Jennifer Francis

HAVE FINANCIAL STATEMENTS LOST THEIR RELEVANCE

The authors explore the concern that financial statements no longer have the same relevance to investors that they had in the past. They test for “value relevance” by measuring the total return that could have been earned from prior knowledge of financial statement information and by examining the explanatory power of accounting information on market values and annual market-adjusted returns. Both analyses are applied to a broad sample of exchange-listed and Nasdaq firms for the 1952–94 period. The authors find mixed evidence on value relevance of financial statement reporting during the test period.

Comparing the accuracy and explainability of dividend, free cash flow, and abnormal earnings equity value estimates

This paper compares the reliability ofvalue estimates from the discounted dividend model, the discounted free cash flow model and the discounted abnormal earnings model. Using a large sample of Val ...

Agency costs and innovation some empirical evidence

Abstract This paper examines the empirical relation between corporate ownership structure and innovation. We test the hypothesis that diffusely-held firms are less innovative than firms with either a high concentration of management ownership or a significant equity block held by an outside investor. Overall, the evidence indicates that diffusely-held firms are less innovative along the dimensions we examine: patent activity, growth by acquisition versus internal development, and timing of long-term investment spending. These results are consistent with the conjecture that concentrated ownership and shareholder monitoring are effective at alleviating the high agency and contracting costs associated with innovation.

The Relative and Incremental Explanatory Power of Earnings and Alternative (to Earnings) Performance Measures for Returns

We analyze the ability of earnings and non-earnings performance metrics to explain the variability in annual stock returns for industries where we identify, ex ante, an allegedly preferred (for valuation purposes) summary performance metric. We identify three industries where earnings before interest, taxes, depreciation, and amortization (EBITDA) and cash from operations (CFO) are preferred, and three industries where specific non-GAAP performance metrics are preferred. As a benchmark, we also examine the ability of EBITDA and CFO to explain returns for seven industries for which earnings is the preferred metric. Results for the benchmark earnings industries show that earnings dominates EBITDA and CFO in explaining returns. All other results are inconsistent with the view that perceptions of preferred metrics are reflected in actual aggregate investment behaviors.

Information Uncertainty and Post-Earnings-Announcement-Drift

We examine whether rational investor responses to information uncertainty (IU) explain properties of and returns to the post-earnings-announcement-drift (PEAD) trading anomaly. Consistent with a rational learning explanation, we find that: (1) unexpected earnings (UE) signals that are characterized as having greater IU have more muted initial market reactions; (2) extreme UE portfolios are characterized by securities with higher IU than non-extreme UE portfolios; and (3) within the extreme UE portfolios, high IU securities are more prevalent and earn larger abnormal returns than low IU securities. Further tests show that prior evidence of greater PEAD profitability for higher idiosyncratic volatility securities is explained by the greater information uncertainty associated with these securities.

Discussion of Lawsuits against Auditors

Lys and Watts (hereafter LW) report empirical evidence on selected audit and client characteristics associated with litigation against auditors over allegedly misleading financial reports during the period 1955-94. LW use a paired-sample design which matches each of the 153 lawsuit firms with a nonlawsuit firm of similar size, industry, and delisting status; their univariate and multivariate tests compare characteristics of the resulting lawsuit and nonlawsuit samples. Their analysis extends Stices [1991] work in four ways: (1) they use a larger sample of lawsuits against auditors which encompasses recent time periods; (2) they investigate a larger set of variables; (3) they measure the variables in both the median wrongdoing year and the filing year (Stice compared characteristics in the year prior to alleged wrongdoing);1 and (4) they examine the relative importance of client and audit characteristics across subperiods believed to be characterized by different levels of auditor liability or exposure. Because LWs results are sensitive to some features of the test design (e.g., univariate versus multivariate tests and when the variables are measured), I have chosen to focus my discussion on the results of their multivariate analysis performed on variables measured in the median wrongdoing year. In terms of audit characteristics, these results show that the incidence of lawsuits naming the auditor as a defendant is

Financial Reporting for Pollution Reduction Programs

We develop a conceptually grounded approach, based on the International Accounting Standards Board’s conceptual framework, to the accounting for the rights and obligations embodied in a cap-and-tra...