Firm size, Excess returns, LIFO adoption, Tax savings

Accounting changes, LIFO, Market response, Annual earnings announcements

This study assesses the stock market's reaction to a series of events leading up to a mandated change in accounting for retail land sales. Evidence is found to support the conclusion that the market reacted to some of these events in a manner consistent with the effects of the accounting change on debt annagement contracts. A distinctive aspect of the analysis is the efficient use of security returns data to detect market reactions and to derive empirical distributions of test statistics employed. The analysis is extended by a model for grouping regression equations known as seemingly unrelated regressions. However, the gains from this extension are modest.

This paper provides descriptive data on standard sources of analyst forecasts used in accounting research: the Value Line Investment Survey, the Institutional Brokers Estimate System (IBES), and, toa lesser extent, the Standard & Poor's Earnings Forecaster and Zacks Investment Research. We examine the relative accuracy of seven forecast error metrics, using various combinations of Value Line and IBES forecasts of quarterly earnings per share (EPS) and actual earnings as reported by Value Line, IBES, and Compustat. (Appendix A reports the relative accuracy of a forecast error metric based on a smaller sample of Standard and Poor's forecasts of annual EPS). We find the forecast error metric that pairs the Value Line forecast EPS with the Value Line actual EPS produces the smallest absolute forecast errors. We also test the association of these forecast error metrics with threeday excess returns centered on the data of a quarterly earnings announcement. The strongest associations are obtained with the use of Value Line actual earnings and either Value Line or IBES forecast data. This suggests that the choice of actual EPS data is more crucial than the source of forecast EPS data. Our overall conclusion is that Value Line

Following a five year moratorium on adoption of interest capitalization by the SEC, the Financial Accounting Standards Board issued SFAS No. 34 mandating that firms previously writing off interest charges related to the construction of assets change to capitalizing those charges. The purpose of this study is to analyze the impact of this change in terms of the security market's reactions both to policy announcements leading up to the promulgation of SFAS No. 34, and to earnings announcements following implementation by affected companies. Significant average market reactions are indicated for two of ten policy announcements before the effects of firm size are considered; however, significance disappears when those effects are removed from excess returns. Although a bias is detected in the forecasts of analysts consistent with less than full revision to include the earnings impact, there is little evidence of market reactions to announcements of those earnings. Résumé. Après un moratoire de cinq ans sur l'adoption de la capitalisation de l'intérêt par la S.E.C., le Financial Accounting Standards Board a émis le bulletin numéro 34 qui demande aux entreprises qui passaient aux dépenses les charges d'intérêts reliées à la construction d'actifs, de les capitaliser. L'objectif de cette étude, est d'analyser l'impact de ce changement (en termes des réactions du marché des valeurs) aux annonces de politiques qui ont conduit à la promulgation du bulletin 34 et aux annonces de bénéfices qui ont suivi l'implantation pour les compagnies touchées. Les réactions du marché en moyenne sont significatives pour deux des dix annonces de politiques, avant de prendre en considération les effets de l'ampleur de la firme; cependant, ce n'est plus significatif lorsque ces effets sont retranchés des rendements excédentaires. Quoiqu'un biais soit détecté dans les prévisions des analystes, en accord avec une révision moins que complète pour inclure l'impact des bénéfices, il y a peu d'évidence des réactions du marché aux annonces de ces bénéfices.

ABSTRACT: This paper reassesses the Information content of annual earnings announcements using errors in analyst forecasts published within one week of those announcements as the proxy for unexpected earnings. In addition to the use of analyst forecasts near to the announcement date, features which distinguish this study from earlier work include: a more precise dating of earnings announcements; a comparison of analyst forecast errors and changes in fourth-quarter earnings as proxies for unexpected earnings; tests of unusual variability in excess returns at the time of earnings announcements with the influence of forecast errors removed; a separation of early and late disclosers within an industry; and an examination of the properties of forecast range as an ex ante measure of earnings predictability. We conclude that: provided that analyst forecast errors measure unexpected earnings, annual earnings announcements have information content even when compared to market expectations very near to those announcements; analyst forecast errors do not dominate fourth-quarter changes as a proxy for unexpected earnings; other information released concurrently with earnings announcements appears to have significant pricing implications; there is greater information content in earnings announcements of early disclosers than of late disclosers; and forecast ranges may provide a reasonable measure of the error in analyst forecasts, and hence of earnings predictability.

[This paper reassesses the information content of annual earnings announcements using errors in analyst forecasts published within one week of those announcements as the proxy for unexpected earnings. In addition to the use of analyst forecasts near to the announcement date, features which distinguish this study from earlier work include: a more precise dating of earnings announcements; a comparison of analyst forecast errors and changes in fourth-quarter earnings as proxies for unexpected earnings; tests of unusual variability in excess returns at the time of earnings announcements with the influence of forecast errors removed; a separation of early and late disclosers within an industry; and an examination of the properties of forecast range as an ex ante measure of earnings predictability. We conclude that: provided that analyst forecast errors measure unexpected earnings, annual earnings announcements have information content even when compared to market expectations very near to those announcements; analyst forecast errors do not dominate fourth-quarter changes as a proxy for unexpected earnings; other information released concurrently with earnings announcements appears to have significant pricing implications; there is greater information content in earnings announcements of early disclosers than of late disclosers; and forecast ranges may provide a reasonable measure of the error in analyst forecasts, and hence of earnings predictability.]

ABSTRACT: It is uncommon for non-discretionary accounting changes to increase reported income. An earlier study by Harrison [1977] concluded that the stock market reacted favorably to such changes. This study reexamines the market's reaction to a change from the cost to the equity method of accounting for long-term investments. Evidence is found to support the view that earnings adjustments precipitated by the change contained new information. However, no market reaction was detected in weeks containing public announcements leading up to and including the Accounting Principles Board's adoption of the change.

[It is uncommon for non-discretionary accounting changes to increase reported income. An earlier study by Harrison [1977] concluded that the stock market reacted favorably to such changes. This study reexamines the market's reaction to a change from the cost to the equity method of accounting for long-term investments. Evidence is found to support the view that earnings adjustments precipitated by the change contained new information. However, no market reaction was detected in weeks containing public announcements leading up to and including the Accounting Principles Board's adoption of the change.]

William R. Baber, Eugene H. Brooks, William E. Ricks, An Empirical Investigation of the Market for Audit Services in the Public Sector, Journal of Accounting Research, Vol. 25, No. 2 (Autumn, 1987), pp. 293-305