[This study examines the effect of the uncertainty in analysts' earnings forecasts on the relation between unexpected returns and unexpected earnings. Numerous theorists have considered the effect of uncertainty on firm value, with particular interest in the uncertainty in a firm's future cash flows that underpin firm value. Since accrual accounting earnings represent a theoretical proxy for future cash flows, the effect of earnings uncertainty on firm value is also of considerable interest. However, observed uncertainty in accounting earnings may be attributable to noise (garbling) in the earnings signal or to the fundamental uncertainty of expected future cash flows, or both. Moreover, theory suggests these different forms of uncertainty may have differing effects on firm value. To date, there is little empirical evidence concerning the effect of uncertainty in earnings on firm value. We investigate the effect of ex ante earnings uncertainty by using the familiar linear relation between unexpected stock returns (UR) and unexpected earnings (UE), with 3,167 firm-year observations collected over the six-year period 1979-84. The variance in analysts' earnings forecasts just prior to a firm's annual earnings announcement is employed as our firm-specific proxy for ex ante uncertainty. Our results indicate a systematic relation between ex ante uncertainty and the information content of earnings. A given unit of earnings news has a greater effect on unexpected stock price change as the amount of pre-earnings-announcement uncertainty decreases. Firms with relatively high ex ante uncertainty exhibit little or no systematic price change at the time earnings are announced. Sensitivity tests reveal our results to be robust over numerous alternative specifications of the variables and models employed. Sensitivity tests also suggest that our results are not driven by either firm size or the amount of information available about the firm. In addition, we develop and report results of a model that controls for the effects of uncertainty. This results imply that the dispersion (disagreement) in analysts'earnings forecasts is more likely to be a proxy for noise in the financial reporting system than a proxy for fundamental uncertainty in a firm's future cash flows.]

[This study investigates the incremental information in alternative measures of constant dollar and current cost operating income reported under SFAS No. 33 over historical cost income and its cash and accural components. To do so, it examines contemporaneous associations between unexpected returns at the time of release of the annual report or 10-K report and variables measuring the unexpected components of these alternative income measures. The research design exploits the difference in timing of the release of historical cost income and of SFAS No. 33 income. The empirical analysis indicates that current cost and constant dollar operating income measures have incremental information over historical cost income and its cash and accural components. The results also indicate that there is incremental information in cash flow over that conveyed by alternative measures of constant dollar and current cost operating income. However, incremental information in SFAS No. 33 measures and of cash flow is observed only for a subset of the industries examined.]

In this paper we provide evidence on the relationship between revisions in analysts' composite earnings forecasts and contemporaneous stock price movements. Most of the research on forecasts of accounting earnings has focused on (1) whether earnings forecasts have information content, and (2) the pros and cons of regulations (standards) requiring earnings forecasts (Gonedes, Dopuch, and Penman [1976]). The second issue is moot if earnings forecasts do not contain information. Empirical evidence suggests that management earnings forecasts are associated with significant security price revisions (Foster [1973], Patell [1976], Nichols and Tsay [1979], and Penman [1980]). Similar results were obtained for analysts' forecasts (Gonedes, Dopuch, and Penman [1976]). One aspect of this area of research which has been neglected is the relationship between analysts' forecasts and managements' forecasts. Normally, corporations do not issue public forecasts of accounting data on a regular basis.' However, security analysts are in frequent contact with corporations in an effort to confirm information or obtain new

Gerald J. Lobo, Amal A. W. Mahmoud, Relationship between Differential Amounts of Prior Information and Security Return Variability, Journal of Accounting Research, Vol. 27, No. 1 (Spring, 1989), pp. 116-134

Examines the effect of the uncertainty in analysts' earnings forecasts on the relation between unexpected returns (UR) and unexpected earnings (UE). Review of related research; Description of measures and research methodology; Model for controlling ex ante uncertainty; Implications of the study.

This study Investigates the Incremental information in alternative measures of constant dollar and current cost operating income reported under SFAS No. 33 over historical cost income and its cash and accrual components. To do so, it examines contemporaneous associations between unexpected returns at the time of release of the annual report or 10-K report and variables measuring the unexpected components of these alternative income measures. The research design exploits the difference in timing of the release of historical cost income and of SFAS No. 33 income. The empirical analysis indicates that current cost and constant dollar operating income measures have Incremental information over historical cost income and its cash and accrual components. The results also indicate that there is Incremental information in cash flow over that conveyed by alternative measures of constant dollar and current cost operating income. However, Incremental Information in SFAS No. 33 measures and of cash flow is observed only for a subset of the industries examined.

Lenders reduce their monitoring efforts after hedging their credit risk exposure through credit default swap (CDS) contracts, which are akin to insurance against borrowers’ adverse credit events. In this study, we examine whether, upon observing the reduced lender monitoring following CDS trading, shareholders demand that borrowing firms invest in more aggressive tax planning strategies, which were previously constrained by risk-averse lenders. Using a difference-in-differences design that exploits the variation in timing of the inception of CDS trading, we document that borrowers exhibit greater tax avoidance after the inception of CDS trading. Consistent with shareholders stepping up their demands post-CDS, we find that the increase in tax avoidance is stronger for (i) firms with more powerful and influential shareholders, as measured by dedicated institutional investors, (ii) firms with stronger shareholder defenders, as measured by board independence and board size, and (iii) firms with more strategic default options. We also find that borrowers with higher levels of tax avoidance are less likely to file for bankruptcy in the future. Our findings are robust to a battery of sensitivity checks, including controlling for cost of debt and endogeneity, as well as using alternative measures of tax avoidance.

We identify two research design issues that explain the inconsistency between the theoretically predicted negative relation between audit effort and misstatements (measured using restatements) and empirical findings. First, auditor risk adjustment behavior induces an upward bias in the association between audit effort and restatements. Second, the theoretical prediction applies only to audited financial reports (i.e., annual reports) and not to unaudited reports (i.e., interim quarterly reports). Comingling restatements of audited with unaudited reports introduces an additional upward bias in the association between audit effort and restatements. After correcting for these two sources of bias, we find a robust negative association between audit effort and annual report restatements. JEL Classification: M49. Data Availability: Data used in this study are available from public sources.