[This paper examines the stock price effects of alternative types of management earnings forecasts. Beyond deciding whether to disclose forecasts, managers must decide whether to issue a point projection or a more qualitative estimate (e.g., a bounded range), and whether to project interim or annual earnings or both. Our empirical tests assess differences in the information content of management earnings forecasts that differ by form and horizon. Our tests provide a comprehensive investigation of the price effects of these alternative forecast disclosure types. While an extensive literature exists on the relation between management forecasts and stock prices, most previous studies examine only point and range forecasts of annual earnings (e.g., Penman 1980; Ajinkya and Gift 1984; Waymire 1984; McNichols 1989; Pownall and Waymire 1989). Exceptions include Lev and Penman (1990), Patell (1976), and Baginski et al. (1993). Lev and Penman (1990) include lower and upper bound forecasts for part of their sample period, but do not examine these disclosure forms separately. Patell (1976) provides evidence on mean price changes associated with a pooled sample of annual minimum and maximum forecasts. Baginski et al. (1993) examine alternative forecast forms. Prior analyses of managers' disclosure incentives speculate that investors may condition their assessment of forecast information on disclosure form and horizon. For instance, King et al. (1990) suggest that forecast disclosures emerge as voluntary managerial actions to reduce costly information asymmetry in capital markets. Under the "expectations adjustment" hypothesis, managers have incentives to acquire and maintain a reputation for credible disclosure. Rational investors recognize that disclosure quality varies systematically by disclosure form and will discount qualitative projections or those issued with longer horizons. Policy debates on mandatory disclosure of qualitative information, such as the recent SEC debates over the content of "Management Discussion and Analysis" disclosures, and deliberations on forecast disclosure in the 1970s (see King et al. 1990), also suggest a need for evidence on the information content of qualitative prospective disclosures and alternative forms of forecasts.1 Our primary tests are based on a sample of 1,252 forecasts disclosed by 91 firms between July 1, 1979 and December 31, 1987. Several conclusions emerge from these tests. First, forecast disclosures remain highly informative even when including other disclosure types not analyzed in prior studies. Second, forecasts are less informative than earnings announcements for our full sample, a finding that is inconsistent with earlier results in Pownall and Waymire (1989). Third, differences across forecast forms are not significant at conventional levels. Fourth, interim forecasts are significantly more informative than annual projections. This result is driven largely by maximum forecasts, which are highly informative and more frequent in the interim forecast subsample. We document several additional regularities that may be of interest to researchers. First, point and range annual forecasts comprise less than 20 percent of our sample. This suggests that the incidence of voluntary management forecast disclosure is possibly far greater than suggested by previous studies. Second, range forecasts tend to be quite inaccurate expost. Actual earnings per share (EPS) fell outside the forecasted bounds in more than 50 percent of our range forecasts. Third, forecasts that are more qualitative tend to be issued over longer horizons. Minimum forecasts are issued over the longest horizons for our sample, and interim point projections have the shortest horizons. Finally, extensions to our primary tests provide some evidence that maximum forecasts have significant negative price effects, and that for point forecasts, forecast revisions are highly informative.]

[This study assesses the impact of the firm size effect on test statistics based on market-adjusted and market model abnormal returns. The performance of two alternative abnormal return methods that explicitly control for the effect of firm size on expected returns is also examined. These methods, the size control portfolio and size model approaches, are based upon a companion portfolio approach where companion portfolios are constructed on the basis of firm size. Simulation results indicate that when event dates are clustered in calendar time and the event affects either small or large firms, conventional t-statistics based on market-adjusted or market model abnormal returns are misspecified in that their empirical Type I error rates deviate significantly from those expected under a true null hypothesis. Significance tests based on empirical distributions mitigate these over-rejection tendencies but, in doing so, they sacrifice power. On the other hand, conventional t-statistics based on size control portfolio or size model abnormal returns are well-specified across a variety of event conditions. Accordingly, either size-based method can control for the firm size effect in event study contexts where such control is warranted. Since the size control portfolio approach is simpler to implement, it is the preferred alternative. The study also documents that abnormal performance is detected more often when large firms are affected than when small firms are affected.]

