Colin Clubb

The roles of accounting in organizations and society

Abstract The paper seeks to contrast the roles that have been claimed on behalf of accounting with the ways in which accounting functions in practice. It starts by examining the context in which rationales for practice are articulated and the adequacy of such claims. Thereafter consideration is given to how accounting is implicated in both organizational and social practice. The paper concludes with a discussion of the implications for accounting research.

Accounting in its social context: Towards a history of value added in the United Kingdom

Abstract Although the relationship between accounting and society has been posited frequently, it has been subjected to little systematic analysis. This paper reviews some existing theories of the social nature of accounting practice and, by so doing, identifies a number of significant conceptual problems. Using the case of the rise of interest in value added accounting in the United Kingdom in the 1970s, the paper conducts a social analysis of this particular event and then seeks to draw out the theoretical issues and problems which emerge from this exercise. Finally, the implications of these for the social analysis of accounting are discussed.

The Effect of Earnings Permanence, Growth, and Firm Size on the Usefulness of Cash Flows and Earnings in Explaining Security Returns: Empirical Evidence for the UK

This paper examines the relative information content of earnings and cash flows for security returns using a methodology incorporating contextual factors which may affect earnings and cash flow response coefficients. For our UK dataset, we provide evidence that the earnings coefficient is related to earnings permanence, growth and firm size and that the cash flow coefficient may be related to growth. Although our results emphasise the value relevance of earnings, they also suggest that both contemporaneous and prior period cash flow are positively related to security returns and that market-to-book and market value of equity have predictive power for returns. Copyright Blackwell Publishers Ltd 2001.

The Value Relevance of Earnings and Cash Flows: Empirical Evidence for Japan

The Japanese equity market is one of the largest in the world. In recent years, fund managers worldwide have substantially increased their exposure to the Japanese capital markets. In spite of the Japanese capital markets rapid growth and its increasing importance in the international financial world, there has been limited empirical evidence linking security returns to earnings and cash flows. This study extends the growing empirical literature on the association of earnings and cash flows with security returns by using a Japanese dataset consisting of 6,662 firm-year observations for the period 1984-93. We hypothesize that (i) earnings and cash flows are jointly associated with stock returns, and (ii) the association between cash flows (earnings) and security returns increases (decreases) when earnings are transitory. This study provides empirical evidence (i) that cash flows (earnings) have information content beyond earnings (cash flows) in explaining security returns, and (ii) that cash flows (earnings) play a more (less) important role in the marketplace when earnings are transitory. Moreover, results show that the explanatory power of our Japanese models is similar to the evidence provided in prior US studies, indicating that Japanese investors utilize earnings and cash flows in their pricing of equities as their US counterparts.

The significance of sell-off profitability in explaining the market reaction to divestiture announcements

Abstract Previous research on asset sales has emphasized the divestment motivation and the use of the proceeds from the sale as determinants of selling firm value gains. In contrast, this paper explores the extent to which the relevant information necessary to evaluate sell-offs is embodied in the profitability of the sale, i.e. the price received by the seller over the value-in-use of the divested assets, where the latter is a function of past operating earnings and book value. Our empirical results show that sell-off profitability is substantially more significant in explaining the market reaction to divestiture announcements than the previous literature has suggested. We provide strong evidence of a positive relation between selling firm abnormal returns during sell-off announcements and profit on the sale, which remains significant after controlling for the motivation behind the sell-off, the use of the proceeds from the sale and the presence of agency costs of managerial discretion. We conclude that sell-off profitability explains a major portion of selling firm abnormal returns and is one of the most significant determinants of the market reaction to divestiture announcements.

The Usefulness of Book-to-Market and ROE Expectations for Explaining UK Stock Returns

The fundamental valuation perspective on stock returns suggests that book-to-market will be positively related to returns if market value of equity equals future expected cash flows discounted at the expected return and book value proxies for future cash flows. Building on this perspective, we develop a log linear model which includes expectations of future BM and ROE in addition to current BM as explanatory variables for future stock returns. We show that these three variables explain a significant part of UK cross-sectional stock returns and that they remain highly statistically significant after including additional risk proxy variables. This supports relevance of fundamental valuation based firm characteristics for explaining stock returns and indicates their potential usefulness for predicting future stock returns.

Earnings, Cash Flows and Security Returns Over Long Return Intervals: Analysis and UK Evidence

The aim of this paper is to provide a fuller understanding of the process linking security returns and accounting data by focusing on the effect of long return intervals on the association between security returns and earnings and cash flow variables. First, we develop a theoretical basis for empirical analysis of the relationship between security returns and cash flow data over long return intervals. Second, we carry out empirical analysis of both the information content of cash flow variables and the incremental information content of accounting earnings and cash flows using UK data over the period 1985-92 for annual, two year and four year return intervals. Our results provide strong evidence of the valuation relevance of cash flow information for the dataset examined. Copyright Blackwell Publishers Ltd 1999.

A Structural Accounting Framework for Estimating the Expected Rate of Return on Equity

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 information system simultaneously to produce an estimate for the ERR by iteration, together with predictions for the key clean surplus forecasts of net earnings, net dividend, and the book value of equity. Further decomposition produces estimates of expected capital gain, expected earnings, and the expected change in equity book value, and by rearrangement, the expected change in unrecorded goodwill. The clean surplus relation is maintained in the forecast variables. Exploratory data methods are used to examine the nonlinear relationship between components of the accounting-based ERR and realized stock returns. Findings show that realized returns are higher (lower) than estimated ERR in expansionary (recessionary) periods, with evidence of a stronger returns impact in recessionary periods. For the large majority of firms, realized returns revert to the estimated ERR, and the time-varying accounting components are strongly related to future realized stock returns, consistent with time variation in the ERR around a long-run average. Predicted earnings and dividends provide useful additional information on short-run variations in the ERR.