The net monetary position of a firm, defined as the nominal value of its monetary assets minus the nominal value of its monetary liabilities, partly determines the wealth transferred to (or from) the firm's owners when unanticipated price level change occurs. Price level change (a random variable) is defined as unanticipated when assessments of (the moments of) its probability distribution are systematically incorrect or biased. During unanticipated inflation, which conventionally means an underestimate of the expected value of the distribution of price level change, the real dollar returns of net monetary debtor firms are enhanced—the unforeseen honoring of debt contracts in dollars of lower purchasing power is a wealth transfer to the firm's owners from the firm's creditors. Conversely, real returns of net monetary creditor firms suffer during unanticipated inflation and gain during unanticipated deflation.

This paper examines stock market efficiency with respect to money supply data by testing (1) regression models of stock returns on monetary variables and (2) trading rules based on money supply data. The evidence indicates no meaningful lag in the effect of monetary policy on the stock market and that no profitable security trading rules using past values of the money supply exist. Therefore this evidence is consistent with the efficient market model. Current security returns incorporate all information contained in past money supply data and, in addition, appear to anticipate future changes in the money supply. A number of previous studies have concluded that lags exist and can be used in profitable trading rules. Analysis of these studies demonstrates that for a variety of reasons the evidence in these past studies does not sustain such conclusions.

Analysts forecasts, Interim reporting, Time-series, Analyst forecast revisions

Lawrence D. Brown, Michael S. Rozeff, Univariate Time-Series Models of Quarterly Accounting Earnings per Share: A Proposed Model, Journal of Accounting Research, Vol. 17, No. 1 (Spring, 1979), pp. 179-189

The essence of corporate control includes the hiring and firing of key managers. We examine changes in equity values when the Board of Directors appoints and dismisses top-level managers. The evidence suggests that management changes signal shifts in company policy and raise shareholder wealth, internal promotions confirm the soundness of investment by large companies in firm-specific human capital while external appointments do not, promotions occur more often than external appointments but decline in importance as firm size decreases, and dismissal is not a favored means to handle managerial underperformance but is associated with stock price increases when used.

Insider transactions are not random across growth and value stocks. We find that insider buying climbs as stocks change from growth to value categories. Insider buying also is greater after low stock returns, and lower after high stock returns. These findings are consistent with a version of overreaction which says that prices of value stocks tend to lie below fundamental values, and prices of growth stocks tend to lie above fundamental values.

Ji-Chai Lin, Michael S. Rozeff, Price Adjustment Delays and Arbitrage Costs: Evidence from the Behavior of Convertible Preferred Prices, The Journal of Financial and Quantitative Analysis, Vol. 30, No. 1 (Mar., 1995), pp. 61-80

Two essentially opposite accounting policy decisions were the FASB proposal to eliminate full cost (FC) accounting and the SEC proposal 13 months later to allow FC accounting while reserve recognition accounting was developed. The SEC's reversal of the FASB decision provides an opportunity to develop additional evidence concerning the market consequences of accounting policy decisions. The authors test whether the SEC proposal had a significant effect on the valuation of FC firms and whether its pricing effect was opposite to that observed at the time of the FASB proposal. A generalized least-squares procedure that takes account of contemporaneous correlation in abnormal return data is employed. The procedure and tests are completely general and appropriate for investigating the market effects of a variety of accounting policy decisions in which cross-sectional correlation of the data is a problem. Evidence is presented that the FC firms had significantly higher returns in the SEC period than the successful efforts firms. Furthermore, within the FC sample, a negative relationship is found between the abnormal returns of individual firms at the times of the FASB and SEC proposals.