PhD Seminar: An Introduction to Capital Markets Research. September 2009
Syllabus and reading list
The research area discussed in this seminar falls into two closely related categories: (1) studies of the usefulness of accounting information to security market participants, and (2) use of the security returns as a tool for validating accounting procedures. Any study which relates accounting information and stock market metrics (e.g., volume of shares traded, return-based measures of risk (e.g., beta, implied expected rates of return), share prices, abnormal returns at the time of the announcement of information, returns over very long intervals (such as a year) etc.,) are candidates for this course. This is a vast research literature that is the core of at least half of the research effort in accounting over the past three decades. Although the reading list is considerable, it represents the set of papers that must be well known by all Ph.D. graduates in accounting.
Each session will have four parts. We will begin with a presentation of a paper that is central to the topic being discussed. One student will present the paper as if they are the author. That is, their aim will be to present the main ideas of the paper as if they were one of the original authors. They should be prepared to defend and explain all of its contents, and to respond to questions/comments/suggestions from the other participants in the seminar. This presentation should take about 80 minutes. The second session will be a critique of the key paper (also presented - with questions of clarification only - by one of the students). The main idea of this session will be to provide a list of reasons why the paper should be accepted/rejected for publication in one of the major accounting research journals. This presentation should take about 30 minutes. All students must submit a written recommendation to an editor of one of these journals recommending publication/re-submission/out-right rejection from publication. The third session will be a presentation (also by a student) of a paper that is very closely related to the key paper. The emphasis of this presentation will be on the connection to the key paper and the contribution beyond the key paper. This presentation should take about 30 minutes. The final session (which will take about 60-90 minutes) will be a discussion of the related papers. In order to prepare for this session, students are required to prepare a literature review that describes each of the papers on the reading list and any other papers that are arguably closely related or central to the theme of the main paper. As with all literature reviews, this review should include a summary of the main points of each paper and a clear indication of the thread that connects the papers together.
Assessment will be allocated as follows:
Replication** write-up and presentation 15%
Presentation of key paper 15%
Critique of key paper 15%
Presentation of related paper 15%
Literature review 15%
* the exam will be a one-week take-home in which students will be required to write a
referee report in much the same spirit of the reports associated with the critiques during
** Students are required to replicate a well-known published paper using data on Dutch or
other European companies. This should be completed before the first class. The write-up
should include (1) a brief discussion of aims, methods, and contributions of the paper, (2)
replication of all graphs and tables, (3) discussion and analyses of any differences in
results, and, (4) possible extensions and analyses of alternate ways that the fundamental
question in the paper could be addressed/analyzed. The last session will be devoted to
presentations of the papers. Students will present the replication as if they were the
original author. Students may encounter some (possibly serious) limitations. These
should be viewed as a challenge and every effort should be made to overcome – or,
otherwise avoid them.
Reading list: (** represents key paper, * represents key related paper)
The Beginning: Value Relevance and Information Content Studies
**Ball, R. and P. Brown, “An Empirical Analysis of Accounting Income Numbers,” Journal of
Accounting Research (1968): 159-78.
*Beaver, W., “The Information Content of Annual Earnings Announcements,” Journal of
Accounting Research (1968): 67-92.
Atiase, R., “Pre-disclosure Information, Firm Capitalization, and Security Price Behavior
Around Earnings Announcements,” Journal of Accounting Research (1985): 21-36.
Ball, R. and L. Shivakumar, “How much New Information is there in Earnings?” Journal of
Accounting Research (2008): 975-1016.
Beaver, W., R. Clarke and W. Wright, “The Association between Unsystematic Security Returns
and the Magnitude of the Earnings Forecast Error,” Journal of Accounting Research
Chambers, R., “Financial Information and the Securities Market,” Abacus Vol 1, No 1, (1965).
Fama, E., I. Fisher, M. Jensen, and R. Roll, “The Adjustment of Stock Prices to New
Information,” International Economic Review (1969): 1-21.
Freeman, R., “The Association between Accounting Earnings and Security Returns for Large
and Small Firms,” Journal of Accounting and Economics (1987): 195-228.
Hagerman, R., Zmijewski, M., and P. Shah, “The Association between the Magnitude of
Earnings Forecast Errors and Risk-Adjusted Returns”, Journal of Accounting Research,
Patell, J. and M. Wolfson, “The Intraday Speed of Adjustment of Stock Prices to Earnings and
Dividend Announcements,” Journal of Financial Economics (1984): 223-252.
