Research Lab

Money managers select weights of managed portfolios to enhance their reputation in the spot market for their services, inevitably using their actions to signal their quality. We develop a two-asset signalling model of money managers. A unique screening equilibrium and (under certain parameter configurations) a host of pooling equilibria survive the Cho-Kreps Intuitive Criterion. In all the equilibria managers behave more aggressively than they would in the absence of the signalling motive, exaggerating their position in the risky asset.

This paper documents the revaluation practice over a ten-year period from 1981 of a large sample of Australian firms and examines the association between these revaluations and stock market prices and returns. The analysis uses several different approaches in order to obtain a thorough understanding of the reevaluation process in Australia. We include a description of hand-collected data from published financial statements, follow-up interviews with chief financial officers of the sample firms, and association tests between hand-collected accounting data and stock market measures.

Firms registered outside the United States and listed on a primary U.S. exchange may provide their U.S. shareholders with financial statements prepared under their domestic (non-U.S.) generally accepted accounting principles (GAAP). The Securities and Exchange Commission requires such firms to reconcile their reported earnings and shareholders' equity to U.S. GAAP as part of a Form 20-F filing. These reconciliations provide a set of precise measures of the differences created by alternative accounting practices.

Price deviations from basic valuation models based on accounting earnings and book value of owners' equity are used to test the intrinsic value explanation of the price-earnings and price-book value anomalies. Relative price deviations from the implied benchmark prices are used to assign years into high and low deviation groups. Traditional zero investment hedge portfolios are formed in each year, and the returns are compared across high and low deviation years.

Research was conducted to investigate the value implications of the changes in annual earnings. It was assumed that a relationship exists between the persistence of earnings and the changes in stock prices associated with reported earnings innovations. The study yielded three major findings. Results showed that other data contained in annual financial statements can be used to evaluate pricing multipliers. Findings also revealed the variability of the persistence of earnings and the pricing multipliers indicated by financial statements.

Writing for the New Palgrave Dictionary of Money and Finance, Stephen Zeldes and Stephen O'Connell trace the history of the term "Ponzi Games" and define it as "a situation in which a borrower rolls over debt perpetually, covering all interest and/or principal repayments with additional borrowing. " They illustrate why a perpetual flow of new lenders is necessary to a Ponzi game, and discuss the link between Ponzi games and phenomena such as valued fiat money, asset price bubbles, and dynamic efficiency.

This article outlines research developments that reconcile both fundamental analysis and accounting measurement to the modern theory of valuation. Three features of accounting suggest it may play a role. First, it has the nominal attributes of a value measurement system. The financial accounting process is focused on tracking the book value of equity or net worth. The final entry in the periodic accounting cycle is the close to book values.

The paper analyzes the contemporaneous association between market returns and earnings for long return intervals. The research design exploits two fundamental accounting attributes: (i) earnings aggregate over periods, and (ii) expanding the interval over which earnings are determined, is likely to reduce "measurement errors" in (aggregate) earnings. These concepts lead to the level of (aggregate) earnings as a natural earnings variable for explaining security returns.

This article explores the differential measurement problems related to the earnings components by invoking the standard errors-in-variables perspective on estimated coefficients. A more traditional way of looking at accounting recognizes the process as one of measurements. That is, the analysis of transactions leads to line items in the financial statements, which in turn aggregate into the bottom line numbers: earnings and book value. The disclosures of the line items clearly suggest that the accountant is aware of the insufficiency of earnings and book values as determinants of values.