Dennis Murray

The relative and complementary performance of analyst and security-price-based measures of expected earnings

Abstract This paper evaluates the relative performance of IBES consensus financial analyst forecasts and forecasts based upon the anticipatory behaviour of security prices, according to two criteria: (a) the accuracy of earnings growth predictions and (b) the contemporaneous association between unexpected earnings and security returns during the forecast year. Results are presented for firms in differing size groups, measured here by market capitalization. The results indicate that neither forecast source is superior to the other in terms of either criterion. There is, however, significant complementarity of financial analyst and price-based forecasts.

Functional fixation in product pricing: A comparison of individuals and groups

Abstract This study tests the functional fixation hypothesis by comparing changes in the product pricing decisions of individuals and small groups in response to a fully disclosed, cosmetic change in depreciation method. The study provides several methodological refinements over earlier related studies. The research design incorporates full disclosure of the effect of accounting differences and a variety of measures are used to assess the impact of the accounting change, these revealing the inadequacy of the aggregate measures employed in earlier studies. Furthermore, the paper includes a comparison of the quality of group versus individual decision making with respect to functional fixation. The findings indicate that while individuals have a more pronounced shift in decision models than do groups, neither individuals nor groups fully adjust for the change.

The Effect of Certain Research Design Choices on the Assessment of the Market's Reaction to LIFO Changes: A Methodological Study

A major objective of the research design of an empirical study is the elimination of as many rival hypotheses as possible. One strategy frequently used for this purpose is to employ control groups as standards of comparison (such as used by Dyckman and Smith [1979] and Collins and Dent [1979] in their assessments of the exposure draft of FASB Standard 19). Ideally, any observed difference between an experimental group and a control group should be due to the experimental condition. In true experiments, this is more likely to be achieved through a random selection of subjects, followed by their random assignment to the experimental and control conditions. However, market-based research is ex post; the researcher does not exercise control over the independent variable(s) nor over the assignment of firms to the experimental or control group. The self-selection of firms into their respective groups introduces the possibility that self-selection biases may confound the results. Firms may differ on characteristics other than the independent variable(s), and these differences may induce variations in the dependent variable. One approach used to reduce the likelihood of self-selection bias is to match the experimental and control group on variables that, on an a priori basis, are believed to influence the dependent variable.1 Harrison [1977], for

THE ECONOMIC THEORY OF REGULATION AND SUNSET REVIEWS OF PUBLIC ACCOUNTANCY LAWS: THE ROLE OF POLITICAL IDEOLOGY

Abstract The economic theory of regulation (ETR) holds that various groups will attempt to influence the regulatory process to promote their self-interest, and that politicians respond most favorably to those groups that can assist them in their careers. Prior research has used ETR to explain the variation in accounting regulations across states. This paper extends that work by examining, in depth, a recently completed sunset review process in one state. Various parties, including government officials, the State Board of Accountancy, the State Society of CPAs, and educators, were involved in this process. We conclude, as indicated by ETR, that the positions of these groups appear to be consistent with their respective self-interests. Also consistent with ETR, several factors suggest that the regulated profession (CPAs) has successfully captured the first level regulators (the State Board). In addition, we conclude that the political ideology of the governor was an important determinant of the sunset review’s outcome.

Diversifying Earnings Forecast Errors via Composites of Market-Based, Analyst and Time-Series Predictions

Accuracy in predicting earnings is a fundamental concern in investment analysis. The substantial resources devoted to the production and dissemination of earnings forecasts evidence the reliance by investors upon earnings expectations for purposes of portfolio management.1 Analytical research in finance has established the relevance of earnings to security valuation, and empirical research has shown that shifts in earnings expectations are associated with revisions in security prices.