The Effect of Limited Liability on the Market Response to Disclosure

Posted: 19 Mar 1997

See all articles by Paul E. Fischer

Paul E. Fischer

University of Pennsylvania - Accounting Department

Robert E. Verrecchia

University of Pennsylvania - Accounting Department

Abstract

We formalize the effects of an earnings disclosure on security prices under an assumption of limited liability. We derive various non-linear relations between equity prices and earnings under a variety of capital structure assumptions and, if possible, tie the relations attained to results from the existing empirical literature. We also characterize how debt prices respond to earnings when holders of debt have limited liability. Finally, we analyze how changes in the degree of leverage and conversion features of debt affect the relation between price and earnings.

JEL Classification: M41, G12, K22, G32

Suggested Citation

Fischer, Paul E. and Verrecchia, Robert E., The Effect of Limited Liability on the Market Response to Disclosure. CONTEMPORARY ACCOUNTING RESEARCH, Vol 14, No 3, 1997. Available at SSRN: https://ssrn.com/abstract=2925

Paul E. Fischer (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Robert E. Verrecchia

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6976 (Phone)
215-573-2054 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,529
PlumX Metrics