ABSTRACT: The study investigates the effect on security prices of the FASB's 1974-1976 deliberations in the inflation accounting issue. The test period is divided into two segments, one corresponding to initial consideration by the FASB of a proposal requiring supplemental general price-level adjusted financial reformation, and another corresponding to withdrawal of the proposal. This reversal-in-position setting, along with secondary analysis tests, substantially screens test results from a "correlated events" criticism. The results do indicate that there was a market reaction to the inflation accounting deliberations.

The Basu and N&S methodologies differ on three dimensions: choice of test statistic, method of computing significance levels, and method for sampling from among the possible observable reactions. In our opinion, neither methodology dominates the other, and we could easily envisage future researchers drawing from both approaches. To a large extent, the three basic differences between the methodologies involve independent choices, so that it is possible to choose from the best features of each methodology. For example, a researcher might decide to use correlations as the test statistic (N&S), compute significance levels relative to an empirical distribution (N&S), and test for a significant correlation between the abnormal returns for one "partitioning" event and the abnormal returns for each of the other possible events (Basu).

ABSTRACT: Returns on common stocks are examined in this article for possible reactions to FASB deliberations on inflation accounting, using a "price reversal" methodology that does not require ex ante specification of the direction or magnitude of the reactions, The analysis concentrates on three specific events associated with these deliberations: the report in January 1974 that compulsory inflation disclosures had been placed on the FASB agenda; the report in November 1975 that the FASB had decided not to issue a statement in 1975; and the report in January 1979 that the FASB had once again proposed that inflation disclosures be required. The results suggest that there was indeed a market reaction to these inflation accounting deliberations.