Earnings Response Coefficients
The papers that started it all:
**Easton, P. and M. Zmijewski, “Cross-sectional Variation in the Stock Market Response to
Accounting Earnings Announcements,” Journal of Accounting and Economics (1989):
*Collins, D. and S. Kothari, “An Analysis of Intertemporal and Cross-sectional Determinants of
Earnings Response Coefficients,” Journal of Accounting and Economics (1989): 143-181.
Kormendi, R. and R. Lipe, “Earnings Innovations, Earnings Persistence and Stock Returns,”
Journal of Business (1987): 323-45.
Refinements and specification issues:
Freeman, R., and S. Tse, “A Non-linear Model of Security Price Responses to Unexpected
Earnings: Confirmations and Contradictions of Previous Earnings Reports,” Journal of
Accounting Research, (1989): 49-84.
R. Lipe., Bryant, L., and S. Widener, “Do Non-Linearity, Firm-specific Coefficients, and Losses
Represent Distinct Factors in the Relation between Stock Returns and Earnings?” Journal
of Accounting and Economics (1998).
Teets, W., and C. Wasley, “Estimating Earnings Response Coefficients: Pooled vs Firm-specific
Models,” Journal of Accounting and Economics (1996): 279-296.
Collins, D., and W. Salatka, “Noisy Accounting Earnings Signals and Earnings Response
Coefficients: the Case of Foreign Currency Accounting,” Contemporary Accounting
Research, (1993): 119-159.
Dickenson, V., P. Kimmel, and T. Warfield. “The Accounting Consequences of Accelerated
Share Repurchases.” University of Florida Working paper, (2008).
Elliot, J., and D. Hanna, “Repeated Accounting Write-offs and the Information Content of
Earnings,” Journal of Accounting Research (1996): 135-155.
Francis, J., K. Schipper, and L. Vincent, “Earnings Announcements and Competing
Information,” Journal of Accounting and Economics (2002): 313-342.
Kross, W. and D. Schroeder, “An Investigation of Seasonality in Stock Price Responses to
Quarterly Earnings Announcements,” Journal of Business, Finance, and Accounting
Teoh, S., and T. Wong, “Perceived Auditor Quality and the Earnings Response Coefficient,” The
Accounting Review (1993): 346-367.
Estimating earnings response coefficients:
Brown, L., R. Hagerman, P. Griffin, and M. Zmijewski, “An Evaluation of Alternative Proxies
for the Market‟s Expectations of Earnings,” Journal of Accounting and Economics (1987):
Prices lead earnings:
Beaver, W., R. Lambert, and D. Morse, “The Information Content of Security Prices,” Journal of
Accounting and Economics (1980): 3-28.
Beaver, W., R. Lambert, and S. Ryan, “The Information Content of Security Prices: a Second
Look,” Journal of Accounting and Economics (1987): 139-157.
Introduction of earnings as an explanatory variable for returns:
Easton, P. and T. Harris, “Earnings as an Explanatory Variable for Returns,” Journal of
Accounting Research (1991): 19-36.
Introduction of other accounting data as an explanatory variable for returns:
Easton, P. and J. Pae, “Accounting Conservatism and the Relation between returns and
Accounting Data.” Review of Accounting Studies (2004): 495-521.
Earnings as an Explanatory Variable for Returns,” Journal of Accounting Research (1991): 19-
Understanding the role of earnings levels:
Ali, A.. and P. Zarowin, “The Role of Annual Earnings in Annual Earnings-Returns Studies”,
Journal of Accounting Research, (1992): 289-96.
Ali, A. and P. Zarowin, “Permanent Versus Transitory Components of Annual Earnings and
Estimation Error in Earnings Response Coefficients”, Journal of Accounting and
Economics, (1992): 249-64.
Longer return intervals:
**Easton, P., T. Harris, and J. Ohlson, “Aggregate Accounting Earnings Can Explain Most of
Security Returns: the Case of Long Event Windows,” Journal of Accounting and
Economics, (1991): 119-142.
*Kothari, S., and R. Sloan, “Information in Prices About Future Earnings: Implications for
Earnings Response Coefficients,” Journal of Accounting and Economics, (1992): 143-
Ohlson J., and S. Penman, “Dis-aggregated Accounting Data as Explanatory Variables for
Returns,” Journal of Accounting, Auditing, and Finance (1992): 553-573.
Shroff, P., “The Relation between Aggregate Earnings and Security Returns over Long
Intervals,” Contemporary Accounting Research (2002): 147-164.
