Accounting Information, Disclosure, and the Cost of Capital

In this paper we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the Capital Asset Pricing Model and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures affect the firm's assessed covariances with other firms' cash flows, which is nondiversifiable. The indirect effect occurs because higher quality disclosures affect a firm's real decisions, which likely changes the firm's ratio of the expected future cash flows to the covariance of these cash flows with the sum of all the cash flows in the market. We show that this effect can go in either direction, but also derive conditions under which an increase in information quality leads to an unambiguous decline in the cost of capital.     

Accounting Valuation Models: A Short Primer

This note discusses basic issues related to residual income valuation (RIV) and abnormal earnings growth (AEG) models but has only scratched the surface of a complex subject. What clearly emerges from this 'primer' is the conclusion that AEG is a more complex valuation model than RIV. This complexity concerns both the mechanics and interpretation of AEG compared to RIV. Furthermore, a study by Penman (2005 ) raises a question about the usefulness of AEG compared to RIV. His comparisons between RIV and AEG are rather remarkable and suggest that RIV gives estimates of value which are more accurate and less variable than estimates based on AEG. Clearly, these results need further study.     

Comparing the Post–Earnings Announcement Drift for Surprises Calculated from Analyst and Time Series Forecasts

Post–earnings announcement drift is the tendency for a stock's cumulative abnormal returns to drift in the direction of an earnings surprise for several weeks following an earnings announcement. We show that the drift is significantly larger when defining the earnings surprise using analysts' forecasts and actual earnings from I/B/E/S than when using a time series model based on Compustat earnings data. Neither Compustat's policy of restating earnings nor the inclusion of “special items” in reported earnings contribute significantly to the disparity in drift magnitudes. Rather, our results suggest that this disparity is attributable to differences between analyst forecasts and those of time‐series models—or at least to factors correlated with these differences. Further, we document that analyst forecasts lead to return patterns around future earnings announcements that differ from those observed when using time‐series models, suggesting that the two types of surprises may capture somewhat different forms of mispricing.     

The Wage Structure of Latino‐Origin Groups across Generations

We analyzed in detail the wages of Latinos of Mexican origin, Central/South Americans, and Puerto Ricans. The wage structure facing second and third‐ and higher‐generation Latinos is very similar to the wage structure of third‐ and higher‐generation White workers. Unlike African American workers, more than half of the native Latino/White wage gap can be accounted for by the lower educational attainment and potential experience of native Latino workers.     

KEYNES AND LEIJONHUFVUD

The main thesis is that Keynes' theory is quite distinct fromthe ‘Keynesian’ income-expenditure theory (Leijonhufvud(1968), p. 8).