[This note examines the term "incremental information content," considers the most informative composition of income to include only components that are valued by investors, and determines the preferred level of disaggregation. The most common analysis in studies of incremental information content is to examine the coefficients from a regression of market-adjusted security returns for a 12-month period on the unexpected portion of two or more accounting income variables. A nonzero coefficient on one accounting variable is interpreted as evidence that the variable has information content that is "incremental" to the other variables in the equation. The accounting interpretation of this result in terms of the composition or disclosure of income depends on the other independent (conditioning) variables included in the estimated relation. Therefore, the interpretation of results beyond a statistical statement that one variable has information content incremental to another depends on the specification of the regression equation that is estimated. Results presented in two previous studies (Rayburn 1986; Bowen et al. 1987) are reviewed and extended from the perspective of the composition and disclosure of income. Taken together, the tests based on data reported in those two studies provide consistent and strong evidence that both cash flow and accrual components add to the informativeness of income. However data from Bowen et al. provide only weak evidence that current accrual and cash flow components of income are valued differently by investors, and similar tests based on Rayburn's data fail to reject the hypothesis that cash flows and current accruals are valued equivalently by the market. These results indicate that more research is needed on this issue.]

Examines the term `incremental information content,' which considers the the current accrual and cash flow components of income. Value placed by investors on the components of income; Preferred level of aggression; Analysis of studies of incremental information content; Accounting interpretation of the term; Composition and disclosure of income.

This study examines whether annual financial statements filed with the Securities and Exchange Commission are timely sources of information for investors. We examine a summary measure, the probability of bankruptcy, through which the release of financial statements might communicate information to investors. The results indicate that a significant association exists between revisions in the probability of bankruptcy due to nonearnings data and security returns over the fiscal year, but that investors have largely revised their estimates of the probability of bankruptcy prior to the release of the full financial statements.

Presents the findings of the tests for stock price response to disclosure of 1974 last in, first out (LIFO) inventory accounting decisions by adopting and non-adopting firms in the United States. Model of stock price change upon a firm's disclosure of a LIFO decision; Model and research design; Identification of disclosure interval; Estimates of LIFO adoption probabilities.

Ross Jennings, Paul J. Simko, Robert B. Thompson II, Does LIFO Inventory Accounting Improve the Income Statement at the Expense of the Balance Sheet?, Journal of Accounting Research, Vol. 34, No. 1 (Spring, 1996), pp. 85-109

[During 1974-75, more than a fourth of the manufacturing and merchandising firms listed on the New York Stock Exchange and the American Stock Exchange adopted or extended their use of the last-in, first-out (LIFO) method of inventory accounting. Because a change to LIFO accounting can materially affect a firm's cash flows, the stock price behavior of firms adopting LIFO during fiscal year 1974 has been studied extensively. However, existing studies provide little evidence that stock price movements during the period were directly linked with LIFO adoption. In this article, we report the results of new tests for a stock price response to disclosures of 1974 LIFO decisions by both adopting and non-adopting firms. Our tests assume that, prior to disclosure, prices reflect available information about the likelihood of LIFO adoption. This implies (for both groups of firms) that the stock price change in response to disclosure of the LIFO decision depends on investors' revisions in their beliefs regarding the probability of adoption caused by the disclosure. We use this implication to design tests of the null hypothesis of no association between stock price movements and the disclosure of 1974 LIFO decisions. Our tests are based on a sample of 487 firms that could have adopted LIFO during fiscal 1974. For each firm, we first identify an interval that includes the disclosure of its LIFO decision. We then estimate the probability of LIFO adoption at the beginning of that interval on the basis of information that was available at the time. Finally, we regress disclosure-interval stock returns on revisions in the probability of adoption resulting from disclosure of the decision. Our results provide strong evidence of a price response for nonadopting firms and weaker evidence of a price response for adopting firms.]

This study explores close US congressional elections involving politicians who have influence over the SEC to examine the effect of firms' political connections on their financial reporting. This question is important in understanding the overall effect of political connections on financial reporting. Our difference‐in‐differences tests reveal no evidence that firms experiencing a relative increase in political connections report more opportunistically after close elections in anticipation of preferential treatment by the SEC in its enforcement actions. In contrast, we find evidence that these firms report less opportunistically in response to an increase in their connections with SEC‐influential politicians. Further tests show that our findings are unlikely to be driven by capital market pressure, managerial equity incentives, or corporate governance. Overall, our results are consistent with political connections mitigating opportunistic reporting through enhanced scrutiny by the SEC of politically connected firms' financial reporting. Our findings provide new insights into the interactions among political connections, SEC oversight, and financial reporting by showing how politically connected firms alter their financial reporting in anticipation of differential treatment by the SEC.