I review empirical research on the relation between capital markets and financial statements.The principal sources of demand for capital markets research in accounting are fundamental analysis and valuation, tests of market efficiency, and the role of accounting numbers in contracts and the political process.The capital markets research topics of current interest to researchers include tests of market efficiency with respect to accounting information, fundamental analysis, and value relevance of financial reporting.Evidence from research on these topics is likely to be helpful in capital market investment decisions, accounting standard setting, and corporate financial

It is well established that the realized returns of ‘growth ’ stocks have been low relative to other stocks. We show that this phenomenon is explained by a large and asymmetric response to negative earnings surprises for growth stocks. After controlling for this effect, there is no longer evidence of a stock return differential between growth stocks and other stocks. Our evidence is consistent with investors having naively optimistic expectations about the prospects of growth stocks (e.g., Lakonishok, Shleifer, and

comments on this paper. The capable computer assistance provided by Ashok Natarajan is appreciated.

University of Virginia (Darden Business School), and Vanderbilt University for many helpful comments. We also Securities litigation poses large costs to firms. The risk of litigation is heightened when firms have unexpected large earnings disappointments. Previous literature presents mixed evidence on whether voluntary disclosure of bad news prior to regularly scheduled earnings announcements deters or triggers litigation. We show that the counterintuitive finding in prior literature that disclosure triggers litigation is potentially driven by the endogeneity between disclosure and litigation. Using a simultaneous equations methodology, we find no evidence that disclosure triggers litigation. In fact, consistent with economic arguments, our evidence suggests that disclosure can deter litigation

Recent articles in the popular press suggest that managers are placing greater emphasis on meeting or exceeding analysts ’ expectations. 1 Consistent with this, empirical research provides evidence that firms manage both earnings and earnings forecasts in order to report earnings that meet or exceed analysts ’ expectations (Burgstahler and Dichev, 1997; Brown, 1998; Burgstahler and Eames 1998;

This paper examines share price behaviour surrounding announcements of CEO departures from UK firms listed on the All Share Index between 1990 and 1995.

We empirically investigate the effects of the adoption of Regulation Fair Disclosure (“Reg FD”) by the U.S. Securities and Exchange Commission in October 2000. This rule was intended to stop the practice of “selective disclosure, ” in which companies give material information only to a few analysts and institutional investors prior to disclosing it publicly. We find that the adoption of Reg FD caused a significant reallocation of information-producing resources, resulting in a welfare loss for small firms, which now face a higher cost of capital. The loss of the “selective disclosure ” channel for information flows could not be compensated for via other information transmission channels. This effect was more pronounced for firms communicating complex information and, consistent with the investor recognition hypothesis, for those losing analyst coverage. Moreover, we find no significant relationship of the different responses with litigation risks and agency costs. Our results suggest that Reg FD had unintended consequences and that “information ” in financial markets may be more complicated than current finance theory admits. We thank Thompson Financial for providing access to the First Call database, the Rodney White Center

XBRL is a computer language add-on that facilitates the rendering of financial information. Its development has been accompanied by claims that XBRL will, among other things, lead to continuous reporting and eliminate financial reporting differences including differences between jurisdictional GAAP. These discussions have largely ignored the literature on voluntary disclosures and earnings management. Once this literature is considered the predicted implications of XBRL appear exaggerated. XBRL does not solve financial reporting judgment issues or lead to continuous reporting. The reduced transaction costs and improved efficiency in rendering the information are, however, powerful and far-reaching consequences of the language. XBRL also has implications for financial system design, auditing and market efficiency and it has the potential to enrich the data available to analysts and researchers. I identify and discuss some of the implications of XBRL for businesses and, in doing so, identify research opportunities. Implications of XBRL- financial reporting research opportunities 1.

Penman, as well as the participants of the U.S. Securities and Exchange Commission and accounting workshops at Columbia University and Washington University. Electronic copy available at:

Firms often disclose information security risk factors in public filings such as 10-K reports. The internal information associated with disclosures may be positive or negative. In this paper, we are interested in evaluating how the nature of security risk factors disclosed, which is believed to represent the internal information regarding information security, is associated with future breach announcements. For this purpose, we build a decision tree model, which classifies the occurrence of future security breaches based on the textual contents of the disclosed security risk factors. The model is able to accurately associate disclosure characteristics with breach announcements about 77 % of the time. We further explore the contents of the security risk factors using text mining techniques to provide a richer interpretation of the results. The results show that the security risk factors with action-oriented terms and phrases are less likely to be related to future incidents. We also conduct a cross-sectional analysis to study how the market interprets the nature of information security risk factors in annual reports at different time points. We find that the market reaction following the security breach announcement is different