Portfolios are formed directly and exclusively upon residual return behavior in the months prior to portfolio formation. The empirical behavior of residual return in the post-formation period is then examined. Based upon the overall time period studied (1932 through 1977), the average residual return is essentially zero in the months subsequent to the portfolio formation. However, systematic (i.e., non-zero) residual behavior is observed in particular years. Moreover, the results suggest the possibility that ‘abnormal’ returns observed after certain events (e.g., earnings announcements) may at least in part reflect more general phenomena associated with being ‘winners’ and ‘losers’ in terms of residual returns in the months previous to the event.

William H. Beaver, Stephen G. Ryan, Biases and Lags in Book Value and Their Effects on the Ability of the Book-to-Market Ratio to Predict Book Return on Equity, Journal of Accounting Research, Vol. 38, No. 1 (Spring, 2000), pp. 127-148

We examine the role of concurrent information in the striking increase in investor response to earnings announcements from 2001 to 2016, as measured by return variability and volume following Beaver (1968). We find management guidance, analyst forecasts, and disaggregated financial statement line items are more frequently bundled with earnings announcements, and each of these items explains part of the increase in market response. Furthermore, collectively, these concurrent information releases explain a substantial fraction of the increase in market response to earnings announcements since 2001. This is in contrast to the decline in market response to management guidance issued separately from earnings and the much smaller increase in market response to analyst forecasts issued separately from earnings over this time. The findings indicate that information arrival at earnings announcement dates has increased significantly over the past two decades, and that key components of this are increased disclosures by management of guidance and financial statement line items and forecasts by analysts.

Beaver, Lambert and Morse (1980) employ a regression of percentage change in prices on percentage change in earnings in which data are grouped by the dependent variable. Reverse regression offers a more intuitive and direct way to assess the information content of security prices, the objective of Beaver et al. While grouping is asymptotically equivalent, reverse regression is a more efficient way of examining the incremental explanatory power of lagged values of percentage change in price with respect to accounting earnings.

One criterion being employed by a growing body of empirical research is predictive ability. According to this criterion, alternative accounting measurements are evaluated in terms of their ability to predict events of interest to decision-makers. The measure with the greatest predictive power with respect to a given event is considered to be the best method for that particular purpose. Because the predictive ability criterion is currently being used and is likely to experience even greater use in the future, this article examines its origin, its relation-ship to the facilitation of decision-making, and the potential difficulties associated with its implementation. Knowing the origin of the predictive ability criterion is important in understanding what is meant by predictive ability and why it is being used in evaluating accounting data. The criterion is well established in the social and natural sciences as a method for choosing among competing hypotheses. The use of the predictive ability criterion presupposes that alternatives under consideration have met the tests of logic and that each has a theory supporting it.

Provides evidence that fair value estimates of loans, securities and long-term debt disclosed under Statement of Financial Accounting Standards (SFAS) No. 107 provide significant explanatory power for bank share prices beyond that provided by related book values. First-difference estimation; Specifications.