Knowledge that Transforms

In this paper we investigate whether the level of earnings divided by price at the beginning of the return period is relevant for evaluating earnings/returns associations.' The primary model motivating this research relies on the idea that book value (owners' equity) and market value are both stock variables indicating the wealth of the firm's equity holders. The related flow variables (after adjusting for dividends) are, respectively, earnings divided by price at the beginning of the return period (A/P-1) and market returns. It then follows that earnings divided by beginning of period price should be associated with returns. Although models based on a relation between market value and book value are used occasionally in the accounting research literature (see, for example, Landsman [1986], Harris and Ohlson [1987], and Barth

Earnings management, Jones model, Import relief, Discretionary accruals

Analyst forecasts, Analyst forecast consensus, Market association, Timely aggregate analyst forecasts

Auditing, Internal control judgement, Meta Analysis

Financial reporting, Conservatism, Auditor-client negotiations, Auditing

Voluntary Disclosure, Management forecasts, Earnings forecasts, Revenue forecasts

Public announcement, Preannouncements of information, Private information, Price reaction

Stewardship role, Accounting information systems, Management control, Value of information system

Auditing, Litigation, Legal disputes, Auditor trials

IN THE FIELD OF NONCOOPERATIVE GAME THEORY, Nash equilibrium (Nash (1951)) has played a central role as a solution concept. In bold strokes, one may discern two major interpretations of Nash equilibrium in the context of rational players. The first, which is close to the eductive interpretation of Binmore (1987, 1988) and the complete information interpretation of Kaneko (1987), assumes that the game is played exactly once (if it is a repeated game, the repetition occurs once), and the players have sufficient knowledge and ability to analyze the game in a rational manner. Sometimes it is assumed that all players have consistent hierarchies of beliefs, where the game and their priors are common knowledge. Bayesian interpretation such as proposed by Aumann (1987) advanced this idea to the level that the players have a common prior. From this point of view, however, Nash equilibrium seems far from being satisfactory