The proposed elimination of full cost accounting in the extractive petroleum industry: An empirical assessment of the market consequences

On July 15, 1977, the Financial Accounting Standards Board (FASB) issued an Exposure Draft of Statement 19 in which a proposal was set forth to establish the uniform usage of successful efforts accounting and to eliminate full cost accounting in the extractive petroleum industry. This study addresses the question of whether the proposed elimination of full cost accounting had an adverse effect on the security returns of full cost versus successful efforts firms. The evidence presented in this study suggests that the proposal to eliminate full cost accounting was associated with a significant negative difference in risk-adjusted rates between full cost firms and successful efforts firms whose financial reports remained unaffected by the proposed change. This observed difference was found to be sustained over an eight month period including confirming events and disclosures associated with the initial proposal. We do not attribute this difference to market inefficiencies but, rather, to the anticipated consequences which this mandated accounting change is likely to have on managerial behavior and to increased costs that will have to be borne by the affected companies.     

The FASB exposure draft on accounting for business combinations and intangible assets: an instructional assignment

Accounting standards are constantly evolving to meet the needs of a rapidly changing business environment and changes in accounting theory. Accounting students need to be familiar with the content of Exposure Drafts, since these documents reflect the Financial Accounting Standards Board's (FASB) position on current financial reporting issues. Students are generally not well versed on the standard setting process and how contextual factors affect this process. The purpose of this instructional assignment is to enhance students' understanding of how contextual factors affect the standard setting process within the context of the Exposure Draft on “Business Combinations and Intangible Assets.” The assignment requires that students examine the Exposure Draft and answer questions designed to elicit responses as to why the FASB is considering a new standard and the impact the standard would have on current accounting procedures and financial statements.     

Trident Utility: accounting for nuclear decommissioning costs

This case relates to current accounting for the costs that utility companies will incur in the future to decommission their nuclear plants and how the accounting would change under a new Exposure Draft. There is currently considerable diversity in the methods used to account for costs incurred to decommission nuclear power plants. The Financial Accounting Standards Board (FASB) issued an initial Exposure Draft concerning these costs in 1996 and issued a revised version in February 2000. The Exposure Drafts propose more uniform accounting practices in this area. The proposed standard would, however, have significant effects on the balance sheets of utility companies that own nuclear power plants. This case investigates the consequences that the proposed standard would have on financial analysts’ perceptions of the financial soundness of utility companies affected by the standard. The case also explores some recent developments regarding deregulation of the electric utility industry and their ramifications for accounting.     

Value-relevance of pension transition adjustments and other comprehensive income components in the adoption year of SFAS No. 158

In the present study, we examine the value-relevance of pension transition adjustments and other comprehensive income (OCI) components in the initial adoption year of Statement of Financial Accounting Standard (SFAS) 158—Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. Using a sample of 697 Standard and Poor (S&P) firms with the fiscal year ending on December 31, 2006, we perform several cross-sectional regression analyses to test the value-relevance of transition adjustments and OCI components in presence of various earnings measures. The results indicate that there is a negative relationship between both the level and change in stock returns and the magnitude of pension transition adjustments. We also find earnings measures and some OCI components are significantly associated with stock returns. When analyzed separately, we find our main results are mostly confined to the sample large S&P 500 firms. We do not find any result for the S&P mid-cap and small-cap firms. The overall results suggest the stock market negatively reacts to the adverse impact of SFAS #158 pension transition adjustments on net worth and future cash flows when the impact is substantial in its magnitude in dollar terms. The study further provides useful insight into the information processing by documenting that the market evaluates accounting information more effectively when such information is recognized in the financial statements rather than disclosed only in the financial footnotes.     

Day-of-the-Week Effects in the Long-Run Performance of Initial Public Offerings

This study examines the influence of day-of-the-week patterns in security returns on long-run IPO underperformance. Comparisons are made between the IPOs in Ritter's [20] database, and a constructed set of matching firms based on SIC code and size, using NYSE, AMEX, and NASDAQ securities. It is found that virtually all of the IPO underperformance occurs on Mondays and Tuesdays and that the degree of underperformance significantly differs from other days. Thus, a common explanation may exist for the general day-of-the-week pattern in security returns and IPO long-run underperformance.     

