Knowledge that Transforms

This paper studies a firm's decision to replace its auditor when the replacement affects outsiders' perceptions of its financial condition and auditors' attestations. If the auditor and firm possess common information about the firm's financial condition, and this information can be communicated through financial statements, then, quite generally, the auditor is never replaced. If the firm possesses information superior to that of the auditor and financial reports reflect only the auditor's information, then the auditor is more likely to be replaced the more favorable the firm's information and less favorable the auditor's information. Low-balling is explained by its effect on auditors' attest behavior, rather than by the cost differences of initial and repeat engagements.

Announcements of stock repurchase tender offers are examined as a source of information about firms' future earnings prospects and market risk levels. We document positive earnings surprises and equity systematic risk reduction following tender offers. Announcement stock price reactions are positively correlated with earnings surprises over the concurrent and subsequent two years, and negatively correlated with changes in equity market risk. Finally, stock price reactions to quarterly earnings announcements are more strongly correlated with time-series based earnings surprises in the year prior to the tender offer than during the subsequent year, consistent with tender offer announcements conveying earnings information.

This paper examines the competitiveness of the financial markets with respect to taxes. A unique set of interest rates from leveraged ESOPs enables precise measures of the effect of a debt subsidy on prices. I find that the market shifts most of the tax benefits to borrowers, indicative of an elastic supply curve for lenders. Lenders are compensated for incremental costs, such as reductions in tax rates and barriers to entry. Evidence is also presented that ESOP lenders are high taxpaying banks, suggesting the existence of a tax clientele.

This paper is an empirical examination of the nature of information conveyed by open-market stock repurchase announcements. The findings weakly indicate that: (1) there are positive unexpected annual earnings in the repurchase announcement year and positive revisions of earnings forecasts by analysts around announcement dates, and that (2) repurchase announcements are followed by declines in the repurchasing firms' common-stock risk. In addition, a regression analysis shows that repurchase announcement returns are positively (negatively) correlated with the earnings (risk) changes conveyed by repurchase announcements.

This paper investigates the hypothesis that CEOs in their final years of office manage discretionary investment expenditures to improve short-term earnings performance. We examine the behavior of R & D expenditures for a sample of firms in industries that have significant ongoing R & D activities. The results suggest that CEOs spend less on R & D during their final years in office. However, we find the reductions in R & D expenditures are mitigated through CEO stock ownership. There is no evidence that the reduced R & D expenditures are associated with either poor firm performance or reductions in investment expenditures that are capitalized for accounting purposes.

This paper addresses whether events leading to three regulatory accounting principles issued by the Federal Home Loan Bank Board affected the market value of Savings and Loan Associations (S&Ls). The market reaction to these regulations is predicted to be positive since they effectively eased minimum regulatory net worth requirements. A significant market reaction is observed for the regulation that allowed S&Ls to increase regulatory net worth by permitting appraised equity capital. However, results are inconsistent with the alternative hypothesis associated with the regulations permitting deferral of loan losses and net worth certificates.

This paper provides descriptive data on standard sources of analyst forecasts used in accounting research: the Value Line Investment Survey, the Institutional Brokers Estimate System (IBES), and, toa lesser extent, the Standard & Poor's Earnings Forecaster and Zacks Investment Research. We examine the relative accuracy of seven forecast error metrics, using various combinations of Value Line and IBES forecasts of quarterly earnings per share (EPS) and actual earnings as reported by Value Line, IBES, and Compustat. (Appendix A reports the relative accuracy of a forecast error metric based on a smaller sample of Standard and Poor's forecasts of annual EPS). We find the forecast error metric that pairs the Value Line forecast EPS with the Value Line actual EPS produces the smallest absolute forecast errors. We also test the association of these forecast error metrics with threeday excess returns centered on the data of a quarterly earnings announcement. The strongest associations are obtained with the use of Value Line actual earnings and either Value Line or IBES forecast data. This suggests that the choice of actual EPS data is more crucial than the source of forecast EPS data. Our overall conclusion is that Value Line

SEC, AAER, Auditing enforcement releases, Market reaction

Information Allocation, Private information, Information asymmetry, Disclosures

Alison J. Kirby, Stefan Reichelstein, Pradyot K. Sen, Tae-Young Paik, Participation, Slack, and Budget-Based Performance Evaluation, Journal of Accounting Research, Vol. 29, No. 1 (Spring, 1991), pp. 109-128