The accounting method in Statement of Financial Accounting Standards ( SFAS ) No. 8 for restatement of a foreign operation's financial statements denominated in a foreign currency into the parent's currency equivalents for inclusion in the parent company's financial statements was severely criticized by market participants and managers. Its replacement, SFAS No. 52, represented an attempt to improve on the methods of SFAS No. 8. This study examines two questions: did SFAS No. 8 produce relevant information for valuing US multinational firms, and are the results reported under SFAS No. 52 more valuation relevant than those reported under SFAS No. 8? Valuation relevance is studied because the Financial Accounting Standards Board (FASB) has stated that relevance is an important criterion for choosing among alternative accounting methods. Considered collectively, the results suggest that the rules in SFAS No. 8 produced a poor accounting measure for valuing US multinational firms, and that the introduction of SFAS No. 52 has resulted in a significant improvement in the valuation relevance of the accounting numbers associated with the restatement of a foreign operation's financial statements. However, this improvement applies only to the subset of firms that designated a foreign currency as their functional currency (i.e., switched to the current‐rate method) and not to firms that designated the dollar as their functional currency (i.e., as if they still reported under SFAS No. 8).

Rendleman, Jones, and Latané (1987) and Bernard and Thomas (1990) hypothesize and report evidence that investors use a ‘naive’ seasonal random walk model, at least in part, for quarterly earnings. We show that the market acts as if it: (1) does not use a simple seasonal random walk model; (2) does exploit serial correlation at lags 1–4 in seasonally-differenced quarterly earnings; (3) does use the correct signs in exploiting serial correlation at each lag; but (4) underestimates the magnitude of serial correlation by approximately 50% on average. We discuss the consistency of alternative hypotheses with our evidence.

We examine the relation between exchange rate variability and stock return volatility for U.S. multinational firms and decompose this relation into components of systematic and diversifiable risk. Focusing on two five-year periods around the 1973 switch from fixed to floating exchange rates, we find a significant increase in volatility of monthly stock returns corresponding to the period of increased exchange rate variability, even relative to the increase in stock return volatility for three control samples. In conjunction with this increase in total volatility there is also an increase in market risk (beta) for multinational firms.

The release of the full set of financial statements in Form 10–Q provides investors with the data necessary to estimate the discretionary portion of earnings, thereby allowing them to better assess the integrity of reported quarterly earnings. We thus expect a negative association between unexpected discretionary accruals estimated using 10–Q disclosures and stock returns around 10–Q filing dates. Consistent with our expectations, we document a negative association between unexpected discretionary accruals and cumulative abnormal returns over a short window around the 10–Q filing date. Furthermore, this association varies systematically with investor sophistication. Finally, results from portfolio tests indicate that this association is economically as well as statistically significant. One interpretation of our findings is that accruals management has substantial valuation consequences, which are quickly impounded into stock prices.

This paper investigates the decision by top-level executives of more than 1,200 public corporations to exercise a large number of stock option awards in the period 1992–2001. We hypothesize and find that abnormally large option exercises predict stock return future performance. We then hypothesize that this predictive ability represents private information about disappointing earnings in the post-exercise period. Consistent with this hypothesis we find that abnormally positive earnings performance in the pre-exercise period turns to disappointing earnings performance in the post-exercise period, and that this pattern comes as a surprise to even sophisticated market participants (financial analysts). We also hypothesize and find that the disappointing earnings in the post-exercise period represent a reversal of inflated earnings in the pre-exercise period. Collectively, these findings suggest that the private information used by top-level executives to time abnormally large exercises follows from earnings management so as to increase the cash payout of exercises.

Does the placement of a line item in the income statement matter to investors? The passage of Statement of Financial Accounting Standards (SFAS) No. 145 (Financial Accounting Standards Board [FASB] 2002) affords a quasi-experimental setting to answer this question, because pre-SFAS No. 145, gains/losses from early debt extinguishments were reported below the line, while post-SFAS No. 145, they were reported above the line. After controlling for other identified changes that occur during our sample period, we find that, pre-SFAS No. 145, the market does not respond to these gains/losses, whereas post-SFAS No. 145, it does. This suggests that the market response to gains/losses is associated with their placement in the income statement. Our findings contribute to the literature on the importance of income statement presentation by demonstrating that a line-item position in the income statement has important valuation implications.

Prior research has examined how companies exploit Twitter in communicating with investors, and whether Twitter activity predicts the stock market as a whole. We test whether opinions of individuals tweeted just prior to a firm's earnings announcement predict its earnings and announcement returns. Using a broad sample from 2009 to 2012, we find that the aggregate opinion from individual tweets successfully predicts a firm's forthcoming quarterly earnings and announcement returns. These results hold for tweets that convey original information, as well as tweets that disseminate existing information, and are stronger for tweets providing information directly related to firm fundamentals and stock trading. Importantly, our results hold even after controlling for concurrent information or opinion from traditional media sources, and are stronger for firms in weaker information environments. Our findings highlight the importance of considering the aggregate opinion from individual tweets when assessing a stock's future prospects and value.