[This study presents an empirical examination of whether managers manipulate earnings through the timing of income recognition from disposal of long-lived assets and investments (hereafter assets). Since managers can often choose the period during which an asset will be sold, and since the principle of acquisition cost underlying the accounting valuation of assets implies that changes in the market value of an asset between acquisition and sale are reported in the period of sale, it follows that there are opportunities for managers to manipulate earnings through the timing of asset sales at relatively low cost. Two common explanations for earnings manipulations are examined: the earnings-smoothing and the debt-equity hypotheses.1 The earnings-smoothing hypothesis predicts that earnings are manipulated to reduce fluctuations around some level that is considered normal for the firm (see, e.g., Ronen and Sadan 1981, 6). The debt-equity hypothesis suggests a positive relation between a firm's debt-equity ratio and managers' choice of earnings-enhancing activities (see, e.g., Watts and Zimmerman 1986, 200-21).2 The findings are consistent with the timing of asset sales by managers so that the recognized income from these sales smooths intemporal earnings changes and mitigates accounting-based restrictions in bond covenants. The results also show that the earnings-smoothing and the debt-equity effects are incremental; after controlling for one effect the other still exists. Finally, sensitivity analysis showing that these results are robust to specifications that consider asset sale levels, bonus plans, possible tax effects, and financial soundness suggests that the findings are not attributable to misspecified statistical tests. The results of this study may be relevant to the ongoing debate about dropping the principle of acquistion cost underlying the accounting valuation of assets in favor of the principle of current cost (see, e.g., The Wall Street Journal 1990b). While the former is considered reliable, the latter is said to be vulnerable to earnings manipulations because net income is materially affected by management opinion on the sale values of the assets involved (see, e.g., Kieso and Weygandt 1987, 35). The evidence in this study suggests that, despite its reliability, managers take advantage of the acquisition-cost principle to manipulate earnings. This should be considered when evaluating the advantages and disadvantages of acquisition-cost accounting relative to current-cost accounting.]

[This article presents an empirical exploration of a specific market-inefficiency explanation for the observed post-earnings-announcement drift in stock prices. The research question is whether or not the observed relation between unexpected earnings in quarter t and stock-price changes in quarter t + 1 represents a failure of the market to characterize the time-series properties of earnings correctly. The article contributes to the existing literature in two ways. First, it provides corroborating evidence of the failure of the market to characterize the properties of the process underlying earnings correctly. Second, and more importantly, it directly tests the conjecture that this failure explains the post-announcement drift. Corroborating evidence of the market's failure to characterize the properties of the process underlying earnings correctly is derived from a distributed lag model; a LOGIT model is employed to regress unexpected earnings on their four most recent past realizations. The results indicate that the probability of positive unexpected earnings in quarter t + 1 is increasing in its (lagged) values for quarters t through t - 2 and decreasing in its (lagged) value for quarter t - 3. The ability of the model to predict future earnings changes and stock returns outside of the estimation period was examined as well. The results show that the model robustly predicts both one-quarter-ahead earnings changes and future (abnormal) stock returns. Furthermore, future stock returns remain predictable even after current unexpected earnings are controlled. This last relation further corroborates the incremental explanatory power of the lagged unexpected earnings over the unexpected earnings of the current quarter with respect to the post-announcement drift in stock prices. Although this predictability of future earnings changes and stock returns is consistent with the results of prior research (see, e.g., Foster 1977; Griffin 1977; Foster et al. 1984, table 1; Bernard and Thomas 1990, tables 1 and 5), there is an important difference between previous and present methodology. The tests here involve predicting future earnings changes and stock returns by using data from a holdout period, rather than by documenting correlations in the sample. Thus, the tests used here increase the confidence that the results are not driven by modeling or sampling errors. Evidence from this study and prior research is consistent with the conjecture that the market systematically errs in predicting one-quarter-ahead (quarter t + 1) earnings and stock prices. Such an error implies that a drift would be observed during quarter t + 1, as the market uses predisclosure information to update expectations for earnings in quarter t + 1. To my knowledge, the extent to which this error explains post-announcement drift has not been directly tested. I formally test the extent to which this systematic error in predicting future earnings explains the drift by exploring the relation between the drift in stock prices observed in quarter t + 1 and unexpected earnings in quarter t, while controlling for the implications of past earnings for future earnings. In particular, cumulative abnormal returns (CARs) for the period commencing three days after the earnings announcements of quarter t and ending one day following earnings announcements for quarter t + 1 were computed for four portfolios that were constructed on the basis of unexpected earnings in quarter t. Once the implications of past earnings for future earnings are controlled, the positive relation between unexpected earnings in quarter t and the drift in stock prices observed in quarter t + 1 no longer exists. This finding suggests that the observed relation between unexpected earnings in quarter t and stock price changes in quarter t + 1 is fully explained by a systematic error in forecasting earnings.]

