This paper provides a framework and some empirical evidence to evaluate the seriousness of problems in inference that arise in stockreturn-based studies when the data are cross-sectionally dependent. The study is motivated on the grounds that statistical procedures designed to address such problems are often infeasible, and even when they can be implemented they sometimes introduce other more serious difficulties. Thus, researchers have frequently adopted an approach that ignores the cross-sectional dependence (e.g., ordinary least squares [OLS]). The objective of this paper is to help identify the contexts in which ignoring the dependence would lead to serious misstatement of significance levels. Cross-sectional dependence in stock returns data is likely to exist when at least some of the returns are sampled from common time periods. This would be the case in all studies of the reaction of stock prices to a

This paper examines the use of alternative information sets in the construction of inflation hedge portfolios. The study is motivated by consideration of the investor's problem in a multiperiod world. Several authors (e.g., Merton [1973] and Breeden [1979]) have shown that in a multiperiod setting, optimal investment behavior will, in general, involve holding portfolios that can be used to hedge against changes in certain relevant states of nature. One potentially relevant state of nature is the rate of inflation in general prices (Jones [1982] and Elton, Gruber, and Rentzler [1983]). In contrast to prior related research, the empirical results indicate that it is possible to construct inflation hedge portfolios successfully, if certain accounting information is used. However, portfolios constructed on the basis of historical security price information do not serve as effective hedges. One contribution of this paper is to demonstrate the potential usefulness of accounting information to a price-taking investor. Although financial statements play an important role in the setting of equilibrium

Evidence presented here indicates that the relationship between stock returns and unexpected inflation differs systematically across firms. The differences are shown to be consistent with cross-sectional variation in firms' nominal contracts (monetary claims and depreciation tax shields). The differences are also partially explained by proxies for underlying firm characteristics that could create interaction between unexpected inflation and operating profitability. Finally, much if not most of the differences appear to arise because unexpected inflation is correlated with changes in expected aggregate real activity, the effects of which tend to vary across firms according to their systematic risk.

Stock markets myopia, Short term earnings, Future earnings, Mispricing

Post-Earnings-Announcement drift, Risk premium, Delayed market reaction, Incomplete risk adjustment

Victor L. Bernard, Thomas J. Frecka, Commodity Contracts and Common Stocks as Hedges against Relative Consumer Price Risk, The Journal of Financial and Quantitative Analysis, Vol. 22, No. 2 (Jun., 1987), pp. 169-188

Reviews the book "Accounting Research Methods: Do the facts Speak for Themselves?," by Wanda A. Wallace.

Based on stock price behavior around the release of annual reports in 1981 and 1982, Wilson [1987] concludes that for a given amount of earnings, the market reacts more favorably the larger (smaller) are cash flows (current accruals). The goals of this paper are to assess the generality of Wilson's finding and to assess alternative economic arguments that would manifest themselves as a "preference" for cash flows over current accruals. For the overall period, 1977-1984, there Ts no evidence of the simple relation observed by Wilson in his two-quarter test period. We then examine progressively more contextual models of the implications of cash flows and accruals. These models are also unsuccessful in explaining stock price behavior around the release of detailed financial statements. We conclude that either (1) the security price reactions to the release of cash flow and accrual data in financial statements are too highly contextual to be modeled parsimoniously, or (2) important uncertainties about the contents of detailed financial statements are resolved prior to their public release.

[Several studies have hypothesized that economic consequences of mandated accounting procedures arise through impacts on firms' accounting-based loan covenants. However, this research has involved very little direct examination of the loan contracts. This study directly examines how public and private loan agreements were affected by an accounting procedure mandated by the SEC. It analyzes 24 loan agreements of 18 oil and gas firms that, as a result of an SEC requirement announced on May 6, 1986, recorded writeoffs of exploration costs for the first quarter of 1986. The principal finding is that, even for a mandated accounting procedure that caused both large financial statement differences and some technical violations of loan covenants, there were no observable economic consequences for the affected firms. This result casts doubt on the importance of economic consequences of other mandated accounting procedures that might operate through effects on debt covenants.]