Partnership, Information systems, Accounting method

Mayers and Rice conjecture that an investor with better information will on average plot above the security market line as drawn by uninformed investors. This paper demonstrates that this conjecture is false in general, by constructing a counterexample. However, the Mayers-Rice conjecture is really part of a much broader hypothesis concerning whether increases in expected returns correspond to increases in expected utilities. It is shown that this latter hypothesis is true when the investor has an exponential or logarithmic utility function.

[We present a model of information acquisition in a competitive market in which traders can learn both from costly (and diverse) private enquiry and price, which costlessly (but partially) reveals the total amount of information known to all traders. Our major purpose is to show that an equilibrium exists in such a market: that is, there exists a rational expectations competitive equilibrium in which the amount of costly diverse information each trader acquires is endogenously determined. From this result we investigate the change in the informativeness of price relative to changes in the level of noise, the cost of acquiring information, and the distribution of traders' risk preferences.]

Pre-announcement information is private information gathered in anticipation of a public disclosure. Event-period information is private information useful in conjunction with the announcement itself. Typically rational models of trade are based exclusively on one type of information. Such models are less descriptive of real market settings and misspecified empirically. Therefore, we introduce a model of rational trade with both features and discuss its implications.

The paper analyzes the use of reported accounting earnings and price as a basis for compensating a manager when he trades on private information, and share price is set rationally based on privately held information, publicly available and contractible information, and publicly available but noncontractible information. In addition, we analyze the comparative statics of the compensation on reported earnings and price with respect to changes in the economy.

This paper suggests that earnings announcements provide information that allows certain traders to make judgements about a firm's performance that are superior to the judgements of other traders. As a result, there may be more information asymmetry at the time of an announcement than in nonannouncement periods. More information asymmetry implies that bid–ask spreads increase, suggesting that market liquidity decreases at the time of an earnings announcement. Furthermore, informed opinions resulting from public disclosure may lead to an increase in trading volume, despite the reduction in liquidity that accompanies announcements.

Since cost allocation has been widely viewed as an arbitrary process, the theory of choice among allocation alternatives is little advanced. This paper illustrates some practical problems that result in the absence of well-established guidelines for choosing among cost allocation alternatives. Specifically, two appeals before the Armed Services Board of Contracts Appeals involving the issue of cost allocation are discussed and analyzed.