This paper is an empirical examination of the nature of information conveyed by open-market stock repurchase announcements. The findings weakly indicate that: (1) there are positive unexpected annual earnings in the repurchase announcement year and positive revisions of earnings forecasts by analysts around announcement dates, and that (2) repurchase announcements are followed by declines in the repurchasing firms' common-stock risk. In addition, a regression analysis shows that repurchase announcement returns are positively (negatively) correlated with the earnings (risk) changes conveyed by repurchase announcements.

The accounting method in Statement of Financial Accounting Standards ( SFAS ) No. 8 for restatement of a foreign operation's financial statements denominated in a foreign currency into the parent's currency equivalents for inclusion in the parent company's financial statements was severely criticized by market participants and managers. Its replacement, SFAS No. 52, represented an attempt to improve on the methods of SFAS No. 8. This study examines two questions: did SFAS No. 8 produce relevant information for valuing US multinational firms, and are the results reported under SFAS No. 52 more valuation relevant than those reported under SFAS No. 8? Valuation relevance is studied because the Financial Accounting Standards Board (FASB) has stated that relevance is an important criterion for choosing among alternative accounting methods. Considered collectively, the results suggest that the rules in SFAS No. 8 produced a poor accounting measure for valuing US multinational firms, and that the introduction of SFAS No. 52 has resulted in a significant improvement in the valuation relevance of the accounting numbers associated with the restatement of a foreign operation's financial statements. However, this improvement applies only to the subset of firms that designated a foreign currency as their functional currency (i.e., switched to the current‐rate method) and not to firms that designated the dollar as their functional currency (i.e., as if they still reported under SFAS No. 8).

[Previous research has demonstrated that information asymmetry translates into higher transaction costs for trading shares of the firm which, in turn, raise the required rate of return and lower current stock price. The information asymmetry perspective suggests that, ceteris paribus, managers wishing to maximize the value of their firms have incentives to reduce the degree of information asymmetry by switching to newly available accounting techniques which make financial statements more informative to investors. Firms with greater information asymmetry are predicted to be more likely to switch to more informative accounting methods when they become available. Tests on the choice of functional currency among U.S. multinational firms support these predictions after controlling for variables such as the debt-equity ratio, interest coverage, size, and the relative size of the foreign currency adjustment in the financial statement.]

Consistent with previous research, the authors fail to find a significant correlation between the abnormal returns of their sample firms with international activities and changes in the dollar. They investigate the possibility that this failure is due to mispricing. Lagged changes in the dollar are a significant variable in explaining current abnormal returns of the authors' sample firms, suggesting that misprizing does occur. A simple trading strategy based upon these results generates significant abnormal returns. Corroborating evidence from returns around earnings announcements as well as errors in analysts' forecasts of earnings is also provided.

This study presents an empirical examination of whether managers manipulate earnings through the timing of income recognition from disposal of long-lived assets and investments (hereafter assets). Since managers can often choose the period during which an asset will be sold, and since the principle of acquisition cost underlying the accounting valuation of assets implies that changes in the market value of an asset between acquisition and sale are reported in the period of sale. It follows that there are opportunities for managers to manipulate earnings through the timing of asset sales at relatively low cost. Two common explanations for earnings manipulations are examined: the earnings-smoothing and the debt-equity hypotheses. The earnings-smoothing hypothesis predicts that earnings are manipulated to reduce fluctuations around some level that is considered normal for the firm (see, e.g., Ronen and Sadan 1981, 6). The debt-equity hypothesis suggests a positive relation between a firm's debt-equity ratio and managers' choice of earnings-enhancing activities (see, e.g.. Watts and Zimmerman 1986, 200-21). The findings are consistent with the timing of asset sales by managers so that the recognized income from these sales smooths intemporal earnings changes and mitigates accounting-based restrictions in bond covenants. The results also show that the earnings-smoothing and the debt-equity effects are incremental; after controlling for one effect the other still exists. Finally, sensitivity analysis showing that these results are robust to specifications that consider asset sale levels, bonus plans, possible tax effects, and financial soundness suggests that the findings are not attributable to misspecified statistical tests. The results of this study may be relevant to the ongoing debate about dropping the principle of acquisition cost underlying the accounting valuation of assets in favor of the principle of current cost (see, e.g.. The Wall Street Journal 1990b). While the former is considered reliable, the latter is said to be vulnerable to earnings manipulations because net income is materially affected by management opinion on the sale values of the assets involved (see, e.g., Kieso and Weygandt 1987, 35). The evidence in this study suggests that, despite its reliability, managers take advantage of the acquisition-cost principle to manipulate earnings. This should be considered when evaluating the advantages and disadvantages of acquisition-cost accounting relative to current-cost accounting.

