The currently prescribed method of dealing with potentially dilutive securities in earnings per share calculations is reconsidered in light of the more recent development of equilibrium pricing models for options and convertible securities. This new treatment of an old problem offers a theoretical structure founded upon recent developments in finance. It is shown that fairly precise statements about the timing of voluntary conversion or exercise of potentially dilutive securities are often possible. Moreover, assessments of the probabilities of future stock prices reaching levels which would allow conversion or exercise can be derived from a widely used stochastic model of security price behavior. Some implications for policy are discussed.

SFAS No. 2, issued in October, 1974, required most firms to expense the costs of their R&D activities as incurred. Upon careful consideration of the accounting change imposed on firms previously following the deferral alternative, it is argued that a market reaction to the accounting change could be attributed to the effects of new information or to the effects of expected changes in management decisions. The tests in this study are designed to detect effects of the latter type. No significant market reaction to the imposition of SFAS No. 2 was observed. These results are consistent with the hypothesis that investors did not expect managements' decisions to change as a result of the new accounting method for R&D costs.

Until 1974, firms could capitalize or expense all or part of their research and development (R&D) costs. Managerial choice between these two alternatives is hypothesized to be affected by the existence of debt covenants which employ accounting numbers relating to leverage, interest coverage, and ability to pay dividends. In addition, the use of public versus private debt is hypothesized to affect the accounting choice due to differential renegotiation costs. Lastly, a political cost hypothesis is tested. This study uses a multivariate statistical technique, the generalized jackknife. The results suggest that firms which capitalized R&D costs were more highly levered, used more public debt, were closer to dividend restrictions, and were smaller than firms which expensed R&D costs.

This study investigates empirical relations that are consistent with the hypothesis that variance in analysts' forecasts of earnings (i.e., disagreement among analysts) is useful as an ex ante measure of the market's aggregate uncertainty regarding a future earnings signal. We hypothesize and test for a positive association between the variance of analysts' forecasts and (1) the ex post magnitude of unexpected earnings. (2) the ex post variance of returns around the actual earnings announcement date. and (3) the average variance of return to maturity implied by prices of options maturing after the earnings announcement date. Our results generally confirm that the disagreement among analysts' earnings forecasts Is a useful Indicator of the market's aggregate uncertainty regarding future earnings announcements.

Reviews the book "Contemporary Financial Reporting: A Casebook," by David A. Wilson, John Shank and Dennis Frolin.