The role of levels of future earnings:
Liu, J., and J. Thomas, “Stock Returns and Accounting Earnings”, Journal of Accounting
Research, (2000): 71-101.
**Ball, R, and L. Shivakumar, “Earnings Quality in UK Private firms: Comparative Loss
Recognition Timeliness,” Journal of Accounting and Economics, (2005): 83-128.
Basu, S., “The Conservatism Principle and the Asymmetric Timing of Earnings,” Journal of
Accounting and Economics, (1997): 3-37.
*Givoly, D., C. Hayn, and A. Nataragan, “Measuring Reporting Conservatism,” The Accounting
Review 82 (2007): 65-107.
Easton, P. "Discussion of Accounting Data and Value: The Basic Results." Contemporary
Accounting Research (2009): 261-272.
Easton, P., V. Nikolaev, and L. van Lent, “Price Convexity and the Earnings-Return Relation,”
Tilburg University Working paper, (2008).
Ohlson, J. "Accounting Data and Value: The Basic Results." Contemporary Accounting
Research (2009): 231-259.
Penman, S., and X. Zhang. “Accounting Conservatism, the Quality of Earnings, and Stock
Returns.” The Accounting Review (2004): 237-264.
Watts, R., “Conservatism in Accounting Part I: Explanations and Implications,” Accounting
Horizons 17, 3 (2003): 207-221.
Watts, R., “Conservatism in Accounting Part II: Evidence and Research Opportunities,”
Accounting Horizons 17,4 (2003): 287-301.
Detecting earnings management
Dechow, P., R. Sloan, and A. Sweeney, “Detecting Earnings Management”, The Accounting
Review, (1995): 3-42.
Dechow, P. and Dechev, I. “The Quality of Accruals and Earnings: The role of Accrual
Estimation Errors.” The Accounting Review (2002): 35-59.
Guay, W., S. Kothari, and R. Watts, “A Market-based Evaluation of Discretionary Accrual
Models”, Journal of Accounting Research, (1996): 83-106.
Healy, P., “Discussion of „A market-based Evaluation of Discretionary Accrual Models‟,”
Journal of Accounting Research, (1996): 107-115.
Healy, P., and J. Wahlen, “A Review of the Earnings Management Literature and its
Implications for Standard Setting,” Accounting Horizons 13,4 (1999): 365-374.
Jones, J., “Earnings Management During Import Relief Investigations”, Journal of Accounting
Research, (1991): 193-228.
Patterns of earnings management
*Barth, M., J. Elliot, and M. Finn, “Market Rewards Associated with Patterns of Increasing
Earnings”, Journal of Accounting Research, (1999): 387-414.
Bartov, E., D. Givoly, and C. Hayn, “The Rewards to Meeting and Beating Earnings
Expectations,” Journal of Accounting and Economics 33 (2004): 173-204.
**Kasznick, R., and M. McNichols, “Does Meeting Expectations Matter? Evidence from
Analyst Forecast Revisions and Share Prices,” Journal of Accounting Research 40, 3
Lopez, T., and L. Rees, “The Effect of Meeting and Missing Analysts‟ on the Information
Content of Unexpected Earnings,” Journal of Accounting, Auditing, and Finance 17, 2
Skinner, D., and R. Sloan, “Earnings Surprises, Growth Expectations, and Stock Returns or
Don‟t Let an Earnings Torpedo Sink Your Portfolio,” Review of Accounting Studies 7, 2-
3 (2002): 289-
Earnings Management Around Thresholds
**Burgstahler, D. and Dichev, I., “Earnings Management to Avoid Earnings Decreases and
Losses,” Journal of Accounting & Economics 24 (1997): 99-126.
Das, S., and H. Zhang, “Rounding up in Reported EPS, Behavioral Thresholds and Earnings
Management,” Journal of Accounting and Economics, 2003: 31-50.
Degeorge, F., J. Patel, and R. Zeckhauser, “Earnings Management to Exceed Thresholds”,
Journal of Business (1999): 1-33.
*Durtschi, C., and P. Easton, “Earnings Management? The Shapes of the Frequency
Distributions of Earnings Metrics are not Evidence Ipso Facto,” Journal of Accounting
Research, 2005: 557-592.
Durtschi, C., and P. Easton, “Earnings Management? Erroneous Inferences based on Earnings
Frequency Distributions.” University of Notre Dame Working paper, (2009).
Jacob, J., and B. Jorgensen, “Earnings Management and Accounting Income Aggregation,”
Forthcoming, Journal of Accounting and Economics, (2007): 369-390.