Trevor S. Harris

Aggregate accounting earnings can explain most of security returns: The case of long return intervals

Abstract The paper analyzes the contemporaneous association between market returns and earnings for long return intervals. The research design exploits two fundamental accounting attributes: (i) earnings aggregate over periods, and (ii) expanding the interval over which earnings are determined, is likely to reduce ‘measurement errors’ in (aggregate) earnings. These concepts lead to the level of (aggregate) earnings as a natural earnings variable for explaining security returns. We hypothesize that the longer the interval over which earnings are aggregated, the higher the cross-sectional correlation between earnings and returns. The empirical findings support this hypothesis.

An Investigation of Revaluations of Tangible Long-Lived Assets

This paper documents the revaluation practice over a ten-year period from 1981 of a large sample of Australian firms and examines the association between these revaluations and stock market prices and returns. The analysis uses several different approaches in order to obtain a thorough understanding of the revaluation process in Australia. We include a description of hand-collected data from published financial statements, follow-up interviews with chief financial officers of the sample firms, and association tests between hand-collected accounting data and stock market measures. The possibility of revaluing long-lived assets to reflect market prices has been, and continues to be, controversial. Historically, part of the debate revolved around the issue of accounting for changing prices. For example, in the United States (U.S.), Statement of Financial Accounting Standards (SFAS) No. 33 (FASB [1979]) required supplementary information based on current cost (constant dollar) inventory and property, plant, and equipment. In the United Kingdom (U.K.), Statement of

Dividend taxation in firm valuation: New evidence

In this paper we develop a residual-income model showing how taxes on dividends affect the relative valuation of retained earnings versus contributed equity, as well as the value of expected future earnings. Tests of predictions from our model for a sample of Compustat firms from 197594 suggest that overall firm value, and the relative valuation weights investors assign to retained earnings, contributed equity, and current earnings, all critically depend on dividend taxes. The findings also suggest that investors take a proprietary perspective in valuation and impute an unrecorded shareholder-level tax liability on retained earnings. The U.S. tax system subjects retained earnings to dividend taxes upon distribution to shareholders, while contributed equity is returned to shareholders as a nontaxable return of capital. From the shareholders (proprietary) perspective, therefore, retained earnings should be valued on

The Predictive Ability Of Geographic Segment Disclosures

This research is aimed at evaluating whether geographically segmented (GEOG) data provide incremental information about the earnings process. Previous research on segment data has focused on the relevance of line-of-business (LOB) segment reports.1 But, to our knowledge, no similar research has been done on the GEOG disclosures which have been required since the introduction of Statement of Financial Accounting Standard (SFAS) No. 14. The issue of providing segment disclosures has renewed significance because the SEC has been considering the extension of segment disclosures (both LOB and GEOG) to all interim financial statements (Ernst and Whinney [1985] and Craven and Feller [1984]).2 In addition, segment

Do management forecasts of earnings affect stock prices in Japan

The authors are both Associate Professors, Graduate School of Business, Uris Hall, Columbia University, New York, NY 10027. We are grateful to Jim Haggard for significant programming assistance, and to The Center on Japanese Economy and Business at Columbia University for their financial assistance in obtaining the data. We also acknowledge the cooperation provided by Nihon Keizai Shimbun, in particular H. Tanaka and J. Uno for hours of conversation with invaluable wisdom.

Accounting’s Role in the Reporting, Creation, and Avoidance of Systemic Risk in Financial Institutions

The financial crisis that erupted in late 2007 has resurfaced debates about the role of accounting and external financial reporting by financial institutions in helping detect or mask systemic risks and in exacerbating or mitigating such risks. The debate has largely focused on the role of fair value accounting, securitization and special purpose entities, off-balance sheet reporting and pro-cyclicality. We consider these and other issues using a single company’s published accounts. We explain the role, purpose and limitations of external financial reporting and suggest that there are aspects of the current accounting system that may help provide early warnings of and help mitigate potential systemic risks and others that may mask and exacerbate these risks. We offer some ideas on how the accounting might be adjusted to mitigate the latter. Our arguments lead to several conclusions the most important of which include: that credit-related crises are at least partly induced by not requiring financial institutions to take credit valuation adjustments on loans based on expected losses, and that disclosures would have to change significantly to allow an investor or regulator to make a realistic attempt at measuring a firm’s risk and even more so any potential systemic risk. But there is no way that an accounting system that is based on measurements at a single point can serve to fully identify and capture the uncertainty and risks. We believe that to be able to assess systemic risk even for a single firm we would need massive amounts of detailed data that few market participants would be able to utilize and interpret. At best the system can provide more disclosures to facilitate the understanding of such risks.