James C. McKeown

An Evaluation Of Univariate Time-Series Earnings Models And Their Generalization To A Single Input Transfer-Function

The development of statistical models for accounting earnings has been an evolving process. Earlier studies used simple index and/or naive models (e.g., Ball and Brown [1968] and Brown and Kennelly [1972]) because of the lack of tools to deal with formal time series. Later, Dopuch and Watts [1972], Ball and Watts [1972], and others employed formal time-series models to annual earnings, and Collins and Hopwood [1980], Brown and Rozeff [1979], Foster [1977], Griffin [1977], and Watts [1975] did the same with quarterly earnings. While this research has produced some conclusions with respect to the time-series properties of earnings and how these may be used in predicting earnings, Brown and Rozeff [1978] and then Collins and Hopwood [1980] recently provided evidence that financial analysts can produce forecasts more accurate than those based on the ARIMA models alone. This suggests that other information may be useful in providing estimates of future earnings, when incorporated with knowledge of the time-series properties of earnings. The purpose of this study is twofold: (a) we first evaluate the models used in past studies of quarterly time series of earnings in order to determine whether they are systematically misspecified due to the omission of other information which is implicitly contained in a market earnings index-the evidence suggests that the misspecification exists, and (b) we introduce a transfer function model which utilizes the timeseries properties of both the index and earnings numbers. This model is obtained based on both theoretical derivation and inspection of data.

Discussion: “An Empirical Examination of Factors Affecting the Timing of Environmental Accounting Standard Adoption and the Impact on Corporate Valuation”

This paper studies accounting choice and accounting information concerning cleanup costs within the natural resources sector. The authors position their work by referencing previous studies on implementation of the Canadian Institute of Chartered Accountants (CICA) requirement on accruing liabilities for site restoration costs as well as previous studies concerning Superfund disclosures. They cite three contributions of the paper: measurement of the impact of the CICA requirement on corporate disclosure, determination of factors affecting timing of the adoption of the new standard, and estimation of the valuation relevance of the disclosures. While the previous studies appear to have adequately reported the impact of the requirement on corporate disclosure, the authors do clearly differentiate their situation from the Superfund situations, thereby creating some distance between this study and the previous studies of Superfund situations. They make the case that their situation is cleaner than the Superfund situations because the latter have substantial allocation uncertainty concerning responsibility. On the other hand, both situations can have considerable uncertainty regarding amounts of future costs, at least partly because of government involvement in both cases. However, they do not make clear their reasons for examining adoption timing. In Section 3.1 they cite Amir and Ziv (1997) as showing that “managers have incentives to strategically choose the adoption timing and reporting method to signal to the market their private information about the new standard’s financial impact.” They seem to imply that this assertion will be tested, but the hypotheses and analyses do not have any connection that I can see with this assertion. In fact, the hypotheses seem to be generated based on expectations unrelated to the Amir and Ziv model. When formulating Hypothesis 1 , the authors make the case that healthier firms are better able to absorb the financial statement consequences of adopting the new standard. However, they do not follow through and discuss any benefit such firms