[SFAS 94 (1987) requires consolidation of all majority-owned subsidiaries (unless control is temporary or does not rest with the majority owners), including those of nonhomogeneous operations, large minority interests, or foreign locations. An effect of implementing the standard is that financial statements components other than net income and stockholders' equity will differ from those that would have been reported as if the standard did not apply. In this study, I use a sample of 72 companies to examine the security market reaction to the issuance of SFAS 94 that required consolidation of finance subsidiaries. The results indicate that the issuance of SFAS 94 was associated with significant negative excess stock returns. Of the hypotheses tested, this evidence is consistent with the prediction generated by the cash-flow effects hypothesis; but is inconsistent with the redistribution-effects hypothesis. In addition, no significant positive excess returns were obtained for nonconvertible debt securities of firms that did not consolidate prior to SFAS 94, which provides weak evidence of the dominance of the cash-flow effects of SFAS 94 over the redistribution effects.]

[This study investigates the impact of the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (FASB 1990, hereinafter, SFAS 106) for a sample of rate-regulated public utility firms. The results of a recent study by Espahbodi et al. (1991) of the market reaction to the issuance of the exposure draft for SFAS 106 suggest that, for a sample including both regulated and non-regulated firms, investors perceived the required disclosures as value-decreasing due to higher contracting costs. However, the unique institutional setting for rate-regulated firms implies that while a similar negative market reaction may result for some regulated firms, there is also a theoretical basis for predicting either no market reaction or a positive reaction to the proposed accounting standard. The no reaction hypothesis is motivated by the nature of the relationship between regulatory rate-setting process and special external financial reporting procedures; as a result, some regulated firms may be sheltered from the indirect costs attributed to SFAS 106. A prediction of a positive market reaction arises from the notion that accounting rules can have an effect on the way regulators set rates, resulting in a direct (positive) cash flow effect for some of the sample firms. Our results suggest that investors in public utilities did not, on average, view the proposed standard as a value-decreasing event. This result is in sharp contrast to the Espahbodi et al. (1991) finding of a large negative average reaction for firms affected by SFAS 106. We also find evidence that the market reaction at the exposure draft announcement varies cross-sectionally based on the market's exante expectation of regulators' actions and the resulting changes in revenues from the adoption (or non-adoption) of the accounting rule for ratemaking purposes. The results thus add to a growing body of literature which demonstrates differences in the market's assessment of accounting information across regulated and non-regulated industries. More importantly, the results point to the role of regulatory response in the market's assessment of impending accounting changes in regulated industries.]

The article reports on the result of a study which examined the security market reaction to the issuance of SFAS No. 94 that required consolidation of finance subsidiaries in the United States. SFAS 94 (1987) requires consolidation of all majority-owned subsidiaries, including those of nonhomogeneous operations, large minority interests, or foreign locations. An effect of implementing the standard is that financial statements components other than net income and stockholders' equity will differ those that would have been reported as if the standard did not apply. The results indicate that the issuance of SFAS 94 was associated with significant negative excess stock returns. Of the hypotheses tested, this evidence is consistent with the prediction generated by the cash-flow effects hypothesis; but is inconsistent with the redistribution-effects hypothesis. In addition, no significant positive excess returns were obtained for nonconvertible debt securities of firms that did not consolidate prior to SEAS 94, which provides weak evidence of the dominance of the cash-flow effects of SEAS 94 over the redistribution effects.

In this study, we investigate whether investor perceptions of the financial reporting credibility of Big 5 audits are related to the auditor's economic dependence on the client as measured by nonaudit as well as total (audit and nonaudit) fees paid to the incumbent auditor. We use the client‐specific ex ante cost of equity capital as a proxy for investor perceptions of financial reporting credibility and examine auditor fees both as a proportion of the revenues of the audit firm and as a proportion of the revenues of the audit firm's practice office through which the audit was conducted. Our findings suggest that both nonaudit and total fees are perceived negatively by investors' that is, the higher the fees paid to the auditor, the greater the implied threat to auditor independence, and the lower the financial reporting credibility of a Big 5 audit. Furthermore, our findings appear to be largely unrelated to corporate governance: investors do not perceive the auditor as compensating for weak governance. Separately, recent anecdotal evidence suggests that declining revenues from nonaudit services' as a result of recent regulatory restrictions” are being offset by substantial increases in audit fees. Other things being equal, rising audit fees imply higher profit margins for audit services, indicating that the audit function may no longer be a loss leader. Thus, to the extent that investors perceive total fees negatively, recent regulatory initiatives to limit nonaudit fees may not have adequately addressed the perceived, if not the actual, threat to auditor independence posed by fees.

To date, the discussion of the Lev and Thiagarajan 1993 fundamentals in the prior literature has been exclusively in the context of the stock market. Our study is the first to examine the value‐relevance of these fundamentals for default risk. By focusing on the market for new bond issues, we examine the value‐relevance of the fundamental score using expected rather than realized returns. Also, by focusing on the bond market we provide a different perspective than that brought by prior studies relying solely on stock prices. We find the fundamentals to be priced in the market for new bond issues as indicators of expected future earnings and to be value‐relevant in enabling the market to discern differences in bond credit quality over and above the published bond ratings.

[Economic and political events have led to utility regulation decisions which, in turn, provide an impetus for significant changes in industry accounting and reporting practices. The prospect of continuing change in the operating environment for utilities suggests that some deferred assets created by regulatory actions are subject to uncertain recovery. Accounting regulators have responded by imposing additional constraints on the firm's ability to record these so-called "regulatory assets." Our results indicate that investors' valuation of regulatory assets depends on the regulatory environment in which the utility is operating. That is, there are cross-sectional valuation differences arising from the market's assessment of the probability that regulators will ultimately allow for the full recovery of the deferred costs.]

Prior research suggests that Big 4 auditors provide higher quality audits in the U.S. in order to protect the firm's brand name reputation and to avoid costly litigation. In this study, we examine whether the perceived higher quality of a Big 4 audit is related to auditor litigation exposure or to reputation concerns. Specifically, we utilize an estimable proxy for financial reporting credibility—the ex ante cost of equity capital—to examine whether Big 4 auditors are perceived as providing higher quality audits (relative to non-Big 4 auditors) in the U.S., and in the less litigious (but economically similar) environments in other Anglo-American countries during the 1990–99 period. We find that a Big 4 audit is associated with a lower ex ante cost of equity capital for auditees in the U.S. but not in Australia, Canada, or the U.K. Our findings suggest that it is litigation exposure rather than brand name reputation protection that drives perceived audit quality.

Examines the market valuation of regulatory assets in public utilities. Description of the rate regulation process; Effects of the process on reported values of assets; Evolution of regulatory accounting.

Investigates the impact of the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 106, `Employers' Accounting for Postretirement Benefits Other Than Pensions' for a sample of rate-regulated public utility firms. Economic consequences of SFAS 106 for non-regulated firms; Expected impact of SFAS 106 on utility accounting and ratemaking.