Demski and Sappington (1990) treat income disclosure as a process that conveys fully revealing information, and they establish two results related to this commentary: (1) an income-disclosure procedure is fully revealing if, and only if, the related end-of-period, present-value measures always are invertible in the realized information-structure signals, and (2) strict favorableness is sufficient for fully revealing income disclosure under the true probability measure. This commentary shows that the first result follows from a more interesting necessary and sufficient condition than invertibility. Essentially it shows that an income-disclosure procedure is fully revealing if, and only if, differences in perceptions about the discounted expected values of future cash flows or differences in current cash flows are possible in all periods for all cash flow/signal pairs. In the context of the second result, an alternative, more general, sufficient condition for fully revealing income disclosure under the true probability measure is identified. This outcome is assured if differences in perceptions about the discounted expected values of future-periods cash flows are possible in all periods for all cash flow/signal pairs.
[Demski and Sappington (1990) treat income disclosure as a process that conveys fully revealing information, and they establish two results related to this commentary: (1) an income-disclosure procedure is fully revealing if, and only if, the related end-of-period, present-value measures always are invertible in the realized information-structure signals, and (2) strict favorableness is sufficient for fully revealing income disclosure under the true probability measure. This commentary shows that the first result follows from a more interesting necessary and sufficient condition than invertibility. Essentially it shows that an income-disclosure procedure is fully revealing if, and only if, differences in perceptions about the discounted expected values of future cash flows or differences in current cash flows are possible in all periods for all cash flow/signal pairs. In the context of the second result, an alternative, more general, sufficient condition for fully revealing income disclosure under the true probability measure is identified. This outcome is assured if differences in perceptions about the discounted expected values of future-periods' cash flows are possible in all periods for all cash flow/signal pairs.]
Presents a commentary on the study of Kermit Larson and R. W. Schattke on the additivity of current cash equivalent (CCE). Arguments concerning the nonadditivity of CCE; Principle of measurement theory; Process which incorporates the combining operation for purchasing power and can be used to determine whether the property is additive.
The article focuses on methodology of financial accounting. In recent years, a number of accounting theoreticians have begun to attempt to apply the methodology of theory construction and confirmation in sciences to financial accounting. The impetus for these efforts probably was the desire to develop a theory or theories of accounting, which has the explanatory, the predictive and the descriptive powers of theories of sciences. In any case, these pioneering efforts have identified an inextricable link between theory construction and confirmation and measurement theory. The purpose of the paper is to appraise the validity of the ratio-scale view. The next section of the paper contains an overview of the analysis and the third subdivision of the paper provides a detailed analysis of the logic of this viewpoint. The final section provides conclusions concerning the future development of accounting theory, which are based on the examination of the ratio-scale view. The importance of the connection between theory construction and confirmation and measurement theory implies that accountants need to explore thoroughly the relationship between the numerical assignments of extant accounting systems and requirements of measurement theory.
The article identifies the conditions for classifying accounting as a measurement discipline. A typical definition of measurement is "the assignment of numerals to objects or events according to rules." Defining measurement in this manner overcomes the objections mentioned above and insures that measures obtained via the various scales will be informative and consistent. A more satisfactory definition of measurement is the assignment of numerals to represent elements or a property of elements in a specified system on the basis of isomorphism or homomorphism existing between one or more empirical relational systems and one or more numerical relational systems. For example, if purchasing power, which is defined as the ability of an object to command other objects and services in exchanges, is shown to satisfy the conditions above, more precise definitions of accounting concepts could be formulated. Similarly, in choosing a depreciation method for a particular asset, the accountants would choose the method which is believed to parallel more closely the decline in the purchasing power of the asset. If accountants are not willing to choose an economic property for accounting measurement, which approximates extensiveness, and to assume that the property is extensive, they must abandon their attempts to improve and to explain accounting via measurement theory.
The primary goals of this paper were (a) to test the information content of stock dividend announcements and (b) to produce evidence about the validity of the AICPA conclusion that small stock dividends almost always produce significant amounts of extra value on the ex date and that large stock dividends fail to generate such ex date value. In regard to the first objective, the authors' findings imply that the market, in the aggregate, uses stock dividend information in setting equilibrium security prices, that much of the market's reaction to such information occurs no later than the declaration date, and that such information tends to produce positive unexpected returns. With respect to the second goal, the results imply that the market is not conditioned to react positively to stock dividends of any size on the ex date and, consequently, that the AICPA conclusion is valid (invalid) with respect to large (small) stock dividends.
The goal of this study is to investigate the incremental information content of the 10-K (i.e., the information content of the data which are contained in the 10-K, but which are not included in the annual report) from a market perspective. This objective was accomplished by examining aggregate market reaction to the 10-K via several statistical procedures. Each of these procedures appears to imply that the market, in the aggregate, uses the incremental data in the 10-K in setting equilibrium security prices and, consequently, that this data set possesses information content.
[Under existing generally accepted accounting principles, no compensation expense is recorded for executive stock options (ESOs) if the exercise price on the date of grant is equal to (or greater than) the market price of the stock. Similarly, only negligible compensation expense tends to be recorded if the exercise price on the date of grant is less than the market price of the stock. The inadequacy of this method (see Boudreaux and Zeff 1976; Smith and Zimmerman 1976; and Weygandt 1977) has led the Financial Accounting Standards Board (FASB) to consider a proposal to measure compensation related to grants of ESOs at their fair values, with a lower bound constraint. A candidate model for the estimation of fair value (Swieringa 1987) is the Black and Scholes (B-S) (1973) pricing model with the Merton (1973) modification that allows for continuous-dividends. It would seem natural (and we infer that the FASB would opt) to use the continuous-dividend version of the B-S model for firms that pay cash dividends and the no-dividend version for firms that do not pay dividends. Note that if cash dividends are assumed to be zero (as would be the case for firms that do not pay dividends), the continuous-dividend version reduces to the original B-S formulation. Thus, we label the B-S continuous-dividend model (subject to the stipulation that the B-S estimate not be less than the number yielded by the FASB's minimum-value model) as the FASB proposal. This labeling applies whether the grant date or the vesting date is considered to be the measurement date (discussed below). To examine the income effect of changing the accounting method of ESOs, this study applies the FASB's proposal to a random sample of firms that granted stock options in order to assess the impact of the related compensation expense on operating income. A second objective is to compare ESO compensation estimates from the two models underlying the FASB proposal: (1) the B-S continuous-dividend model, and (2) the FASB's minimum-value procedure (discussed subsequently). In addition, the latest FASB proposal requires that stock option compensation be measured as of the vesting date, as opposed to the date of grant. Thus, a third objective is to provide evidence as to whether vestingdate estimates of ESO compensation are significantly different from ESO estimates generated on the grant date. The results indicate that, using a three percent materiality threshold, more non-dividend paying firms (about 30 percent) would have material income effects than dividend-paying firms (about eight percent). Furthermore, using alternative measures of service periods shorter than the lives of options, produces material ESO compensation expense for a high percentage of sample firms. Finally, applying the FASB proposal on the basis of the vesting date would result in a lower income effect than applying it on the basis of the date of grant. In general, material income effects are observed when the FASB's proposal is adopted irrespective of the valuation model used.]