[This paper investigates whether stock prices reflect information about future earnings contained in the accrual and cash flow components of current earnings. The extent to which current earnings performance persists into the future is shown to depend on the relative magnitudes of the cash and accrual components of current earnings. However, stock prices are found to act as if investors "fixate" on earnings, failing to reflect fully information contained in the accrual and cash flow components of current earnings until that information impacts future earnings.]

[We provide evidence that the auto-regressive structure of seasonally differenced quarterly earnings is consistent with the requirements of the integral approach to interim reporting. In particular, we show that the auto-regressive coefficients for standardized seasonally differenced quarterly earnings are larger when the quarters employed in the auto-regressions belong to the same fiscal year than when they belong to different fiscal years. We then show that the signs and magnitudes of abnormal stock returns following earnings announcements are systematically related to these differences in the auto-regressive structure of seasonally differenced quarterly earnings. Specifically, stock returns act as if investors underestimate the larger auto-regressive coefficients between quarters in the same fiscal year. Thus, we corroborate and extend the Bernard and Thomas (1990) hypothesis that stock prices fail to reflect the extent to which quarterly earnings series differ from a seasonal random walk.]

Li, Watts, and Zhu (2024) provide evidence that retail investors trade in response to financially material ESG news. This evidence is consistent with retail investors trading in response to the financial implications of ESG-related information in much the same way that they trade in response to the financial implications of other information. The authors suggest that their evidence is inconsistent with retail investors making investment decisions based on their nonpecuniary preferences. I suggest that their research design is constructed to identify financially motivated trading and is not well suited to drawing inferences about retail investors’ nonpecuniary investment decisions.

Bushman and Smith (2001, this issue) provide a useful review of research on the role of accounting in management compensation contracts and an appealing future research agenda that builds on recent research using a cross-country approach. This paper rounds out their discussion by highlighting some limitations of their research agenda, providing a critical review of the contributions of accounting scholars to governance research and highlighting research opportunities on the role of financial accounting in governance mechanisms other than managerial incentive contracts.

The papers by Muller and ABK (Aboody, Barth and Kasznik) provide evidence on the reliability of estimates of assets' `current' or `market' values. Muller finds that the decision to capitalize estimates of acquired brand values is influenced by contracting incentives, suggesting that the reliability of these estimates is compromised by managerial manipulation. ABK find that estimates of fixed asset revaluations have a statistically significant association with both contemporaneous stock prices and future operating performance. It is difficult to assess the implications of ABK's results for the reliability of the revaluations, because stock prices and operating performance are influenced by many other factors.

This paper investigates the role of accounting earnings in top executive compensation contracts. It provides evidence in support of the hypothesis that earnings-based incentives help shield executives from market-wide factors in stock prices. The paper demonstrates that earnings reflect firm-specific changes in value, but are less sensitive to market-wide movements in equity values. As a result, the inclusion of earnings-based performance measures in executive compensation contracts helps shield executives from fluctuations in firm value that are beyond their control. The hypothesis is shown to explain cross-sectional variation in the use of earnings-based incentives.

Publications on external reporting have played an important role in the first 100 years of The Accounting Review. The first 40 years featured publications prescribing desirable financial accounting principles. The next 45 years featured archival empirical research focusing on managers’ financial accounting choices and the use of financial accounting information by capital market participants. The most recent 15 years have been characterized by growth in research on sustainability reporting. I briefly summarize this research and propose opportunities for future research. Data Availability: Data are publicly available from sources indicated in the text.

In their classic text Security Analysis, Graham and Dodd (1934) warn investors against sole reliance on a few quantitative factors in investment decisions. Instead, they recommend that investment decisions be based on a comprehensive fundamental analysis of the underlying securities. While their views held sway for many decades, recent years have witnessed a sharp reversal. Scholars of finance often overlook fundamental analysis, and their influence has led to a surge of investment products relying solely on a few quantitative factors. These products often have names that appeal to fundamental analysis, such as “value” and “quality.” I argue that Graham and Dodd's (1934) recommendations continue to have merit. I show how popular quantitative approaches to investing overlook important information and select stocks with distorted accounting numbers rather than temporary mispricing. I conclude that informative financial reporting and comprehensive fundamental analysis are essential for the efficient functioning of capital markets. Data Availability: Data are publicly available from sources indicated in the text.

Investigates whether stock prices reflect information about future corporate earnings contained in accrual and cash flow components of currents earnings. Relationship of current earnings performance on the magnitude of cash and accrual flows; Relationship between the accrual and cash flow of earnings.

Stock return over a period reflects the market's revision in expectation of future earnings. Accounting earnings over the same period, however, have limited ability to reflect such revised expectations. Therefore, returns anticipate earnings changes and the earnings response coefficient from a regression of returns on contemporaneous earnings changes is biased toward zero. We reduce this bias by including leading-period returns in price-earnings regressions. The resulting estimated earnings response coefficient magnitudes suggest that the capital market, on average, views earnings changes to be largely permanent. This is consistent with the random walk time series property of annual earnings.