ABSTRACT We commemorate the 50th anniversary of Ball and Brown [1968] by chronicling its impact on capital market research in accounting. We trace the evolution of various research paths that post–Ball and Brown [1968] researchers took as they sought to build on the foundation laid by Ball and Brown [1968] to create a body of research on the usefulness, timeliness, and other properties of accounting numbers. We discuss how those paths often link back to the groundwork laid and questions originally posed in Ball and Brown [1968].

Short-window earnings response coefficients estimated from pooled time-series cross-sectional regressions are systematically smaller than corresponding averages of firm-specific coefficients estimated from time-series regressions. The cause is a negative relation between firm-specific earnings response coefficients and unexpected earnings variances. If the hypotheses of equality of firm-specific coefficients and equality of firm-specific unexpected earnings variances are rejected, firm-specific estimation should be used instead of pooled estimation. Using pooled estimation may lead to incorrect inferences about the magnitude of estimated coefficients and/or incorrect inferences about differences in coefficient behavior between groups of firms.

The capital asset pricing model's (CAPM) primary empirical implication is a positively sloped linear relation between a security's expected rate of return and its relative risk (beta). Recent research indicates that inferences about the risk-return relation are sensitive to the choice of the return measurement interval. The authors perform multivariate tests of the Sharpe-Lintner CAPM using monthly and annual returns on market-value-ranked portfolios. The CAPM is rejected using monthly returns, a result consistent with previous research. In contrast, the authors fail to reject the CAPM when annual holding period returns are used.

Under Ralston Purina Company's 1986 incentive contract 14 managers would receive 49.1 million in stock if within ten years the stock price closed above 100 for ten consecutive days. While the contract required a 57.8% increase in stock price, it did not motivate managers to create value because the rate of return required to reach 100 in ten years was substantially less than Ralston's cost of equity capital at the time of the contract's adoption. Barring any action by managers that would substantially change the market's expectations about the firm, reaching the 100 hurdle price would be easy. In fact, managers collected the contract's payoffs within five years despite an industry-adjusted loss of $2.1 billion in shareholder value.

The size effect is sensitive to the length of the return interval used in estimating betas. Beta changes with the return interval because an asset's covariance with the market and the market's variance do not change proportionately as the return interval is changed. We document beta sensitivity to the return interval. Evidence from cross-sectional regressions of returns on monthly and annual betas is inconsistent with beta changes stemming only from the higher standard errors of the longer-interval betas. We provide evidence that the size effect becomes statistically insignificant when risk is measured by betas estimated using annual returns.

Abstract ABSTRACT: This study assesses the impact of the firm size effect on test statistics based on market-adjusted and market model abnormal returns. The performance of two alternative abnormal return methods that explicitly control for the effect of firm size on expected returns is also examined. These methods, the size control portfolio and size model approaches, are based upon a companion portfolio approach where companion portfolios are constructed on the basis of firm size. Simulation results indicate that when event dates are clustered in calendar time and the event affects either small or large firms, conventional t-statistics based on market-adjusted or market model abnormal returns are misspecified in that their empirical Type I error rates deviate significantly from those expected under a true null hypothesis. Significance tests based on empirical distributions mitigate these over-rejection tendencies but, in doing so, they sacrifice power. On the other hand, conventional t-statistics based on size control portfolio or size model abnormal returns are well-specified across a variety of event conditions. Accordingly, either size-based method can control for the firm size effect in event study contexts where such control is warranted. Since the size control portfolio approach is simpler to implement, it is the preferred alternative. The study also documents that abnormal performance is detected more often when large firms are affected than when small firms are affected.

ABSTRACT We study a relatively recent change in voluntary disclosure practices by management, namely, the issuance of cash flow forecasts. We predict and find that management issues cash flow forecasts to signal good news in cash flow, to meet investor demand for cash flow information, and to precommit to a certain composition of earnings in terms of cash flow versus accruals, thus reducing the degree of freedom in earnings management. Our results also suggest that management discloses good news in cash flow to mitigate the negative impact of bad news in earnings, to lend credibility to good news in earnings, and to signal economic viability when the firm is young. Our finding that management cash flow forecasts primarily convey good news is in contrast to the generally negative nature of management earnings guidance and suggests that different incentives drive firms' disclosure of different financial information.