Robert E. Verrecchia, The Use of Mathematical Models in Financial Accounting, Journal of Accounting Research, Vol. 20, Supplement: Studies on Current Research Methodologies in Accounting: A Critical Evaluation (1982), pp. 1-42

Accounting changes, LIFO, Market response, Annual earnings announcements

Accounting Research, Causality, Research methods, Cross-lagged technique

Auditing, Non-Audit services, Auditor independence, Audit quality

This paper examines the relationship between the ownership control status of firms and the accounting methods they adopt. The arguments of Watts and Zimmerman's positive theory are integrated with those of managerial economists to generate the prediction that management controlled firms are more likely than owner controlled firms to adopt accounting methods which increase reported earnings. This prediction is inconsistent with Fama's hypothesis that the market for managerial talent will prevent management controlled firms from acting differently than owner controlled firms. This paper compares the depreciation methods used by a sample of management and owner controlled firms for financial reporting purposes. The comparison considers and controls for the factors of firm size, leverage, and the depreciation method used for tax reporting purposes. The comparison reveals that there is a significant difference in the depreciation methods adopted by management controlled and owner controlled firms for financial reporting purposes.

This study tests Chicago Board Options Exchange efficiency by examining option price behavior in the weeks surrounding a firm's quarterly earnings announcement. The evidence presented here suggests that a first-order autoregressive seasonal process describes quarterly earnings behavior and demonstrates that the information content of an earnings announcement is fully incorporated in option prices by the end of the announcement week.

[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.]