Materiality Judgments and Disclosure of Retiree Health Care Costs Under SFAS No. 81

Generally, researchers have difficulty empirically examining materiality judgments because amounts designated as immaterial are not disclosed. However, reporting requirements under SFAS No. 106 provide a unique opportunity to evaluate expense amounts designated immaterial under SFAS No. 81. We use the cumulative effect associated with the adoption of SFAS No. 106 to evaluate prior management materiality judgments. Univariate and logistic regression results suggest that the decision to disclose SFAS No. 81 costs is positively related to our measures of plan materiality. However, our results also suggest that voluntary disclosure factors may have influenced the disclosure decision.     

Analysts’ forecast revisions and firms’ research and development expenses

This study examines whether reported values for firms’ research and development (R&D) affect analysts’ annual earnings forecast revisions following quarterly earnings announcements. Because R&D introduces uncertainty into earnings forecasts, analysts may benefit from additional information searches in an effort to increase forecast accuracy. Also, accounting standards mandate an immediate expensing of R&D, in essence projecting a zero value for the R&D. To the extent that R&D will produce future payoffs, the expense treatment reduces the informativeness of reported earnings for forecasting future earnings. Thus, the marginal benefit of analysts’ efforts to produce more information may increase with the magnitude of the R&D component of earnings announcements and trigger additional forecast revisions. Alternatively, if the cost of information searches exceeds the benefit, analysts’ forecast revisions may decrease. Our results show a positive relation between R&D expenses and analysts’ forecast revision activity. We also find a positive and significant association between the level of R&D expenses and the magnitude of analysts’ forecast revisions following quarterly announcements. These results point to a greater amount of analyst scrutiny when reported earnings are accompanied by high levels of R&D expenses.

Information asymmetry and accounting disclosures for joint ventures

In September 1999, the Financial Accounting Foundation issued a special report recommending the use of the equity method supplemented with appropriate disclosures for corporate joint ventures in the United States. This study, using data for corporate joint ventures in Singapore, provides some preliminary evidence regarding the effect of the supplementary information disclosure on information asymmetry among market participants as measured by bid-ask spreads. The results show that the disclosure of supplementary information of joint ventures is associated with a significant decline in bid-ask spreads. The results also indicate that the decline in information asymmetry is larger when the investment in joint ventures is significant and that larger investing firms tend to have a smaller decline in information asymmetry compared to smaller investing firms. The implications of this study, that the provision of supplementary information about joint ventures could reduce information asymmetry among participants in equity markets, thus leveling the playing field among traders, could have implications for policymakers.     

Stock Returns and Open-Market Stock Repurchase Announcements

Recent studies document stock price underreactions and overreactions. This evidence is extended by studying open-market stock repurchase announcements. Repurchase announcements were chosen for the study because of the uncertainty regarding the appropriate interpretation of the repurchase announcement. Cross-section regression models are used to test the relation between the reaction to the repurchase announcement and returns in subsequent periods. The results indicate that the market overreacts to repurchase announcements that are deemed to be “good news” by the market. Neither reversal nor drift is observed following repurchase announcements considered to be “bad news” by the market. The results are robust and are not driven by a few influential observations, beta shifts, or bid-ask bounce.     

Price reversal and drift following earnings announcements

Systematic patterns in returns following earnings announcements are difficult to interpret. This study provides additional insights into the observation of price reversal and drift by examining the effects of both the method used to identify winners and losers and also the length of the subsequent period analyzed. The results show that both drift and reversal can be observed for the same sample and event. This evidence indicates that security price behavior following earnings announcements, especially in the short-term, depends not only on the earnings information, as in the drift studies, but also on the price reaction to the earnings information.