Perpetual securities and stock prices: Korean evidence

Perpetual securities are classified as equity under the International Financial Reporting Standards, but various contract terms embedded in the securities create additional debt- and equity-like characteristics. This study examines whether stock market investors differentiate between diverse contract attributes. Using quarterly data on listed non-financial firms in the Korea Exchange that issued perpetual securities during 2012–2020, we document the following findings. First, perpetual securities are positively associated with stock prices. Second, the positive association is driven by perpetual securities convertible to stocks rather than non-convertible ones. Third, when further decomposing convertible perpetual securities based on whether the conversion price is fixed or floating, only fixed-priced convertibles show a positive association with stock prices. Overall, our findings suggest that equity investors consider the detailed contract attributes important for financial instruments.     

The association between accounting earnings and security returns for large and small firms

The differential information hypothesis advanced by Atiase (1980) states that information production and dissemination by private parties for the purpose of identifying mispriced securities is an increasing function of firm size. This study examines two corollaries of that hypothesis. First, security prices of large firms anticipate accounting earnings earlier than security prices of small firms. Second, for a given level of ‘unexpected’ earnings, the cumulative abnormal returns of small firms exceed those of large firms. The results are generally consistent with Atiase's hypothesis.     

The Equity Share in New Issues and Aggregate Stock Returns

The share of equity issues in total new equity and debt issues is a strong predictor of U.S. stock market returns between 1928 and 1997. In particular, firms issue relatively more equity than debt just before periods of low market returns. The equity share in new issues has stable predictive power in both halves of the sample period and after controlling for other known predictors. We do not find support for efficient market explanations of the results. Instead, the fact that the equity share sometimes predicts significantly negative market returns suggests inefficiency and that firms time the market component of their returns when issuing securities.     

Agency problems,accounting slack,and banks’ response to proposed reporting of loan fair values

We investigate the determinants of bank representatives’ responses to the United States Financial Accounting Standard Board’s 2010 Exposure Draft that proposes fair value measurement for most financial instruments. Over 85% of the 2971 comment letters were received from bank representatives, with most bank-affiliated letters addressing—and opposing—one issue: fair value measurement of loans. The Exposure Draft proposes that companies report both fair value and amortized cost measures for loans; thus, the proposal should result in increased levels of loan-related information and improved financial reporting transparency. We investigate three reasons for bank representatives’ resistance. First, fair value measurement should result in less accounting slack than the current incurred-loss model for loan impairments; therefore, we propose that representatives from banks that historically utilized that slack will resist fair value measurement for loans. Second, we propose that agency problems are an important motivating factor because bank representatives reaping more private benefits from their franchises have less incentive to support increases in financial reporting transparency. Third, we test whether the most common reasons for opposition included in the comment letters are associated with negative letter writing. Our analyses support the first two determinants of bank representatives’ resistance to the Exposure Draft. Specifically, accounting slack and lower demand for accounting transparency are strongly associated with resistance to the standard. However, we find that stated reasons for resistance are not associated with letter writing. Specifically, representatives at firms with difficult to value loans and firms that mostly hold loans to maturity are no more likely to resist the standard than others. The narrow scope of bank representatives’ comments and our empirical findings suggest that bankers’ responses to the Exposure Draft may be more driven by concerns over reduced availability of accounting slack and accompanying de facto regulatory forbearance than by the conceptual arguments they offer. Our results have implications for standard setters, who must navigate special interests as they attempt to promulgate high quality accounting standards, and for users of financial statements who must consider how political forces shape generally accepted accounting principles.     

