Knowledge that Transforms

This study examines why some New Zealand listed companies voluntarily present current cost financial statements. The results suggest that tax and political cost considerations are influential in the voluntary disclosure of current cost information.

This paper presents evidence that stock return prediction errors are less positively skewed in the time period surrounding accounting earnings report announcements than in a subsequent non- announcement period. Assuming that information available about firms in non-announcement periods depends on discretionary disclosure practices of firms and discretionary search for information by investors, the results suggest that earnings reports cause more extreme ‘bad news’ to be reflected in stock prices relative to discretionary sources of information.

This paper shows that the effect of nominal contracting on stock returns may be more important than previously believed. When information on the maturity structure of depreciation tax shields is incorporated into tests of the nominal contracting hypothesis, nominal contracting effects that are not otherwise detectable become so. Additionally, the proportion of stock return variation explained by nominal contracting effects and the aggregate effect on stock returns of depreciation tax shield revaluations are found to be greater than previously believed.

The Tepper–Black arguments for tax-arbitrage opportunities from overfunding pension plans are critically examined and modifications proposed. Tax status, a function of current marginal tax rates and expected future taxable income, is predicted to determine funding policy. Tests of this modified tax benefits view suggest that 1) tax status declines are associated with pension contribution reductions, 2) reductions in contributions are related to previous excess contributions as well as non-pension tax shield increases causing the decline in tax status, and 3) cross-sectionally, tax status is related to fund levels, choice of actuarial variables, and the use of defined benefit plans.

This paper adopts a rational market structure to examine the link between the cash flow effects of management policy decisions and the resulting stock price reactions. The focus is on testing cross-sectional associations between cash flow effects and the underlying characteristics of affected firms. We find that it is not possible to infer the sign of association between the stock price reaction and any characteristics of the firm that are observable before management announces its decision. Our methodological suggestions involve exploiting either a priori assumptions or sample information about the probability distribution of unobservable decision variables underlying the management decision process.

This paper examines the corporate reaction to a major U.K. accounting proposal, the 1976 exposure draft which called for the introduction of current cost accounting as the primary accounting convention. Written submissions to the U.K. rule-making body are analyzed and four categories of preference identified. Probit analysis reveals that the expected cost of compliance is the most significant factor in shaping corporate preference. In addition, firms at risk of government investigation are more likely to support and service sector firms are more likely to oppose the proposed standard.

I examine three composite analyst forecast of earnings per share as proxies for expected earnings. The most current forecast weakly dominates the mean and median forecasts in accuracy. This is evidence that forecast dates are more relevant for determining accuracy than individual error. Consistent with previous research, I find analysts more accurate than time-series models. However prior knowledge of forecast errors from a quarterly autoregressive model predicts excess stock returns better than prior knowledge of analysts' errors. This is inconsistent with previous research, and is anomalous given analysts' greater accuracy.

In this paper we present and estimate a model of economic depreciation consistent with producer's optimization. The estimated economic depreciation, which is a function of the rate of utilization and level of maintenance, is about half of that used according to tax (accounting) depreciation. The difference between the economic and tax rates of depreciation results in a subsidy and earlier capital replacement. The implicit maximum net tax subsidy expressed as a proportion of the acquisition price of the asset is 13.3% for a sample of Canadian trucking firms.

We examine capital structure changes to investigate the impact of SFAS No. 13 on lessees. While this accounting standard essentially rearranged capital lease disclosures (from footnotes to the balance sheet), mandated capitalization substantially altered key accounting ratios. Our results document a systematic substitution from capital leases to operating leases and nonleases sources of financing. In addition, lessees appear to reduce book leverage by increasing equity and reducing conventional debt. The magnitudes of these responses are cross-sectionally related to preadoption levels of footnoted capital leases.

Inventory accounting method, LIFO, FIFO, Tax savings