Do differences in financial reporting attributes impair the predictive ability of financial ratios for bankruptcy?

This study explores the effect of cross-sectional and time-series differences in financial reporting attributes on the predictive ability of financial ratios for bankruptcy. We identify proxies for discretion over financial reporting, the importance of intangible assets, the comprehensiveness of the accounting model and recognition of losses. Each of our proxies for financial reporting attributes is associated with financial ratios that are less informative in predicting bankruptcy. Furthermore, our time-series tests reveal a decline in the predictive ability of financial ratios for bankruptcy and document that this decline is associated with our measures of financial reporting attributes.     

Asymmetry in earnings timeliness and persistence: a simultaneous equations approach

This study addresses simultaneity bias in piecewise linear forms of the earnings-return relation. We specify an overidentified system of simultaneous equations that incorporates both asymmetric earnings timeliness and asymmetric earnings persistence specifications and implement two-stage least squares for this piecewise linear system. Estimation of a system that is piecewise linear in endogenous variables presents several issues that are unprecedented in the accounting literature. Findings provide evidence that the asymmetric timeliness specification is particularly affected by simultaneity and that failing to correct for simultaneity results in coefficient estimates that potentially understate the degree of asymmetric earnings timeliness. Moreover, inferences regarding how conditional conservatism has evolved over time are sensitive to whether OLS or 2SLS coefficients are used as the basis of comparison.     

The information content of SEC accounting series release no. 190

The study examines the security price behavior of firms at the time of three events: the proposal of the SEC's accounting series release (ASR 190) to require replacement cost disclosures, the adoption of ASR 190, and the initial filing of the data with the SEC. The primary analysis focuses upon differential security return behavior among reporting firms. Several extensions, including a comparison with nonreporting firms, are also conducted. The basic findings indicates no security price effects and is consistent with the hypothesis that no information was provided to the market during the three time intervals studied. Alternatively, the inability to find an effect may be due to a misspecification in the research design. However, the basic finding is robust under several additional analyses and specifications.     

Discussion of “On Transitory Earnings”

Review of Accounting Studies -     

The Characteristics and Valuation of Loss Reserves of Property Casualty Insurers

This study examines characteristics and valuation of claim loss reserves of property casualty insurers. Using SEC disclosures of revisions (development) in loss reserve estimates, we document substantial serial correlation in loss reserve development, indicating that reported loss reserves do not fully reflect available information, consistent with management exercising discretion over reported loss reserves. We find that loss reserve development reported one year after the balance sheet date has significant explanatory power for firm value incremental to book value of equity and earnings, suggesting investors at least partially identify management's influence on reported loss reserves, and adjust firm values accordingly.     

The information content of earnings announcements: new insights from intertemporal and cross-sectional behavior

This study examines the information content of quarterly earnings announcements, measured as the magnitude of stock price revision at earnings announcements relative to price revision at other times. We investigate whether quarterly earnings announcements are informative using a nonparametric approach and 1971–2011 sample period. The findings affirm prior evidence on earlier sample periods that significantly more information is conveyed to investors in the three days around earnings announcements than in randomly chosen three-day periods. Next, we examine the behavior of information content over our sample period and document four key findings. First, there is a dramatic increase in information content at earnings dates from 2001 onward. Second, the market reaction to loss firms is substantially less than that for profitable firms. Third, there is a significantly greater reaction to larger firms. Fourth, reaction at earnings dates is significantly increasing in analyst coverage, and once analyst coverage is controlled, the association with size becomes less significant.     

The Impact of Analysts' Forecast Errors and Forecast Revisions on Stock Prices

Abstract:  We present a comprehensive analysis of the association between stock returns, quarterly earnings forecast errors, and quarter-ahead and year-ahead earnings forecast revisions. We find that forecast errors and the two forecast revisions have significant effects on stock prices, indicating each conveys information content. Findings also show that the fourth quarter differs from other quarters—the relative importance of the forecast error (quarter-ahead forecast revision) is lower (higher). We also find a marked upward shift over time in the forecast error and forecast revision coefficients, consistent with the I/B/E/S database reflecting an improved quality of both earnings forecasts and actual earnings.     

The incremental information content of replacement cost earnings

The study explores the incremental explanatory power of replacement cost earnings variables (derived from ASR 190 data) with respect to explaining cross sectional differences in security returns. As such, the study is a natural extension of previous research, including analyses of the effect of security returns of ASR 190 data at the time of disclosure, investigations of cross sectional relationships between security returns and historical cost earnings, and studies of multiple signals. The basic finding is that pre-holding gain net income provides no incremental explanatory powerm given knowledge of historical cost earnings. However, the converse does not hold. Taken together, the findings are consistent with the contention that pre-holding gain net income is a garbled version of historical cost earnings. The basic finding is robust under several extensions of the initial research design. The research design incorporates a two-stage approach which permits a determination of the incremental explanatory power of collinear variables. The findings are in contrast to those of a previous study by Easman et al. (1979). The nature of the difference in research design inducing the difference is identified. Potential reasons for the difference in findings are provided.