Valuation Implications of Investment Opportunities and Earnings Permanence

This study investigates the value-relevance of accounting earnings in the presence of investment (growth) opportunities after making two theoretical and methodological research design refinements. First, we test for the incremental effect of growth on firms earnings response coefficients after controlling for the extent of transitory earnings under the assumption that the value-relevance of earnings with respect to growth should be stronger when earnings are more permanent. Second, we perform comprehensive factor analysis using market-based and accounting-based measures to construct a composite proxy for investment opportunities. We find that firms investment opportunities and the relative permanence of current earnings affect the value-relevance of those earnings. Additionally, we find that the interaction between permanent earnings and investment opportunities produces an even stronger price response to earnings.     

An evaluation of SFAS No. 130 comprehensive income disclosures

In this study, we provide evidence on the pricing of other comprehensive income (OCI) that differs from most evidence in prior research. Prior archival research has largely concluded that OCI is not priced by investors. In contrast, we provide evidence in the post-SFAS 130 period that OCI is priced on a dollar-for-dollar basis as is predicted by economic theory for transitory income items. We attribute this finding to our use of post-SFAS 130 as-reported measures of OCI rather than pre-SFAS 130 as-if estimates of OCI measures. Furthermore, we document that two components of OCI, foreign currency translation adjustment and unrealized gains/losses on available-for-sale securities, are priced by investors. In the post-SFAS 130 period, we also find that the type of financial statement in which firms report OCI and its components affects pricing, consistent with the conclusions of prior experimental research. However, our evidence suggests that investors pay greater attention to OCI information reported in the statement of changes in equity, rather than in a statement of financial performance. This could be attributed to investors becoming more familiar in the post-SFAS 130 period with the predominant reporting of OCI and its components in the statement of changes in equity. These findings may be relevant to both the Financial Accounting Standards Board and the International Accounting Standards Board, which jointly are undertaking a new project that, in part, is addressing financial statement presentation of OCI items.

Residential Asking Rents and Time on the Market

Landlords offering a house in the rental market face a difficult strategic pricing decision. The revenue maximizing decision for the landlord involves a tradeoff between the rental rate and time on the market. Because the turnover of renters is higher than owners, and because the landlord must bear some carrying costs on a vacant house, pricing the rent too high may decrease revenue due to a higher vacancy period and pricing it too low may reduce the revenue when occupied. While there is substantial research on the relationship between listed prices and time on the market for freehold interests, this is the first study to provide empirical evidence on the relationship between asking rent, contract rent and time on the market for single family residential rental (leasehold) property interests. We present two models; a rental price model and a duration model for time-on-the market. Using data from the Dallas–Fort Worth area we find that landlords who set a lower asking rent relative to predicted rent can expect a shorter marketing period for their properties. The results also indicate that overpricing the asking rent and then lowering it at a later date leads to a longer marketing time (after the reset) and often a lower rent. These finding are reasonably robust for low-, mid-, and higher-valued rental properties.