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Abstract:
In this study, we provide evidence on the pricing of other comprehensive income (OCI) that differs from most evidence in prior research. Prior archival research has largely concluded that OCI is not priced by investors. In contrast, we provide evidence in the post-SFAS 130 period that OCI is priced on a dollar-for-dollar basis as is predicted by economic theory for transitory income items. We attribute this finding to our use of post-SFAS 130 as-reported measures of OCI rather than pre-SFAS 130 as-if estimates of OCI measures. Furthermore, we document that two components of OCI, foreign currency translation adjustment and unrealized gains/losses on available-for-sale securities, are priced by investors. In the post-SFAS 130 period, we also find that the type of financial statement in which firms report OCI and its components affects pricing, consistent with the conclusions of prior experimental research. However, our evidence suggests that investors pay greater attention to OCI information reported in the statement of changes in equity, rather than in a statement of financial performance. This could be attributed to investors becoming more familiar in the post-SFAS 130 period with the predominant reporting of OCI and its components in the statement of changes in equity. These findings may be relevant to both the Financial Accounting Standards Board and the International Accounting Standards Board, which jointly are undertaking a new project that, in part, is addressing financial statement presentation of OCI items.

Comprehensive income, capital markets, SFAS 130, summary measures of performance

Abstract:
The AICPA's Special Committee on Financial Reporting has urged disclosure of relevant forward-looking and non-financial information to supplement conventional financial statements. We conduct an experiment consisting of 20 laboratory security markets with eight participants each to assess the effects of such disclosures on capital allocation decisions. We observe four markets in each of five accounting information conditions: a baseline condition with an income statement and balance sheet only and four conditions that combine this baseline with supplemental disclosures of proved reserves (a best estimate), total reserves (an upper bound), and minimum reserves (a lower bound). We find first that proved reserve disclosures improve capital allocation decisions, even though these disclosures are redundant with information in the primary financial statements. Second, disclosures of the upper bound (total reserves) in the absence of lower bound (minimum reserves) has the potential to bias security prices upwards, while disclosures of both total and minimum reserves remove this bias. Third, a comparison of individual price predictions to actual market prices reveals both a systematic prediction error and a differential effect of supplemental disclosures on security prices, suggesting that experimental investigations of capital allocation decisions should include market settings. The paper concludes with a discussion of implications for accounting standard setters.

Abstract:
This paper uses a trading volume analysis to examine the extent to which SEC-mandated disclosures make firms' market risk exposures more transparent to investors. We hypothesize that if the SEC's quantitative market risk disclosures reduce investor disagreements about firms' risk exposures, trading volume associated with market rate or price changes should decline after the disclosures are made public. We test for this relationship across three samples of firms that provide the mandated market risk disclosures for the first time in their 10-K reports. We find that the trading volume associated with changes in market rates or prices consistently declines after the 10-K filing for firms exposed to changes in interest rates and foreign currency exchange rates. In contrast, for firms exposed to commodity price changes, we find limited evidence of a decline in trading volume associated with changes in energy commodity prices, and no evidence of a decline in trading volume associated with changes in non-energy commodity prices. We explore several explanations for the weaker commodity price results, some relating to potential deficiencies in the reported commodity information and others to research design issues. In general, we interpret the results as providing evidence suggesting that the SEC's quantitative market risk disclosures reduce investor disagreements about firms' exposures to market risks.

Abstract:
This research examines whether the anticipated imposition of the deferral method of accounting for the investment tax credit affected investors perceptions about the propensity of firms to invest in ITC qualifying assets. We find significant negative (positive) abnormal returns associated with events increasing (decreasing) the probability of the mandated accounting change. Additionally, we find a significant association between these returns and variables measuring potential changes in future investment and proximity to debt covenant constraints. These results have implications for policymakers because they indicate that investors expected the proposed accounting regulation to mitigate the stimulative effects of the tax credit.

Investment tax credit, deferral method of accounting, market reactions

Abstract:
This research examines the value-relevance of fair value accounting relative to historical cost accounting for financial instruments held by closed-end mutual funds to provide evidence on the reliability of fair value estimation. Closed-end funds are considered because their balance sheets and income statements typically are reported at fair value and there is great variation in the types of securities held by various funds. For a sample of 143 closed-end mutual funds during 1982-1997, we find a significant association between stock prices and the fair value of investment securities, as well as between stock returns and fair value securities gains and losses, even after controlling for historical costs. To examine whether differences in the perceived reliability of the investment securities fair values affects investors' assessments of the usefulness of the information, we examine the association between stock price metrics and fair values across different fund types (e.g., publicly held equity securities from G7 countries, equity securities other than those publicly held from G7 countries, U.S. government or municipal securities, corporate bonds). We find that in all cases there is a significant association between the stock price metrics and fair values. This suggests that the need to estimate fair values for securities traded in thin markets, such as private or non-G7 equities, does not cause the incremental value-relevance of fair value information to be eliminated. Our strong and consistent findings in the closed-end fund setting suggest that reliability problems in measuring the fair values of investment securities are not the primary explanation for the inconsistency in prior research results; instead such inconsistency may be attributed to the incomplete availability of fair value measures in other settings.

closed-end mutual funds, fair value accounting, financial instruments

Abstract:
We hypothesize that firms' 10-K market risk disclosures, recently mandated by SEC Financial Reporting Release No. 48 (FRR 48), reduce investors' uncertainty and diversity of opinion about the implications, for firm value, of changes in interest rates, foreign currency exchange rates, and commodity prices. We argue that this reduced uncertainty and diversity of opinion should dampen trading volume sensitivity to changes in these underlying market rates or prices. Consistent with this hypothesis, we find that after firms disclose FRR 48-mandated information about their exposures to interest rates, foreign currency exchange rates, and energy prices, trading volume sensitivity to changes in these underlying market rates and prices declines, even after controlling for other factors associated with trading volume. The observed declines in trading volume sensitivity are consistent with FRR 48 market risk disclosures providing useful information to investors.

Disclosure regulation; Market risk disclosures; Derivatives; Trading volume; Investors' uncertainty; Diversity of opinion

Abstract:
The AICPA Special Committee on Financial Reporting has urged disclosure of relevant forward-looking information on risks and opportunities to supplement conventional financial statements. We conduct a laboratory market experiment to assess the effects of such disclosures on capital allocation decisions. We develop two sets of competing hypotheses regarding how capital markets react to supplemental disclosures. One set is based on the assumption of semi-strong market efficiency, while the other posits that the bounded rationality of individual traders leads to inefficient market prices. We find that explicit disclosure of management's best estimate of an uncertain quantity improves market efficiency, even though this disclosure is redundant with information in financial statements. Second, we find disclosure of an upper bound of management's estimate has the potential to bias security prices upward, while informationally equivalent disclosure of both upper and lower bounds removes this bias. These results suggest that experimental market reactions to these supplemental disclosures are inconsistent with market efficiency. Supplemental analyses of individuals' price predictions and trading behavior support our conclusion that inefficiencies are at least partially attributable to individual information processing biases.

Abstract:
This paper is a self-contained introduction to the concept and methodology of "value at risk," which is a new tool for measuring an entity's exposure to market risk. We explain the concept of value at risk, and then describe in detail the three methods for computing it: historical simulation; the variance-covariance method; and Monte Carlo or stochastic simulation. We then discuss the advantages and disadvantages of the three methods for computing value at risk. Finally, we briefly describe some alternative measures of market risk.