Synergy between Accounting Disclosures and Forward-Looking Information in Stock Prices

28 Pages Posted: 25 Jan 2015

See all articles by Anil Arya

Anil Arya

Ohio State University (OSU) - Fisher College of Business

Brian Mittendorf

Ohio State University (OSU) - Fisher College of Business

Ram Ramanan

SUNY at Binghamton - School of Management

Date Written: January 24, 2015

Abstract

It is often noted that accounting information, while faithfully estimating current profitability, fails to reflect forward-looking information about new ventures. Stock prices, however, reflect the prevailing sentiment about both current and future activities. As a result, though accounting is viewed as an important information source, stock price reactions are the primary gauge of how new technologies are expected to fare. With this in mind, we develop a model of accounting disclosures when market prices serve as a useful tool to inform the use of emerging technologies. We demonstrate that the information in accounting reports about current activities can indeed prove useful in improving decisions about new activities. In addition, we also demonstrate a synergy between accounting reports and market prices in guiding strategies – the more the forward-looking information that can potentially be gleaned from price, the more vital accounting information about current activities proves.

JEL Classification: M41

Suggested Citation

Arya, Anil and Mittendorf, Brian and Ramanan, Ram, Synergy between Accounting Disclosures and Forward-Looking Information in Stock Prices (January 24, 2015). Available at SSRN: https://ssrn.com/abstract=2555034 or http://dx.doi.org/10.2139/ssrn.2555034

Anil Arya

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Brian Mittendorf

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Ram Ramanan (Contact Author)

SUNY at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States

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