Evaluating Constructive Lease Capitalization and Off‐Balance‐Sheet Financing: An Instructional Case with FedEx and UPS

This case illustrates the effects of the proposed new lease standard by the Financial Accounting Standards Board and the International Accounting Standards Board on existing outstanding operating leases. Specifically, the case examines the effects of the proposal that all firms report existing operating leases as capital leases upon the initial adoption of the proposed standard. By applying a constructive capitalization model to two firms who rely on operating leases for financing, FedEx and UPS, we found that both companies would have to record billions of dollars of liabilities that had only appeared in the footnotes of their financial statements under the current lease standards. In addition, the firms would experience a decline in retained earnings and key financial ratios, such as the debt‐to‐equity, return‐on‐assets, and interest coverage ratios, by reporting operating leases as capital leases under the new proposed standard. Furthermore, the magnitude of the lease capitalization impact is much smaller for UPS than for FedEx.     

Book–to–Market Equity, Distress Risk, and Stock Returns

This paper examines the relationship between book–to–market equity, distress risk, and stock returns. Among firms with the highest distress risk as proxied by Ohlson's (1980) O–score, the difference in returns between high and low book–to–market securities is more than twice as large as that in other firms. This large return differential cannot be explained by the three–factor model or by differences in economic fundamentals. Consistent with mispricing arguments, firms with high distress risk exhibit the largest return reversals around earnings announcements, and the book–to–market effect is largest in small firms with low analyst coverage.     

Beta,size, book-to-market equity and returns: A study based on UK data

This paper examines the role of beta, size and book-to-market equity as competing risk measurements in explaining the cross-sectional returns of UK securities for the period July 1980 through June 2000. The methodology of [Fama, E., French, K., 1992. The cross-section of expected stock returns. Journal of Finance 47, 427–467] and [Pettengill, G., Sundaram, S., Mathur, I., 1995. The conditional relation between beta and returns. Journal of Financial and Quantitative Analysis 30, 101–116] is adopted. Results show that, when adopting the methodology of [Pettengill, G., Sundaram, S., Mathur, I., 1995. The conditional relation between beta and returns. Journal of Financial and Quantitative Analysis 30, 101–116], where data is segmented between up and down markets, a significant relationship is found between beta and returns even in the presence of size and book-to-market equity. Size is not found to be a significant risk variable, whereas book-to-market equity is found to be priced by the market and is thus a significant determinant of security returns. This is the case irrespective of the methodology adopted.     

International managerial accounting research: A contracting framework and opportunities

The objective of this paper is to provide an international managerial accounting contracting-based framework that organizes a broad sample of published research and (based on that sample) identifies research opportunities. Organizations that operate in cross-border markets constantly face contracting challenges that arise because of different factor and product market characteristics. Accounting has a role in defining, implementing, monitoring, and negotiating the implicit and explicit contracts firms use in these markets. Thus, a useful framework for considering international managerial accounting research would incorporate different international market characteristics that impact the contracting role of firms. Using such a theoretical framework, this paper examines the role of managerial accounting by focusing on operating and strategic decisions that require knowledge transfer, decision-rights assignment, and decision-rights control within international organizations.     

SEC product-line reporting and market efficiency

This study tests the efficiency of the securities market with respect to non-public segment earnings data for 1967–1969 which was first made public by many firms in 1970 SEC 10-K reports. Trading rule strategies are proposed in which segment-based earnings forecasts are compared to consolidated-based forecasts to anticipate ‘unexpected’ changes in earnings. Using the ‘market model’ to eliminate market related movements in security prices, average monthly abnormal returns conditional on this segment-based strategy are estimated for 1968, 1969, and 1970 for two groups of firms: (1) ‘Non-disclosure’ firms that did not publicly report either segment revenue or profit data prior to 1970, and (2) ‘partial disclosure’ firms that publicly reported segment revenue information, but no segment profits, prior to 1970.The results suggest that the market was not efficient with respect to the non-public segment revenue and profit data of non-disclosure firms for 1968–1969. However, this finding could not be replicated for 1970. The average monthly abnormal returns conditional on the segment-based trading rule strategy were found to be relatively small for the partial disclosure firms. This suggests that segment revenue data can be used to successfully anticipate changes in total entity earnings which would otherwise be ‘unexpected’ if only consolidated data were available.     

