several weeks following an earnings announcement. We show that the drift is significantly larger when defining the earnings surprise using analysts' forecasts and actual earnings from I/B/E/S than when using a time series model based on Compustat earnings data. Neither Compustat's policy of restating earnings nor the inclusion of “special items” in reported earnings contribute significantly to the disparity in drift magnitudes. Rather, our results suggest that this disparity is attributable to differences between analyst forecasts and those of time-series models—or at least to factors correlated with these differences. Further, we document that analyst forecasts lead to return patterns around future earnings announcements that differ from those observed when using time-series models, suggesting that the two types of surprises may capture somewhat different forms of mispricing.

This study documents management's reactions to an inventory tax allowance that is based on inventory levels at the beginning of the year. Such an allowance was permitted by the tax authorities in Canada and Israel. The study develops a theoretical model which shows that a rational management should increase the firm's inventory levels on the balance sheet date beyond what the normal ordering policy would indicate. Moreover, tax authorities, in failing to anticipate this behavior, may, ceteris paribus , overcompensate firms for inflation. Empirical evidence shows that firms do, indeed, alter their ordering policies so that they will hold larger inventories on the balance sheet date. The study also shows that the tax authorities overcompensated firms in Israel, but did not overcompensate firms in Canada. Résumé. Cette étude documente les réactions du management à un dégrèvement fiscal afférent aux stocks basé sur les niveaux des stocks au début de l'année. Un tel dégrèvement était permis par les autorités fiscales au Canada et en Israël. L'étude développe un modèle théorique qui montre qu'un management rationnel devrait augmenter les niveaux des stocks de la firme à la date du bilan, au‐delà de ce que la politique normale d'approvisionnement pourrait indiquer. D'ailleurs, les autorités fiscales qui n'anticipent pas ce comportement peuvent ceteris paribus, sur‐idemniser les firmes pour l'inflation. L'évidence empirique montre en effet, que les firmes modifient leurs politiques d'approvisionnement de façon à avoir de plus gros stocks à la date du bilan. L'étude montre aussi que les autorités fiscales ont sur‐indemnisé les firmes en Israël, mais ne les ont pas sur‐indemnisées au Canada.

Examines managers' adoption-timing motives related to Statement of Financial Accounting Standards (SFAS) No. 106. Government policy on postretirement benefits other than pensions (PRB); Earnings management; Adoption timing and PRB plan amendments.

The article presents reply from authors issues related to alternative interim reporting techniques within a dynamic framework. Professor William S. Hop wood and Paul Newbold criticize the single-period setting and the single-signal-reporting system. In their analysis, they show by counter-examples that when one adopts a multiperiod world, both the integral and the combination method may result in an infinite variance when the reporting objective is to predict the current period earnings. The intuition behind is that when managers have perfect foresight and the reports always contain half of the annual totals, investors are unable to allocate correctly the annual total among the interim periods, if one assumes that the process generating earnings is seasonal. Moreover, since investors have access to other information for breaking down the annual totals, the information set in the beginning of the period may not be as method-dependent. For example, many industry sales and earnings data are reported for interim periods by trade associations. Users can thus derive prior distributions and form expectations regarding interim results from a combination of industry and firm data. Thus, the prior distributions may not be so different, even if different reporting methods had been used in prior periods.

The issue of interim reports is once again under consideration by the accounting profession. In its Discussion Memorandum, the FASB describes three major methods for interim reporting--the integral, the discrete, and the combination. The Board refers to the combination method as the one which combines the advantages of both the integral and discrete methods. Specifying three different objectives of interim reporting and using differing assumptions about the forecasting ability of management, this study examines the conditions under which the Board's assumption might hold true. In doing so, however, it is also shown that there exist conditions wherein one of the other methods would always be preferred. The paper concludes with a suggestion which, if implemented, could result in the combination method being preferred.

This study examines whether components of operating, financing, and investing cash flows are differentially associated with annual security returns, as predicted by theoretical models in finance and economics. The results of the study indicate that disaggregation of net income into cash from operations and accruals does not contribute significantly to the security returns beyond the contribution of net income alone. However, further disaggregation of financing and operating cash flows into their components significantly improves the degree of association as predicted by theory. In contrast, we find no evidence of differential associations across components of investing cash flows.

Segment reporting, FASB Statement No. 14, Mandatory disclosure, Net social benefits