This article presents an empirical exploration of a specific market-inefficiency explanation for the observed post-earnings-announcement drift In stock prices. The research question Is whether or not the observed relation between unexpected earnings in quarter t and stock-price changes in quarter t+1 represents a failure of the market to characterize the time-series properties of earnings correctly. The article contributes to the existing literature in two ways. First, it provides corroborating evidence of the failure of the market to characterize the properties of the process underlying earnings correctly. Second, and more importantly. It directly tests the conjecture that this failure explains the post-announcement drift. Corroborating evidence of the market's failure to characterize the properties of the process underlying earnings correctly is derived from a distributed lag model; a LOGIT model is employed to regress unexpected earnings on their four most recent past realizations. The results indicate that the probability of positive unexpected earnings in quarter t+1 is increasing in its (lagged) values for quarters t through t-2 and decreasing In its (lagged) value for quarter t-3 . The ability of the model to predict future earnings changes and stock returns outside of the estimation period was examined as well. The results show that the model robustly predicts both one-quarter-ahead earnings changes and future (abnormal) stock returns. Furthermore, future stock returns remain predictable even after current unexpected earnings are controlled. This last relation further corroborates the incremental explanatory power of the lagged unexpected earnings over the unexpected earnings of the current quarter with respect to the post-announcement drift in stock prices. Although this predictability of future earnings changes and stock returns is consistent with the results of prior research (see, e.g., Foster 1977; Griffin 1977; Foster et al. 1984, table 1; Bernard and Thomas 1990, tables 1 and 5), there is an important difference between previous and present methodology. The tests here involve predicting future earnings changes and stock returns by using data from a holdout period, rather than by documenting correlations in the sample. Thus, the tests used here increase the confidence that the results are not driven by modeling or sampling errors. Evidence from this study and prior research is consistent with the conjecture that the market systematically errs in predicting one-quarter-ahead (quarter t+1) earnings and stock prices. Such an error implies that a drift would be observed during quarter t + 1 , as the market uses pre disclosure information to update expectations for earnings in quarter t+1. To my knowledge, the extent to which this error explains post-announcement drift has not been directly tested. I formally test the extent to which this systematic error in predicting future earnings explains the drift by exploring the relation between the drift In stock prices observed in quarter t+1 and unexpected earnings in quarter t, while controlling for the implications of past earnings for future earnings. In particular, cumulative abnormal returns (CARs) for the period commencing three days after the earnings announcements of quarter t and ending one day following earnings announcements for quarter t+1 were computed for four portfolios that were constructed on the basis of unexpected earnings in quarter t. Once the implications of past earnings for future earnings are controlled, the positive relation between unexpected earnings in quarter t and the drift in stock prices observed in quarter t+1 no longer exists. This finding suggests that the observed relation between unexpected earnings in quarter t and stock price changes in quarter t +1 is fully explained by a systematic error in forecasting earnings.

This paper finds that firms that meet or beat current analysts’ earnings expectations (MBE) enjoy a higher return over the quarter than firms with similar quarterly earnings forecast errors that fail to meet these expectations. Further, such a premium to MBE, although somewhat smaller, exists in the cases where MBE is likely to have been achieved through earnings or expectations management. The findings also indicate that the premium to MBE is a leading indicator of future performance. This premium and its predictive ability are only marginally affected by whether the MBE is genuine or the result of earnings or expectations management.