A link between the firm's operating decisions and the riskiness of its stocks was established. Differences in the production process affecting the relative shares of fixed and variable costs (i.e., the operating leverage) were found, both analytically and empirically, to be associated with risk differentials. Specifically, other things equal, the higher the operating leverage (i.e., the lower the unit variable costs) the larger the overall and systematic risk of the stocks.Various practical implications are suggested by these findings. On the firm level, it can be expected that large capital expenditures associated with an operating leverage increase will increase stock riskiness. In these cases, the cut-off rate used for the capital budgeting decision (i.e., the cost of capital) should allow for the increased risk. The use of the current cost of capital as the cut-off rate would probably result in a decrease in stock prices, adversely affecting stockholders' wealth. On the investor level, these findings might assist in the estimation of common stocks' risk given expected changes in the firm's operating leverage. Specifically, they suggest that, if a firm will experience a significant operating leverage change, the estimation of risk measures based exclusively on historical returns would be inappropriate.

We examine the value-relevance to investors of financial (accounting) and nonfinancial information of independent cellular companies and find that, on a stand-alone basis, financial information (earnings, book values, and cash flows) are largely irrelevant for security valuation. Nonfinancial indicators, such as POPS (a growth proxy) and Market Penetration (an operating performance measure), are highly value-relevant. However, combined with nonfinancial information, earnings do contribute to the explanation of prices. The complementarity between financial and nonfinancial data is highlighted in this study.

The Value Relevance of Intangibles: The Case of Software Capitalization Author(s): David Aboody and Baruch Lev Source: Journal of Accounting Research, Vol. 36, Studies on Enhancing the Financial Reporting Model (1998), pp. 161-191 Published by: Blackwell Publishing on behalf of Accounting Research Center, Booth School of Business, University of Chicago Stable URL: http://www.jstor.org/stable/2491312 Accessed: 14/09/2010 16:12

Human resources, Human capital, Investments

ABSTRACT: Inequity in capital markets, defined here as Inequality of opportunity or the existence of systematic and significant information asymmetries across investors, leads to adverse private and social consequences: high transaction costs, thin markets, lower liquidity of securities, and in general, decreased gains from trade. Such adverse consequences of Inequity can be mitigated by a public policy mandating the disclosure of financial information in order to reduce information asymmetries. The equity-orientation of disclosure regulation advanced here differs markedly from the traditional, moralistic concepts of equity in accounting, which are generally phrased in terms of maintaining fairness, eliminating fraud, and protecting the uninformed investors against exploitation by insiders. In contrast to such vague, anachronistic, and unattractive notions, the equity concept advanced here is state of the art and operational, being linked directly to recent theoretical developments in economics and finance. As such it provides an economically sound justification for disclosure regulation, and furthermore, it offers accounting policymakers an operational "public interest" criterion for disclosure choices and opens up to researchers a rich agenda for evaluating regulation consequences.

Few, if any, proposals for a change in an accounting method have triggered such a strong and widespread reaction as did the FASB's oil and gas July, 1977, exposure draft, which proposed to put an end to the "full cost" method. Many of the arguments raised in this controversy touched on the impact of the proposed accounting change on capital markets. To provide evidence on the market impact, the behavior of stock prices of oil and gas companies was analyzed in this study. Results indicate that the release of the exposure draft was associated with a decline of about 4.5 percent, on average, in the stock prices of "full cost" companies during a period of three days succeeding the release of the exposure draft. This market reaction appears to be relevant to accounting policy makers.

The article comments on an article dealing with business combinations. Economists encounter serious difficulties in trying to provide motives for the merger phenomenon. In the case of horizontal and vertical mergers, the expected benefits from economies of scale seem to provide an acceptable explanation for the merger. However, this motive cannot explain the more popular kind of business combination, the conglomerate merger, where the economic functions of partners in the merger are unrelated and hence no economies of scale are expected. In imperfect capital markets, the situation is no longer so clear cut. It can be argued that if risk reduction via merger can be achieved less costly than by rearranging individual portfolios, then the economic benefit of such a business combination is apparent. This will be the case when transaction costs involved in a merger are lower than the sum of transaction costs paid by stockholders diversifying their portfolios. The exchange ratio problem is one of conflict among parties who can gain by cooperation despite their opposing interests.

Fundamental Analysis, Value-relevance, Earnings, Earnings persistence

The authors test the proposition that corporate control considerations motivate the means of investment financing-cash (and debt) or stock. Corporate insiders who value control will prefer financing investments by cash or debt rather than by issuing new stock, which dilutes their holdings and increases the risk of losing control. Their empirical results support this hypothesis: in corporate acquisitions, the larger the managerial ownership fraction of the acquiring firm the more likely the use of cash financing. Also, the previously observed negative bidders' abnormal returns associated with stock financing are mainly in acquisitions made by firms with low managerial ownership.

FOLKLORE has it that foreign markets are more risky than domestic markets because of political, economic, and social instability abroad. A normative implication of this belief, sometimes mentioned in the literature, is that a firm must establish itself in the domestic market before venturing into foreign markets; otherwise, it is argued, the inherent instability associated with exports might seriously damage the firm's operations. It is shown here that such implications are at variance with the diversification principle in portfolio theory. Specifically, an individual project might be very risky, yet its incorporation with other projects may decrease the overall risk of the portfolio. The overall risk of a group of projects is affected mainly by the relationships among these projects and only slightly by the individual riskiness of each. The hypothesis advanced in this study was that exports, through market diversification, tend to stabilize the firm's sales, and the larger the spread of these exports over several markets the more stable the sales. This hypothesis was tested on data selected from a sample of about 500 firms in Denmark, the Netherlands, and Israel. Results of the test were consistent with the hypothesis: sales stability and diversification of exports are indeed positively correlated.