Commercial paper is a moneymarket security issued (sold) by large corporations to obtain funds to meet shortterm debt obligations (for example, payroll), and is backed only by an issuing bank or corporations promised to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized credit rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing institution pays. Interest rates fluctuate with market conditions, but are typically lower than banks rates.
Financial Statement Information The Impact of Investors and Managers This is a thesis appearing in the SOM PhD Thesis Series. SOM (Systems, Organisation and Management) is the joint research school of the faculties of Economics, Management and Organization, and Spatial Sciences of the University of Groningen. SOM University of Groningen P.O. Box 800 9700 AV Groningen The Netherlands http://som.rug.nl illustration: Martien Lubberink, Emma on Damrak printed by: O®setdrukkerij Ridderprint BV, Ridderkerk RIJKSUNIVERSITEIT GRONINGEN Financial Statement Information The Impact of Investors and Managers Proefschrift ter verkrijging van het doctoraat in de Economische Wetenschappen aan de Rijksuniversiteit Groningen op gezag van de Rector Magni¯cus, dr. D.F.J. Bosscher, in het openbaar te verdedigen op donderdag 21 september 2000 om 14.15 uur door Martien Jan Peter Lubberink geboren op 2 oktober 1967 te Quito, Ecuador Promotor: Prof.dr. D.W. Feenstra Co-promotor: dr. C.A. Huijgen For Monique, Bastian, and Emma . Acknowledgments Finishing my thesis while preparing moving to Lancaster, with two young chil- dren at home is not an easy job. It feels as if all the work of the last years is compressed into a couple of weeks. Nevertheless, the heavy work makes this period a memorable one and emphasizes the fact that ¯nishing a dissertation is a major even t in my life. My supervisor once told me not to make plans for more than four years ahead. It turned out that he was right. At high school, I decided to study economics, instead of physics or computer sciences because I feared to live the life of a specialist. I did not like the idea of spending all day behind a computer screen, writing computer programs, and working on my own most of the time. I certainly did not plan the life I'm living now: my work is specialized, and I spend a great deal of my time writing computer programs. Moreover, the last two years of my life my o±ce was in a former monastery, where I did work typically associated with monks: writing. However, I don't live the nerdy life I once feared. It turned out that working in academia is not very di®erent from working elsewhere. The major di®erence is that few people place constraints on our work: To a large extent we can do what we want to, when we wan t to, and with whom we wan t to. I enjoy this freedom, and I used it to explore a ¯eld of knowledge to its boundaries. A great deal of the joy of working on this thesis came from working with a number of people whom I want to thank. I am much indebted to my supervisor Dick Feenstra. H e did an excellent job as supervisor. As a true promotor, he sent me to courses and seminars, stimulating me to build up experience and more important, a valuable network of contacts. Also, I would like to thank Dick for cultivating the rebellious kernel in me. I would also like to thank my co-supervisor, Carel Huijgen for his e xcellent comments and also for the good times we spent together. Thanks to Carel, I learned to show moderation in writing, but to feel uninhibited in enjoying good quality red wine and smokers' requisites. I would like to thank the other members of the graduation committee, Willem Buijink, Elmer Sterken, and Frans Tempelaar for their valuable comments. i I thank Evert Schoorl for being a genuine ombudsman and for the ¯ n ancial support he arranged for all my work related trips. I want to thank Sebastiaan de Groot and Auke Plantinga for the good times we spent in and outside the WSN building and for making me enthusiastic about L A T E X and MATLAB: These packages make conducting research a joy. I would like to thank Theo Dijkstra for his inspiring comments and for teaching me the peculiar discipline of never easily accepting the obvious. I thank Pieter Jansen for introducing me to the informal circuit at the department and for being a great cook. I would like to thank Frank Moers and Erik Peek for the valuable discussions about our ¯eld of work. I thank Caren Schelleman for helping me out with many trivial and non-trivial problems. I want to thank Steven Maijoor for permitting me to cause havoc in the otherwise peaceful monastery on Tongersestraat 53. I thank Eijte Foekens for the countless number of jokes, and for demonstrating that people from two unrelated ¯elds { marketing and accounting { can cooperate and create valuable software applications. Further, I thank everyone who contributed to this thesis but whom I did not mention here. Karin Vos and Vicky Goergens, I want to thank you for your hospitality during my occasional visits to Groningen. Finally, Monique, thank you for listening to the boring stories I brought home and for your great support. Maastricht, August 2000 ii Contents 1 Introduction 1 1.1 Introduction 1 1.2 Contemporaryaccountingresearch 3 1.2.1 Introduction 3 1.2.2 Normative¯nancialaccountingresearch 4 1.2.3 Marketbasedaccountingresearch 6 1.2.4 Positiveaccountingtheory 8 1.2.5 Thereturntofundamentals 13 1.2.6 Positiveaccountingtheoryrevisited 15 1.3 IssuesinFinancialReportingRegulation 15 1.4 ObjectiveandOutline 18 2 Investors' Impact on Accounting Information 21 2.1 Introduction 21 2.2 Associationmodels 25 2.3 Earnings,permanentornot 30 2.3.1 Introduction 30 2.3.2 Permanentearnings 30 2.3.3 Transitoryearnings 32 2.4 AnticipationofEarnings 36 2.4.1 Introduction 36 2.4.2 ReturnMeasurementwindows 37 2.4.3 Modelingearnings'anticipations 39 2.4.4 Earnings'anticipations,earningslevelsandchanges 43 2.4.5 Noise 48 