A rapidly growing literature claims to reject the efficient market hypothesis by producing large estimates of long-term abnormal returns following major corporate events. The preferred methodology in this literature is to calculate average multi-year buy-and-hold abnormal returns and conduct inferences via a bootstrapping procedure. We show that this methodology is severely flawed because it assumes independence of multi-year abnormal returns for event firms, producing test statistics that are up to four times too large. After accounting for the positive cross-correlations of event firm abnormal returns we find virtually no evidence of reliable abnormal performance for our samples.

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

Statistical inference in long-horizon event studies has been hampered by the fact that abnormal returns are neither normally distributed nor independent. This study presents a new approach to inference that overcomes these difficulties and dominates other popular testing methods. I illustrate the use of the methodology by examining the long-horizon returns of initial public offerings ~IPOs!. I find that the Fama and French ~1993! three-factor model is inconsistent with the observed long-horizon price performance of these IPOs, whereas a characteristic-based model cannot be rejected. RECENT EMPIRICAL STUDIES IN FINANCE document systematic long-run abnormal price reactions subsequent to numerous corporate activities. 1 Since these results imply that stock prices react with a long delay to publicly available information, they appear to be at odds with the Efficient Markets Hypothesis ~EMH!. Long-run event studies, however, are subject to serious statistical difficulties

This paper develops generalized method-of-moments tests for the rationality of earnings per share forecasts made by individual stock analysts. We fail to reject the hypothesis of rationality as long as we take into account two complications: (1) the correlation in a given period of analysts ’ forecast errors in predicting earnings for firms in the same industry and (2) discretionary asset write-downs, which affect earnings but are intentionally ignored by analysts when they make earnings forecasts. Our results challenge earlier work by De Bondt and Thaler and by Abarbanell and Bernard that found irrationality in analysts ’ forecasts. I.

This paper investigates the economic consequences of the Sarbanes-Oxley Act through a study of market reactions to legislative events related to the Act. I find that the cumulative abnormal return around all legislative events leading to the passage of the Act is significantly negative. The loss in total market value around the most significant rulemaking events amounts to $1.4 trillion. I then examine the private benefits and costs of major provisions of the Act by investigating the cross-sectional variation in market reactions to the rulemaking events. Regression results are consistent with the hypothesis that shareholders consider both the restriction of nonaudit services and the provisions to enhance corporate governance costly to business. The results also show that Section 404 of SOX, which mandates an internal control test, imposes significant costs on firms

We study the stock price reaction to news about tax aggressiveness. We find that, on average, a company’s stock price declines when there is news about its involvement in tax shelters, but the reaction is small relative to reactions to other corporate misdeeds. We find some limited evidence for cross-sectional variation in the reaction. For example, the stock price decline is smaller for firms that have good governance which is consistent with the idea that for these firms the news is less likely to trigger concerns about insiders’ aggressiveness toward the investors themselves. The reaction is more negative for firms in the retail sector, suggesting that part of the reaction may be a consumer/taxpayer backlash. We also test whether the reaction varies with the market’s perception of how tax-aggressive the firm is, using the firm’s current effective tax rate as a proxy for the market’s beliefs, and find mixed results. We also explore the stock price reaction to reports of current effective tax rate calculations released by Citizens for Tax Justice. We hypothesize that these reports signal tax aggressiveness without the implications for tax penalties or illegal behavior

Abstract. Sloan (1996) and a number of subsequent studies present evidence that a trading strategy based on publicly available accounting accruals earns abnormal returns of approximately 10 % in the year following its initiation. This empirical regularity has been named the ‘accrual anomaly’. In this paper I investigate the accrual anomaly along two dimensions. First, I evaluate whether the accrual anomaly is related to other anomalies documented in the finance literature. Second, I investigate whether different methods for calculating long-term abnormal returns have an effect on the returns to the accrual strategy. My results indicate that both mergers and divestitures have an effect on the returns generated by the accrual strategy. After excluding observations associated with either mergers or divestitures, there is a decrease of about 25 % in the strategy’s returns. Second, different calculation methods for benchmark portfolio returns do not have a material effect on the returns of the accrual strategy. Third, when book-tomarket is added to size as a second control for normal returns, returns to the accrual strategy decrease by approximately 20%. Fourth, the accrual strategy’s returns are much larger in a sample of Nasdaq firms. Overall, I conclude that the accrual anomaly is sensitive to the series of tests conducted in this study, although a substantial portion of it remains unexplained. I would like to thank the members of my dissertation committee: Bill Schwert, Jerry Warner, Ross Watts (chair) and Jerry Zimmerman for their valuable comments and suggestions. I also benefited greatly from the insights of

This paper addresses the relevance of value relevance research. Our purpose in doing so is to clarify the motivation, contribution, limitations, and relevance of the value relevance literature. We begin by describing the meaning of value relevance as defined in extant research. We then explain how value relevance research addresses questions of interest to a broad

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We examine whether the provision of non-audit services by auditors is negatively correlated with firm value and the quality of eamings. Because of concerns regarding the effect of non-audit services on auditor independence, the Securities and Exchange Commission recently issued revised auditor independence rules requiring firms to disclose in their annual proxy statement the amount of fees paid to auditors for audit and non-audit services. Using data collected from over 4,000 proxies filed between February 5, 2001 and June 15, 2001, we find a significant negative market reaction to proxy statements filed by firms reporting higher than expected non-audit fees. Our evidence also indicates an inverse relation between the magnitude of non-audit fees and eamings management. Firms purchasing more non-audit services from their auditor are more likely to just meet or beat three earnings benchmarks - analysts' expectations, prior year eamings, and zero eamings- and to report large discretionary accruals.