Alternative accounting methods, information asymmetry and liquidity: theory and evidence

Article Abstract:

A study was conducted to test the information asymmetry perspective. This point of view holds that value-maximizing managers have incentives to select more informative accounting methods to minimize the level of information asymmetry among market participants to the point where the anticipated benefit of greater disclosure is counterbalanced by the expected costs of greater disclosure. Empirical findings provide support to the perspective. A positive relationship was found between measures of information asymmetry and the probability that foreign currency will be chosen as functional currency by the sample firms. This finding was still found even after other extraneous variables were controlled for.

Accounting, Economics, Liquidity (Finance), Information theory, Information theory in economics

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Patterns in unexpected earnings as an explanation for post-announcement drift

Article Abstract:

The phenomenon of post-earnings-announcement drift in stock prices was explored. It was proposed that the observed changes in stock price is due to the inability of market participants to correctly understand the time-series properties of earnings. This market inefficiency explanation was tested using data on quarterly earnings from the COMPUSTAT quarterly industrial file, daily stock returns from the CRSP NYSE/AMEX daily returns file and equally weighted market returns from the CRSP NYSE/AMEX daily index file. The results of the study substantiated the proposition that the post-announcement drift can be explained by the market's failure to accurately characterize the process underlying earnings.

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Refined conditions for fully revealing income disclosure

Article Abstract:

Demski and Sappington's 1990 paper 'Fully Revealing Income Measurement' is reviewed. In that paper, income disclosure was defined as a procedure of making known fully revealing information. Demski and Sappington concluded that income disclosure is only fully revealing if it satisfies the invertibility condition and the strict favorableness condition under the true probability measure. A refined necessary and sufficient condition for qualifying as fully revealing income disclosure is proposed as an alternative to the invertibility condition identified in the Demski and Sappington framework.

Disclosure statements (Accounting), Financial disclosure

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