Studies the information asymmetry perspective of corporate accounting choice. Effects of information asymmetry to transaction costs and liquidity for trading shares; Disclosure opportunity to decrease information asymmetry; Information asymmetry in the choice of functional currency by multinational firms.

Rendleman, Jones, and Latané (1987) and Bernard and Thomas (1990) hypothesize and report evidence that investors use a ‘naive’ seasonal random walk model, at least in part, for quarterly earnings. We show that the market acts as if it: (1) does not use a simple seasonal random walk model; (2) does exploit serial correlation at lags 1–4 in seasonally-differenced quarterly earnings; (3) does use the correct signs in exploiting serial correlation at each lag; but (4) underestimates the magnitude of serial correlation by approximately 50% on average. We discuss the consistency of alternative hypotheses with our evidence.

Consistent with previous research, we fail to find a significant correlation between the abnormal returns of our sample firms with international activities and changes in the dollar. We investigate the possibility that this failure is due to mispricing. Lagged changes in the dollar are a significant variable in explaining current abnormal returns of our sample firms, suggesting that mispricing does occur. A simple trading strategy based upon these results generates significant abnormal returns. Corroborating evidence from returns around earnings announcements as well as errors in analysts' forecasts of earnings is also provided.

Consistent with previous research, we fail to find a significant correlation between the abnormal returns of our sample firms with international activities and changes in the dollar. We investigate the possibility that this failure is due to mispricing. Lagged changes in the dollar are a significant variable in explaining current abnormal returns of our sample firms, suggesting that mispricing does occur. A simple trading strategy based upon these results generates significant abnormal returns. Corroborating evidence from returns around earnings announcements as well as errors in analysts' forecasts of earnings is also provided.

We examine the relation between exchange rate variability and stock return volatility for U.S. multinational firms and decompose this relation into components of systematic and diversifiable risk. Focusing on two five-year periods around the 1973 switch from fixed to floating exchange rates, we find a significant increase in volatility of monthly stock returns corresponding to the period of increased exchange rate variability, even relative to the increase in stock return volatility for three control samples. In conjunction with this increase in total volatility there is also an increase in market risk (beta) for multinational firms.

We empirically investigate valuations of Internet firms at various stages of the initial public offering (IPO) from two perspectives. First, we examine the association between the valuation of Internet IPOs and a set of financial and nonfinancial variables, which prior anecdotal or empirical evidence suggests may serve as value drivers. Second, we document differences in IPO valuations between Internet and non‐Internet firms as well as across different stages in the IPO process—i.e., initial prospectus price, final offer price, and first trading day price—within each set of firms. Our primary two conclusions are as follows. First, there are noticeable differences between valuations of Internet and non‐Internet firms, especially at the prospectus and final IPO stage. Specifically, the valuation of non‐Internet firms generally follows the conventional wisdom regarding valuation: positive earnings and cash flows are priced, while negative earnings and negative cash flows are not. The valuation of Internet firms, however, departs from conventional wisdom, with earnings not being priced, and negative cash flows being priced perhaps because they are viewed as investments. This difference between the two classes of firms may be expected, given the age and unique nature of the Internet industry. Second, there are significant differences between the initial valuation of firms at the prospectus and IPO stage and their valuation by the stock market at the end of the first trading day. For non‐Internet firms, the difference is largely ascribed to the relative offering size. For Internet firms, however, the differences are with respect to positive cash flows, sales growth, R&D, and high‐risk warnings, in addition to the relative offering size.

The release of the full set of financial statements in Form 10–Q provides investors with the data necessary to estimate the discretionary portion of earnings, thereby allowing them to better assess the integrity of reported quarterly earnings. We thus expect a negative association between unexpected discretionary accruals estimated using 10–Q disclosures and stock returns around 10–Q filing dates. Consistent with our expectations, we document a negative association between unexpected discretionary accruals and cumulative abnormal returns over a short window around the 10–Q filing date. Furthermore, this association varies systematically with investor sophistication. Finally, results from portfolio tests indicate that this association is economically as well as statistically significant. One interpretation of our findings is that accruals management has substantial valuation consequences, which are quickly impounded into stock prices.

Does accounting regime play a role in the well-documented phenomenon of overbidding in M&As? The 2001 regulatory change from a goodwill amortization to a non-amortization regime (SFAS 142) affords us a quasi-experimental setting for testing the consequences of M&A accounting rules for acquirers' bidding decisions. Relying on a novel approach to modeling optimal bidding, our primary finding indicates a significant increase in overbidding in the post-2001 period, suggesting that M&A accounting has real consequences for bidding decisions, and that this result is robust to a battery of sensitivity tests. In addition, supplementary tests show that overbidding is more pronounced in pooling versus purchase transactions, and that the accounting regime's implications for overbidding and acquisition premium are distinct. Overall, our findings shed light on the role accounting plays in shaping managerial decisions—and, ultimately, shareholder wealth—in an important corporate setting. They may thus inform researchers, corporate boards, and standards setters. Data Availability: Data are available from the public sources cited in the text.

This paper investigates the decision by top-level executives of more than 1,200 public corporations to exercise a large number of stock option awards in the period 1992–2001. We hypothesize and find that abnormally large option exercises predict stock return future performance. We then hypothesize that this predictive ability represents private information about disappointing earnings in the post-exercise period. Consistent with this hypothesis we find that abnormally positive earnings performance in the pre-exercise period turns to disappointing earnings performance in the post-exercise period, and that this pattern comes as a surprise to even sophisticated market participants (financial analysts). We also hypothesize and find that the disappointing earnings in the post-exercise period represent a reversal of inflated earnings in the pre-exercise period. Collectively, these findings suggest that the private information used by top-level executives to time abnormally large exercises follows from earnings management so as to increase the cash payout of exercises.