Incremental information content of earnings-and nonearnings-based financial ratios*

Abstract. Given the quantity of nonearnings data disclosed in firms' annual reports, and the many dimensions of performance measured, it is likely that such information is used in establishing equilibrium prices in the market for firms' shares. This study empirically tests the hypothesis that equity price-relevant information conveyed by annual reports includes several measures other than earnings. The marginal impact of both earnings- and nonearnings-based financial ratios is analyzed and reported. The ratio information is first partitioned into distinct sets using an a priori linear components (LISREL) model. Association tests then show incremental information effects for the earnings-based ratio set as well as for several nonearnings-based ratio sets. Résumé. Étant donné la quantité de données étrangères aux bénéfices présentées dans les rapports annuels des entreprises et les nombreuses dimensions sous lesquelles le rendement est mesuré, il est probable que cette information soit utilisée dans l'établissement de prix d'équilibre dans le marché des actions des entreprises. Dans la présente étude, les auteurs procèdent à des vérifications empiriques de l'hypothèse selon laquelle l'information pertinente aux prix relative aux participations que livrent les rapports annuels comporte plusieurs mesures étrangères aux bénéfices. Les auteurs analysent l'incidence marginale tant des ratios financiers basés sur les bénéfices que de ceux qui ne le sont pas, et ils en exposent les résultats. L'information indiciaire est d'abord partagée en jeux distincts à l'aide d'un modèle de composants linéaires a priori. Les tests d'association montrent ensuite les conséquences de l'information marginale pour le jeu des ratios basés sur les bénéfices ainsi que pour plusieurs jeux de ratios qui ne le sont pas.     

An Examination of the Super Bowl Stock Market Predictor

Few prediction schemes have been more accurate, and at the same time more perplexing, than the Super Bowl Stock Market Predictor, which asserts that the league affiliation of the Super Bowl winner predicts stock market direction. In this study, we examine the record and statistical significance of this anomaly and demonstrate that an investor would have clearly outperformed the market by reacting to Super Bowl game outcomes.     

Does Prospect Theory Explain IPO Market Behavior?

We derive a behavioral measure of the IPO decision‐maker's satisfaction with the underwriter's performance based on Loughran and Ritter (2002) and assess its ability to explain the decision‐maker's choice among underwriters in subsequent securities offerings. Controlling for other known factors, IPO firms are less likely to switch underwriters when our behavioral measure indicates they were satisfied with the IPO underwriter's performance. Underwriters also extract higher fees for subsequent transactions involving satisfied decision‐makers. Although our tests suggest that the behavioral model has explanatory power, they do not speak directly to whether deviations from expected utility maximization determine patterns in IPO initial returns.     

Commentary: An International Comparison and Evaluation of Financial Accounting Concepts Statements*

Standard setters in several jurisdictions have adopted statements of financial accounting concepts. Given that concepts statements influence accounting standards, similarities and differences of concepts across jurisdictions will affect the ability of the International Accounting Standards Board (IASB) and other accounting bodies to secure standards convergence. This paper analyzes the concepts statements of Australia, Canada, New Zealand, the United Kingdom, the United States, and the IASB. Although these statements seem similar at a “broad brush” level, a closer look reveals substantial differences. The main purpose of this paper is to evaluate these differences and the extent to which they may impair standards convergence. The paper also proposes broadening the scope of the concepts structure to include normative agency‐theoretic considerations, which would bring the legitimate interests of management into the concepts structure, with the potential to move some of the trade‐offs necessary to secure managers' acceptance of accounting standards into the structure itself.     

An Examination of the Empirical Relationship between the Dividend and Investment Decisions: A Note

This paper empirically examines the separation principle, which asserts that investment decisions are not influenced by dividend decisions. Existing empirical evidence on this proposition is inconclusive. In this paper, we employ causality tests to examine whether investment decisions are, in fact, statistically exogenous with respect to dividend decisions. These tests are undertaken using both firm-specific and aggregate data. The results indicate no causal relationship from dividends to investment, which provides support for the separation principle as an empirical proposition.