We study the descriptiveness of the “unravelling” prediction in the 1890s streetcar industry. In this historical setting, capital-intensive streetcar companies gain the opportunity to disclose their earnings to dispersed investors via a new, quarterly newspaper supplement. We document that a quarter of the companies withhold their earnings from the first supplement, inconsistent with the “unravelling” prediction.
Current accounting practice expenses many investments in intangible assets to the income statement, confusing earnings from current revenues with investments to gain future revenues. This has led to increasing calls to book those investments to the balance sheet. Drawing on the relevant research, this paper proposes solutions for the accounting for intangible assets that contrast with balance sheet recognition, and compares them to current practice and the IFRS standards that dictate practice.
Using a price-theoretic framework, we derive and empirically test a fundamental demand force shaping firms’ public disclosure decisions. Our framework suggests that the number of firms’ transacting stakeholders, not just their shareholders, is a major determinant of disclosure demand and, hence, firms’ decision to disclose publicly.
Koszegi and Rabin (2006, 2007) develop a model of expectations-based reference-dependent preferences, in which the agent experiences prospect-theory inspired "gain-loss utility" by comparing his actual consumption to all his previously expected consumption outcomes. Koszegi and Rabin (2009) generalize the static model to a dynamic setting by assuming that the agent experiences both contemporaneous gain-loss utility over present consumption and prospective gain-loss utility over changes in expectations about future consumption.
We examine economic consequences of US bank regulators' phased removal of the prudential filter for accumulated other comprehensive income for advanced approaches banks beginning on January 1, 2014. The primary effect of the AOCI filter is to exclude unrealized gains and losses on available-for-sale securities from banks' regulatory capital.
This paper investigates how book rate of return under GAAP relates to risk and the required return for investing. A standard view sees the book rate of return as a measure of profitability to be compared to the required return to evaluate the success of an investment. A contrasting view sees the book rate of return as indicative of the required return, consistent with the standard risk-return tradeoff. There clearly is some sorting out to do.
We propose the standard neoclassical model of investment under uncertainty with short-run adjustment frictions as a benchmark for earnings-return patterns absent accounting influences. We show that our proposed benchmark generates a wide range of earnings-return patterns documented in prior accounting research. Notably, our model generates a concave earnings-return relation, similar to that of Basu [1997], and predicts that the earnings-return concavity increases in the volatility of firms' underlying shock processes and decreases in investment levels.
This paper modifies the standard returns-earnings regression in accounting research to show that financial reports convey both cash-flow news and discount-rate (expected-return) news. The paper points to the realization principle, associated as it is with the resolution of risk, as the accounting feature that conveys expected-return news. The modified returns-earnings regressions indicate that the information so conveyed pertains to priced risk.
This appendix provides a contrast to the variance decomposition approach for identifying the two types of news in accounting data. This approach, explained in Callen (2009), assumes the Vuolteenaho (2002) model, implemented in a vector autoregressive (VAR) scheme to capture the linear dependencies among multiple time series of indicator variables.