2.4.6 Concludingonpricesleadingearnings 50 2.5 Includingequitybookvaluesinassociationmodels 51 2.5.1 Introduction 51 2.5.2 CleanSurplusAccounting 51 2.5.3 Linearinformationdynamics 56 2.5.4 Conservatism 62 2.5.5 ConcludingontheOhlsonFramework 63 2.6 Concludingremarks 65 iii 3 Managers' Impact on Accounting Information 69 3.1 Introduction 69 3.2 Managersandaccountinginformation 70 3.2.1 Introduction 70 3.2.2 Financialreportingandportfoliotheory 70 3.2.3 Contractingandpropertiesof¯nancialreporting 72 3.2.4 Thecostlycontractingsetting 74 3.2.5 Regulated¯nancialreporting 77 3.2.6 EarningsConservatism 79 3.3 Hypotheses 81 3.4 Methodology 84 3.4.1 Introduction 84 3.4.2 Measuringmanagers'riskpreferences 84 3.4.3 Measuringearningsconservatism 91 3.5 EmpiricalResults 99 3.5.1 Introduction 99 3.5.2 Data 99 3.5.3 Results 103 3.6 Concludingremarks 110 4 Concluding remarks 115 4.1 Introduction 115 4.2 Summaryofmainresults 115 4.3 Strengthsandweaknesses 119 4.4 Policyimplications 121 4.5 Suggestionsforfurtherresearch 122 A Prices Leading Earnings 125 A.1 Introduction 125 A.2 Ageneralframework 125 A.3 PLEandthepricemodel 127 A.4 PLEandtheERCofthereturnsmodel 127 A.5 PLEandbiasedR-squares 129 A.6 PLEandthe`changes'model 129 B The Dutch ¯nancial reporting environment 131 B.1 Introduction 131 B.2 Financialreporting 131 B.3 Corporategovernance 135 C List of Firms 137 References 141 iv [...]... process is a factor that determines reporting practice Further, the results of this thesis suggest that the enforcement of ¯nancial reporting regulation a®ects reported earnings in such a way that the reported earnings number has less bearing on the ¯rm's market value Contrary to what regulators assume, the results of this thesis suggest that ¯nancial reporting regulation, and its enforcement in particular... this thesis is market based accounting research The availability of data on Dutch listed ¯rms makes it possible to \confront" information from ¯nancial reports with information from markets Such a \confrontation" enables an analysis of ¯nancial reporting phenomena, and advances our understanding of ¯nancial reporting The quality of the analysis depends on the methods used For that reason, this thesis. .. drastically { market based accounting research Section 1.2.3 is a brief review of empirical { or market based { research Market based research confronted researchers with the e±cient market hypothesis This hypothesis posed problems to ¯nancial reporting research because its message of substance over form seemed to trivialize accounting principles A reaction to the idea that ¯nancial statements were assumed... use as a predictive criterion is the investment decision as it is re°ected in security prices" (Ball and Brown, 1968) This idea refers to the e±cient market hypothesis Results of Ball and Brown are in conformity with the e±cient market hypothesis and put into perspective the idea that accounting information adds much to what is already known by the market Ball and Brown show \that 85-90 percent is... market hypothesis makes the use of accounting standards for ¯nancial reporting irrelevant This notion challenged research, especially around the beginning of the seventies As a result, new ways of thinking about ¯nancial statements emerged First, there was a relatively defensive view that emphasized the relevance of ¯nancial statements The second view incorporated the e±cient market hypothesis and... interesting property generally associated with this issue is the timeliness of ¯nancial statement information Timeliness is related to conservatism (as this thesis shows), and as both properties are the subject of the research presented in this thesis, it is worthwhile to investigate policymakers' opinions about them Many parties such as auditors, accounting regulators, researchers and accounting practitioners...Nederlandse Samenvatting 153 v Chapter 1 Introduction 1.1 Introduction This thesis investigates the mechanisms that shape ¯nancial statement information, taking two approaches The ¯rst approach focuses on investors, the second concentrates on managers The ¯rst approach assumes... This is a form of \comprehensive income" It re°ects a broader concept of total income, because it presents not only the pro¯t from current operations, but also the changes in the ¯rm's market value The ideas of Edwards and Bell (1961) are interesting for another reason: one of their approaches presents a framework that establishes a link between pro¯ts, dividends, and ¯rms' market values With Edwards... For example, not seldomly managers leave 2 Introduction ¯rms after the announcement of disappointing earnings numbers And, not surprisingly, good earnings performance advances a manager's career This thesis shows that the ¯rst approach, the one that concentrates on investors' interests in ¯nancial reporting, su®ers from methodological and theoretical problems The alternative approach, with a focus... intraday speed of adjustment of stock prices to earnings announcements Evidence from these studies con¯rms the idea of e±cient capital markets5 One phenomenon not in conformity with the e±cient market hypothesis is the post-announcement drift, which suggests that investors trade on public earnings information for quite a while after the announcement Foster et al (1984) document a post-announcement drift, . Financial Statement Information The Impact of Investors and Managers This is a thesis appearing in the SOM PhD Thesis Series. SOM (Systems, Organisation and Management) is the joint research. Brown, 1968). This idea refers to the e±cient market hyp othesis. Results of Ball and Brown are in conformity with the e±cient market hypothesis and put into perspective the idea that accounting. it to explore a ¯eld of knowledge to its boundaries. A great deal of the joy of working on this thesis came from working with a number of people whom I want to thank. I am much indebted to my