Ray J. Pfeiffer

Controlling for lagged stock price responses in pricing regressions: An application to the pricing of cash flows and accruals

This study reevaluates the securities markets differential pricing of the operating cash flow, current accrual (noncash working capital), and non-current accrual components of earnings. This reevaluation is motivated by evidence in Sloan [1996] of a lagged adjustment of securities prices to the differing implications of operating cash flows and accruals for future earnings. Similar to previous research, we find no statistically significant differential valuations of operating cash flows and current accruals in the conventional model that relates contemporary security returns to changes in these earnings components. When we allow for the markets multiyear correction of past mispricing and mean reversion in the earnings components, we document significant valuation differences for operating cash flows, relative to both current and noncurrent accruals.

Corporate Social Responsibility Performance Information and Information Asymmetry

Using Corporate Social Responsibility (CSR) performance scores from KLD STAT, we investigate whether CSR performance affects information asymmetry. We find that both positive and negative CSR performance reduce information asymmetry. Moreover, we find that the influence of negative CSR performance is much stronger than that of positive CSR performance in reducing information asymmetry. We also investigate the effect of informed investors on the CSR performance-asymmetry relation. We find that the negative association between CSR performance and bid-ask spread decreases for firms with a high level of institutional investors compared to those with a low level of institutional investors. This finding suggests that informed investors may exploit their CSR information advantage. Overall, our results suggest that CSR performance plays a positive role for investors by reducing information asymmetry and that regulatory action may be appropriate to mitigate the adverse selection problem faced by less-informed investors.

Causes and Consequences of the Relation between Split-Adjusted Share Prices and Subsequent Stock Returns

In this manuscript, we document and explain an empirical artifact - a persistent and substantial negative relation between split-adjusted share prices and subsequent stock returns - that has potentially important ramifications for capital markets research design. This relation pervades all commonly-used commercial databases and is insensitive to the choice of database used for either prices or returns. We investigate four potential causes of the empirical regularity: survivorship bias, asymmetric returns to low-priced stocks, extreme returns, and the effects of stock-split adjustments on portfolio classifications. We find that survivorship bias accounts for approximately half of the returns documented to a share-price-based hedge strategy and that re-classifications caused by stock split adjustments account for substantially all of the remaining returns. We do not find that controlling for either low-priced stocks or extreme returns is effective in purging the data of the empirical price artifact. These findings and our explanations thereof are important, as they show that there are potentially troublesome consequences of using share price as a deflator in markets-based research. In particular, we note and illustrate cause for concern when interpreting associations between share-price-scaled variables and subsequent returns as evidence of market inefficiency. Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

The Implications of Accounting Research for Accounting–Based Investment Strategies

RAY J. PFEIFFER, JR. is affiliated with the Department of Accounting and Information Systems in the School of Management at the University of Massachusetts in Amherst, Massachusetts. A wide range of equity investment strategies used by alternative asset managers are based on the analysis of available accounting-based information. In contrast to the classic ‘‘efficient market hypothesis’’ in which today’s security prices fully incorporate available public information, academic research has also explored the importance of accounting information on profitable trading strategies in which the impact of past information is slow to impact prices or in which information is costly to obtain. The purpose of this article is to summarize the findings of recent academic accounting research as they pertain to accounting-based investment strategies. Despite the increasing richness of the information environment in many U.S. and foreign markets, firms’ financial Ž . accounting disclosures broadly defined remain a primary source of firm-specific information for investors and creditors and thus a potential source of investmentrelevant data. For the purposes of this article, relevant accounting research can be broadly . categorized into two streams: 1 investigations of the short-term stock price movements surrounding public releases of ac. counting information and 2 investigations of the longer-term association between accounting information and the information reflected in stock prices. Academic research on short-term stock price movements surrounding public releases of accounting information is concerned with the extent and timeliness of market reactions to the first public release of valuerelevant data in events such as quarterly and annual announcements of earnings per share, announcements of one-time accounting charges, accounting method changes, management earnings forecasts, and similar events. Such studies are sometimes referred to as event studies. In contrast, research on the longer-term association between accounting information and the information reflected in stock prices, so-called association studies, are designed to assess the extent to which accounting reports and market prices reflect the same economywide and firm-specific inforŽ mation over longer time periods e.g., a . fiscal year . To date, the vast majority of capital markets research in accounting is premised on the semistrong form of the efficient markets hypothesis, which predicts that observed stock prices should be consistent with those that would obtain if all market participants possessed the