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

www.cepr.org Available online at: www.cepr.org/pubs/dps/DP3941.asp www.ssrn.com/xxx/xxx/xxx ISSN 0265-8003

We estimate a dynamic asset pricing model characterized by heterogeneous boundedly rational agents. The fundamental value of the risky asset is publicly available to all agents, but they have different beliefs about the persistence of deviations of stock prices from the fundamental benchmark. An evolutionary selection mechanism based on relative past profits governs the dynamics of the fractions and switching of agents between different beliefs or forecasting strategies. A strategy attracts more agents if it performed relatively well in the recent past compared to other strategies. We estimate the model to annual US stock price data from 1871 until 2003. The estimation results support the existence of two expectation regimes, and a bootstrap F-test rejects linearity in favor of our nonlinear two-type heterogeneous agent model. One regime can be characterized as a fundamentalists regime, because agents believe in mean reversion of stock prices toward the benchmark fundamental value. The second regime can be characterized as a chartist, trend following regime because agents expect the deviations from the fundamental to trend. The fractions of agents using the fundamentalists and trend following forecasting rules show substantial time variation and switching between predictors. The model offers an explanation for the recent stock prices run-up. Before the 90s the trend following regime was active only occasionally. However, in the late 90s the trend following regime persisted and created an extraordinary deviation of stock prices from the fundamentals. Recently, the activation of the mean reversion regime has contributed to drive stock prices back closer to their fundamental valuation.

Abstract: The efficient market hypothesis based on homogeneous expectations implies that future stock returns are unpredictable. However, the forecastability of stock returns has been well documented in a substantial literature. This paper introduces a new forecasting variable, dispersion in analysts ’ earnings forecasts. The implication from this finding is not only that we have another piece of evidence that stock returns are predictable, but also that alternative models should be used to explain movements of stock prices. Hence, this paper derives a relation between the dispersion in forecasts and future stock returns based on Harrison and Kreps (1978) and shows that the dispersion in forecasts exerts its own positive effect on demand in the market. Furthermore, this paper shows empirically that the dispersion in expectations has particularly strong predictive power for future stock returns at intermediate horizons (between 24 months and 43 months) and that it contains information about future stock returns aside from the information contained in other variables. In addition, the direction of predictive power from the dispersion for future stock returns is consistent with the derived relation from Harrison and Kreps (1978). This paper also shows that most of the movements in dispersion cannot be explained by other variables, such as common financial indicators, macroeconomic variables, market volatility, or non-economic events. Finally, Monte Carlo simulation shows that finite sample biases in long-horizon regressions using the dispersion do not seem so serious.

Federal Reserve Bank of New York for helpful comments. The views stated here are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of New York, or Two-Sided Markets and Inter-Temporal Trade Clustering: Insights into

Abstract: We present and estimate an asset pricing model based on an intertemporal asset allocation problem with n available assets, in which agents have heterogeneous expectations about the future. We, thus, want to bridge the literatures on intertemporal asset allocation and on heterogeneous beliefs. In our model, the interaction between two switching types of agents, e.g. fundamentalists and chartists, is responsible for endogenously generating the observed price trends. We assume that agents have a long horizon objective, based on a stream of consumption, maximizing a recursive utility function. Agents in our model may try to make pro…ts using strategies that are not driven by fundamentals, not necessarily meaning that they behave irrationally. Among the new features in our model, we can mention that the usual representative agent approach for long term investors is no longer valid. Besides, assuming that investors have a long term investment horizon changes the resulting optimum asset allocations and, thus, relative asset prices when compared to short term models. This last feature is even more important since we consider more than one risky asset. We estimate the model considering an investor from USA who can trade four major stock indices: Dow Jones, FTSE, Nikkei and Hang Seng. This lets us check wether or not price movements are driven by fundamentals, helping predicting the creation of bubbles.

I investigate variation in how well firm-initiated disclosures are transmitted to investors. Improved dissemination is hypothesized to lower the cost of information acquisition and increase firm visibility. Through instrumentation, I examine the impact of differential dissemination of firm-initiated disclosures by the press on bid-ask spreads, trading volume, and idiosyncratic volatility. I find that improved transmission causally lowers bid-ask spreads, increases trading volume, and lowers idiosyncratic volatility. Ultimately, the results suggest that the economic impact of a firm’s disclosure program is affected by both the level of disclosure and the effectiveness of mechanisms in distributing firm-initiated information to investors. This paper is based on my doctoral dissertation. I would like to thank my committee members, Douglas Skinner (chair), Christian Leuz, Abbie Smith, and Suraj Srinivasan, for their many insightful comments and suggestions. I

the Informativeness of the Trading Process. *

Much of the literature on the usefulness of company financial statement information focuses on the United States and the United Kingdom. But, these two countries are characterized by similar and rigid regulatory and enforcement regime. This study provides direct evidence from the Netherlands – a country with liberal financial reporting environment and different corporate governance regime. It empirically examines the information content of annual and semi-annual earnings announcements and the long-term association between stock returns and some widely reported financial statement variables. The evidence suggests that earnings and dividends disclosures made by Dutch companies are useful to stock market investors and the extent of the usefulness is not that modest as often perceived. However, the Dutch practice of reporting accounting cash flows as a summary performance measure does not have significant incremental usefulness. 1 1.

This paper tests the implications of an information diffusion model (Lu, 2003) in the quarterly earnings announcement setting. Post-announcement-drift is documented only for earnings announcements that have high information uncertainty, measured by high abnormal trading volume and return volatility surrounding the announcement. The results are robust after controlling for the magnitude of earnings surprise. Preliminary evidence also suggests that the magnitude of drift for good (bad) news firms are positively (negatively) related to analyst following and institutional ownership. Moreover, price movement after a second earnings announcement is affected by the information contained in the previous announcement. These findings are consistent with an information diffusion process at work in capital markets. I would especially like to thank Randy Beatty (Chairman) and K.R. Subramanyam for valuable guidance and many insightful discussions. I acknowledge Mark DeFond, Larry Harris, Raffi Indjejikian and Chuck Swenson for their encouragement and suggestions in this exploratory study. I am also indebted to Rebeeca Hann, Mingyi Hung, Qingzhong Ma, Ted Mock, Jim Manegold, Robert Trezevant, and the participants at the USC accounting research forum for helpful comments on the paper. All errors remain my own responsibility. I acknowledge the financial