[This study evaluates the association between the market value of banks' common equity and fair value estimates disclosed under Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The results suggest that only the reported fair values of investment securities have incremental explanatory power relative to book value. No reliable evidence of incremental explanatory power is found for the fair value disclosures of loans, deposits, long-term debt or net off-balance sheet financial instruments. After controlling for two competing indicators of value captured by the accrual accounting system, ROE and growth in book value, the fair value of securities no longer exhibits a significant association with market value. Results from estimating a returns specification, which may implicitly control for correlated omitted variables, also exhibit no reliable evidence of significant incremental explanatory power in the fair value estimates.]

This study examines whether the reported loss reserves of property-casualty insurers contain an implicit discount for the time value of money. Reporting the present value of loss reserves enables insurers to justify the competitive level of insurance premiums to regulators. The evidence indicates that there is a positive and significant discount rate implicit in the relation between reported loss reserves and expected future claim payments. Moreover, insurers subject to relatively stringent rate regulation discount to a greater extent than do other insurers. The results also suggest that implicit discounting is distinct from solvency and tax motives to exercise discretion over the loss reserve.

Evaluates the association between the market value of banks' common equity and fair value estimates disclosed under Statement of Financial Accounting Standards No.107. Fair value accounting; Financial instruments; Financial statement disclosures; Commercial banking.

We provide evidence that accruals quality in the U.S. has generally improved since 2000, following a decade of decline during the 1990s. Our results indicate that both the initial decline in accruals quality and the subsequent reversal can be explained by an inverse relation with operating cash flow volatility. Moreover, even though patterns of cash flow volatility and accruals quality vary in different regions of the world and relative to the U.S., we find evidence of an inverse relation between accruals quality and cash flow volatility globally. We corroborate our main results in a battery of additional tests, which also indicate that our results are not attributable to other explanations. Overall, our evidence challenges conventional wisdom and suggests that concerns about a sustained decline in accruals quality over time are unwarranted.

This study evaluates corporate voluntary disclosure of forward‐looking information under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Using a sample of 523 computer hardware, computer software, and pharmaceutical firms, we find a significant increase in both the frequency of firms issuing earnings and sales forecasts and the mean number of forecasts issued following the Act’s passage. To provide more direct evidence that our findings are attributable to the Act reducing firms’ legal exposure, we develop a proxy for litigation risk and examine whether the increase in disclosure is more pronounced for firms at greatest risk of a lawsuit. As expected, we find that the change in disclosure is increasing in firms’ ex ante risk of litigation. Finally, we report that the safe harbor had no adverse impact on the quality of forward‐looking information. Forecast errors, whether directional or non‐directional, were not significantly affected by the Act’s passage.

Economic theory suggests that the industry-wide component of firm performance is more persistent than the firm-specific component. This paper provides evidence on this assertion and tests whether investors misprice these components of earnings. Consistent with predictions, we find greater persistence in the industry-wide component of earnings that is not fully recognized in stock prices. We show that these effects are partially driven by the market׳s inability to recognize the differential persistence of industry-wide earnings in homogenous industries or in the presence of a large business shock. Finally, we show that industry-wide cash flows is the most persistent component of earnings while firm-specific accruals is the least persistent, suggesting that economic fundamentals and accounting constructs are jointly informative about firms׳ future earnings. The market predictably misprices these components, however, significantly underweighting the persistence of industry-wide cash flows and overweighting the persistence of firm-specific accruals.

This paper tests the hypothesis that negative client stock returns following the revelation that Enron documents had been shredded are attributable to confounding effects as opposed to a loss of Andersen's reputation. We find that a sharp decline in oil prices along with differences in the industry composition of the Andersen and Big 4 client portfolios combine to produce significantly more negative returns for Andersen clients relative to Big 4 clients, and for Andersen's Houston office clients relative to its clients in other locations. The market reaction to two other Enron-related events also offers little support for a reputation effect.

We document that property-casualty insurers with small positive earnings understate loss reserves relative to insurers with small negative earnings. Furthermore, loss reserves are managed across the entire distribution of earnings, with the most income-increasing reserve accruals reported by small profit firms, and the most income-decreasing reserve accruals reported by firms with the highest earnings. We analyze this pattern separately for public, private, and mutual companies, and find that public companies and mutuals manage loss reserves to avoid losses, but that private companies do not. We also find evidence of reserve management to avoid losses by financially healthy and distressed firms.