Philip Brown, Ray Ball, Some Preliminary Findings on the Association between the Earnings of a Firm, Its Industry, and the Economy, Journal of Accounting Research, Vol. 5, Empirical Research in Accounting: Selected Studies 1967 (1967), pp. 55-77

Ray Ball, Risk, Return and Disequilibrium: An Application to Changes in Accounting Techniques, The Journal of Finance, Vol. 27, No. 2, Papers and Proceedings of the Thirtieth Annual Meeting of the American Finance Association, New Orleans, Louisiana, December 27-29, 1971 (May, 1972), pp. 343-353

Recent evidence reveals significant negative serial correlation in aggregate (market-wide) stock returns. We extend this result to relative (market-adjusted) returns, demonstrating negative serial correlation in five-year returns. We then test two competing explanations: (1) market mispricing and (2) changing expected returns in an efficient market. The tests are conducted using the capital asset pricing model to estimate relative returns. The evidence suggests that negative serial correlation in relative returns is due almost entirely to variation in relative risks, and therefore expected relative returns, through time. We document substantial relative risk shifts, particularly for extreme-performing stocks.

International differences in the demand for accounting income predictably affect the way it incorporates economic income (change in market value) over time. We characterize the `shareholder’ and `stakeholder’ corporate governance models of common and code law countries respectively as resolving information asymmetry by public disclosure and private communication. Also, code law directly links accounting income to current payouts (to employees, managers, shareholders and governments). Consequently, code law accounting income is less timely, particularly in incorporating economic losses. Regulation, taxation and litigation cause variation among common law countries. The results have implications for security analysts, standard-setters, regulators, and corporate governance.

[In competitive product markets, product prices and thus firms' revenues incorporate the cost of equity capital. In a competitive capital market, the cost of equity capital (the expected return on equity) increases with the risk of firms' investments. Because accounting earnings are calculated without deducting the cost of equity capital, they are expected to be an increasing function of firms' investment risks. This simple competitive equilibrium analysis predicts a positive relation between changes in investment risk and expected earnings. The presence of corporate debt complicates the analysis because leverage effects seem likely to affect the relation between changes in investment risk and expected earnings. Using annual earnings and return data from 1950 to 1988, we document a statistically significant positive association between changes in equities' relative risks and in earnings. However, on average, only a small proportion of changes in earnings can be attributed to changes in risk. A much larger proportion is attributable to changes in economic rents (windfall gains and losses). The observed positive association between changes in earnings and changes in equities' risks suggests that leverage effects do not fully offset the effect of changes in investment risks. This association is robust with respect to subperiod analysis, alternative specifications of the earnings change variable, alternative data-availability requirements, and the number of portfolios formed.]

Perhaps one might be forgiven for supposing that, after thirty years of continuing inflation in the United Kingdom, a clear consensus would have emerged among economists, politicians, and men of business as to the causes of that inflation and the steps necessary for its cure. Unfortunately, this is not the case, although the disagreements are often exaggerated for political purposes and the arguments polarized in the sharpness of academic debate. The latest trend in the United Kingdom is to divide the participants into Keynesians and to do battle like mediaeval knights jousting at the tournament. The explanation of prevailing disagreements is in itself complex. It is partly ascribable to the usual difficulties of adequately testing alternative hypotheses against limited sets of time-series data when it is not always possible to reject particular hypotheses against the statistical facts. It must also be said that differences arise that are not so much closely allied to analytical arguments, but which reflect the taste or persuasion of individuals with regard to prescriptions for policy. It is not unknown for positions to be rationalized by subsequent analysis rather than the logical development proceeding in the opposite direction.' In this paper, we argue that the inflationary process in the U.K. economy cannot be simply fitted into either a so-called monetary or a Keynesian framework. The process is a more complicated one that cannot be described simply in terms of the behavior of the money supply on the one hand or the behavior of organized labor on the other. In agreement with the monetarists, it is important to differentiate between the inflationary process under fixed and floating exchange rate regimes, while in opposition to them, we assign a more important role to price and wage inflexibilities in the analysis of imported inflation and the process of adjustment to monetary change.