Knowledge that Transforms

Questions have been raised in recent years concerning the interpretation of previous studies purporting to show that distributed earnings have had a consistently greater impact on equity prices than have retained earnings. Miller and Modigliani have convincingly argued that if capital markets are perfect and rational behavior of market participants is assumed, the price-earnings ratio of the shares of a firm with a given investment policy should be invariant to alternative earnings-payout ratios. They also point out, however, that with the present tax subsidy on capital gains and the existence of substantial brokerage fees and flotation costs, dividend policy might be expected to have an effect on share prices, even though the amount and direction of this effect is an empirical matter and not determinable a priori.

This article will concern itself with the various techniques for selecting portfolios of securities. It should be made clear at the outset that a good portfolio is not just an amalgamation of a number of “good” stocks and bonds. Rather, it is an integrated whole, each security complementing the others. Thus, the investment manager must consider both the characteristics of the individual securities and the relationships between those securities. Until recently there was no comprehensive theoretical framework for the analysis of the latter aspect of the portfolio problem. Intuitive judgment and experience were the guidelines used by investment managers.

The Markowitz analysis of efficient portfolio selection, which can be interpreted as solving the quadratic-programming problem of minimizing the variance of a normal variate subject to each prescribed mean value, easily can be generalized (in the special case of independently distributed investments) to the concave-programming problem of minimizing the “dispersion” of a stable Pareto-Lévy variate subject to each prescribed mean value. Some further generalizations involving interdependent distributions will also be presented here.

“Don't put all your eggs in one basket, ” is a familiar adage. Economists, such as Marschak, Markowitz, and Tobin, who work only with mean income and its variance, can give specific content to this rule—namely, putting a fixed total of wealth equally into independently, identically distributed investments will leave the mean gain unchanged and will minimize the variance.

Price variation accounting, Price-level adjusted accountings, Net income, Time value of money

Liability, Deferred revenue, Breakage, Accrued expense

At the close of such a conference as this, it is appropriate that the critical synthesis be as noncritical as possible. Each of the papers has been dissected; what is necessary at this point are some vacuous well-meaning comments that no one can take umbrage at. To ensure getting comments like these requires selecting someone who is certain not to understand the papers. This does not become a formidable obstacle, because the probability of success is very high if the person selected is one with full professorial rank. My first comments will be directed to the title. Question has been raised as to what empirical research is. To answer this I would like to commence with a possible definition of research, namely that research is the formulation and testing of hypotheses with the aim of understanding and predicting behavior. If this definition is accepted, then it is impossible to classify any endeavor as research unless it is empirical. Hypotheses may be stated without observation or experiment but they cannot be tested in a nonempirical fashion. It has been said that one feature of the Renaissance was the replacement of medieval theorizing by research. If this is true, accounting may be said to be in the renaissance period. Up to this time hypotheses have been formulated (any proposal for a change in accounting methods is basically a hypothesis that the use of the proposed accounting method will have some kind of desirable results-the exact nature of these is frequently not stated), but hypothesis testing has been rare. The only possible reason to use the term empirical research for the papers presented here is to point out to the person accustomed to use the term research in a loose sense that these are research papers in the proper sense. These papers are on empirical research in accounting. Accounting,