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We investigate whether stock prices reflect the asymmetric persistence of accruals and cash flows resulting from conditional conservatism. Using the Mishkin ([Mishkin, F., 1983]) test (MT), we provide further evidence on the earnings fixation explanation for the accrual anomaly. We also apply panel estimation techniques that significantly affect market efficiency inferences. Our results suggest that...
This paper shows how the expected rate of return (ERR) on equity may be estimated using only published accounting results, based on the information dynamics of reported earnings. As accounting‐based valuation models conditional upon financial statement articulation lead to a rank deficient system of estimating equations, the paper introduces a nonlinear constraint on the articulation that allows the...
Under accounting principles, the recognition of earnings is path‐dependent and the path depends on risk and its resolution: under the so‐called realization principle, earnings are not booked until uncertainty is resolved. In asset pricing terms, the principle means that earnings cannot be recognized until the firm can book a low‐beta asset such as cash or a near‐cash discounted receivable. If the...
This paper provides a selective survey of Ohlson and Vuolteenaho‐type accounting valuation models. The focus is on the valuation, return, and cost of capital dynamics of these models. Emphasis is placed primarily on variations of these models that incorporate risk aversion, parameter uncertainty, and/or time‐varying costs of equity. Empirical papers that address the dynamics of these models are also...
Christodoulou et al. ([Christodoulou, D., 2016]) develop measures of the cost of equity capital that require only accounting inputs, using as an identification strategy the linear information dynamics of Feltham and Ohlson ([Feltham, G. A., 1995]). I propose to test these measures by evaluating the predictability of innovations to abnormal earnings using various predetermined variables. The over‐identifying...
We extend Easton's (2007) review of the literature on accounting‐based estimates of the expected rate of return on equity capital, which we refer to as the ERR. We begin by reiterating the reasons why accounting‐based estimates are used. Next, we briefly review the recent literature that focuses on improving forecasts of expected earnings by either (i) removing predictable errors from analysts’ forecasts...
This paper examines three basic equity valuation concepts: (1) residual income valuation (RIV); (2) in the spirit of Miller‐Modigliani, the irrelevance of a firm's dividend payout policy; (3) betas/CAPM, to quantify risk and capitalization factors. As a first cut, results show that RIV, concept (1), lacks empirical support while in contrast concepts (2) and (3) hold up reasonably well. To address...
This article offers a survey of theoretical research on disclosure and the cost of capital. We summarize the current state of the literature and discuss the channels through which information affects the cost of capital. After giving an overview of asset pricing theory, we examine the rationale for an accounting risk factor or an ex‐ante effect of information on the cost of capital. Then, we discuss...
This study investigates whether the eXtensible Business Reporting Language (XBRL) reporting format provides incremental information value beyond the same 10K/10Q filings previously provided in HTML format. Using a sample from the XBRL Voluntary Filing Program, we document a significant increase in stock price variance on the day when voluntary XBRL reports are filed. We find market response is stronger...
This paper advocates abandoning null hypothesis statistical tests (NHST) in favour of reporting confidence intervals. The case against NHST, which has been made repeatedly in multiple disciplines and is growing in awareness and acceptance, is introduced and discussed. Accounting as an empirical research discipline appears to be the last of the research communities to face up to the inherent problems...
This study investigates the signalling role and rectification effectiveness of an audit partner disciplinary system. The signalling role refers to whether sanctions reflect the poor audit quality of disciplined audit partners, and rectification effectiveness addresses whether disciplinary actions enhance subsequent audit quality. The sample consists of Taiwanese listed companies, in the period 2000...
In recent years, financial reporting problems among Chinese reverse merger firms (CRMs), listed on US exchanges, have attracted unfavourable attention from regulators, investors, and the business press. Under the Sarbanes‐Oxley Act of 2002 (SOX), managers' Section 302 assessments of internal control over financial reporting are intended to provide investors with early warning about the likelihood...
China has adopted an executive‐dominated government audit system (GAS), which is frequently criticized for lacking independence. Through a questionnaire survey and interviews, we investigate whether and how the reporting/control requirements of the GAS (hereafter, the institutional arrangements) result in a lack of government audit independence in China and how this affects budget supervision by the...
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