Accelerated Vesting of Employee Stock Options in Anticipation of FAS 123-R

In December 2004, the Financial Accounting Standards Board (FASB) mandated the use of a fair value–based measurement attribute to value employee stock options (ESOs) via Financial Accounting Standard (FAS) 123-R. In anticipation of FAS 123-R, between March 2004 and November 2005, several firms accelerate the vesting of ESOs to avoid recognizing existing unvested ESO grants at fair value in future financial statements. We find that the likelihood of accelerated vesting is higher if (1) acceleration has a greater effect on future ESO compensation expense, especially related to underwater options, and (2) firms suffer greater agency problems, proxied by fewer blockholders, lower pension fund ownership, and top five officers holding a greater share of ESOs. We also find a negative stock price reaction around the announcement of the acceleration decision. Furthermore, stock returns are significantly negative before the new vesting dates and positive afterward, suggesting that vesting dates could have been backdated.     

WTO《金融服务协议》下证券市场开放对我国证券公司的影响与对策

WTO《金融服务协议》在我国体现为开放金融服务市场的具体承诺，包括对银行、保险、证券市场开放所做的具体承诺。我国对开放证券市场的承诺意味着在入世三年内中国的证券市场对外国证券公司逐步开放，中国证券公司会面临客户分流、技术落后以及人才外流等问题。要想在竞争中立于不败之地，我国证券公司需建立竞争观念、构筑人才战略，加强部门间合作，加强与外资的合作，并开展并购顾问业务以及拓展融资渠道。     

THE SEC OVERRULING OF SFAS 19 AND THE BEHAVIOR OF SECURITY RETURNS

In August 1978, the Securities and Exchange Commission (SEC) announced its intention to employ Reserve Recognition Accounting, and also issued Accounting Series Release No. 253 which in substance overruled Statement of Financial Accounting Standards No. 19 (SFAS 19), "Financial Accounting and Reporting by Oil and Gas Producing Companies." There are relatively few cases where accounting promulgations have been reversed, and these cases merit careful analysis. Accordingly, this research employs an identical methodology and sample of an earlier study (Benjamin and McEnroe, 1981) in order to ascertain the security market effect of the SEC's overruling of SFAS 19. The a priori expectation would be that the SEC intervention should cause a reversal of any security market effects found in the prior study.     

New evidence on the announcement effect of convertible and exchangeable bonds

This study investigates the announcement and issuance effects of offering convertible bonds and exchangeable bonds using data for the Swiss and German markets during January 1996 and May 2003. The analysis suggests that announcement effects of convertible bonds and exchangeable bonds are associated with significantly negative abnormal returns. German firms exhibit a stronger reaction than Swiss firms, possibly for institutional reasons. We also investigate the effect of the market return of the announcement effect and find that the negative abnormal returns are significantly more pronounced when previous market returns have been negative. Furthermore, we analyze the relation between the announcement effects and equity components by controlling for the equity signal sent to the market. We find the size of the equity component of an issue to have a strong influence on the announcement effect for convertible but not for exchangeable securities and offer an explanation for this difference.     

Shareholder Wealth Responses to Bankruptcy Filing Announcements under the Chandler and Reform Acts

This paper examines shareholder wealth responses to bankruptcy filing announcements between 1974 and 1989 to draw inferences about the impact of the adoption of the Bankruptcy Reform Act of 1978. The authors find that post-Reform Act announcements are associated with more negative pre-filing and announcement period returns to shareholders. Unlike prior research, this study finds that large firms and NYSE-listed firms experience more negative returns. It also finds that the market can discriminate between firms that are ultimately worthless and those that may retain some value for shareholders.     

Wealth effects of convertible bond and convertible preference share issues: An empirical analysis of the UK market

We examine the wealth effects of the announcement of issues of different types of convertible securities by UK firms and find significant negative effects on shareholder wealth. We however, also find that when the sample is partitioned by method of issue, privately placed convertible bonds, in contrast to previous research, exhibit a negative impact on firm wealth. Further, we also find negative wealth effects for firms that issue convertible securities to refinance previous debt or finance specific acquisitions. However announcements of convertible bond issues, for the purpose of financing capital expenditure schemes, show significant positive wealth effects. Finally, we find mixed support for testable predictions of the main theoretical models relating cross-sectional firm characteristics of convertible bond issuers to abnormal returns.