BMAN30071 SHARE PRICES AND ACCOUNTING INFORMATION 2019
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BMAN30071
SHARE PRICES AND ACCOUNTING INFORMATION
2019
Question 1
In 1989 Lev reviewed twenty years of empirical return-earnings studies and argued that the strict adherence to historical cost accounting, perhaps combined with some degree of earnings management, was most likely to be behind the low explanatory power, or low usefulness, of earnings for returns.
i. Summarise the arguments and observations in Lev (1989).
[20 marks]
ii. Explain why Kothari’s (1992) concept of ‘prices leading earnings’ represents a challenge to Lev’s argument of low earnings usefulness.
[15 marks]
iii. Why is the return-earnings association reviewed in Lev (1989) of continued interest to today’s accounting policy-makers?
[5 marks]
iv. Do you agree with Lev that today’s return-earnings association is likely to be stronger as a result of today’s increased use of fair value accounting under IFRS? Explain why you agree or do not agree with Lev.
[10 marks]
Total 50 marks
Question 2
The following regression models (1) and (2) are taken from Burgstahler, D.C. and Dichev, I.D., 1997. “Earnings, Adaptation and Equity Value”, Accounting Review, Vol. 72, No. 2, pp. 187–215:
(1) MVt γ1BVt γ2Et εt
(2) b1 b2DM b3DH b4 b5DM b6DH et
Estimating regression model (2) for a sample of 684 UK firm-year observations yields the following regression output:
SUMMARY OUTPUT: REGRESSION MODEL (2)
Regression Statistics
Multiple R 0.6626
R Square 0.4390
Adjusted R Square
Standard Error
0.4349
1.41
Observations 684
|
Coefficients |
Standard Error |
T- Statistic |
P-Value |
Intercept D M D H Et ÷ BVt -1 D M × (Et ÷ BVt -1) D H × (Et ÷ BVt -1) |
1.46 -1.07 -1.45 -6.63 18.28 22.03 |
0.09 0.62 0.34 0.63 5.06 1.49 |
15.4 -1.7 -4.2 -10.5 3.6 14.8 |
0.0000 0.0812 0.0000 0.0000 0.0003 0.0000 |
Required
i. Define the three variables in regression model (1). What do BVt and Et proxy for? What is the theory behind regression model (1)? What are the theory’s predictions for γ1 and γ2?
[16 marks]
ii. How does the theory behind regression model (1) compare with the Simple Earnings Capitalisation Model?
[6 marks]
iii. In Burgstahler and Dichev (1997) regression model (2) is derived from regression model (1). Describe the series of steps that are necessary in order to derive regression model (2) from regression model (1), and explain the rationale behind each step. Would it be possible to test the predictions in Burgstahler and Dichev
(1997) by simply employing regression model (1)?
[12 marks]
iv. Interpret the empirical evidence in the above summary output. Is the above evidence consistent with the underlying theory? Is the above evidence consistent with the empirical findings in Burgstahler and Dichev (1997)?
[10 marks]
v. Why are the empirical findings in the above summary output of interest to accounting policy-makers?
[6 marks]
Total 50 marks
Question 3
Ohlson’s Unbiased Accounting Model assumes that the following relationships hold:
(1) yt1 yt xt1 dt1
(2) x1 x vt 1,t1
(3) vt1 vt 2,t1
Ohlson’s Unbiased Accounting Model predicts that:
(4) pt (1 k)yt k(xt dt) 2vt
The following information is extracted from Table 4 in Hand, John RM and Landsman, Wayne R, The Pricing of Dividends in Equity Valuation, Working Paper, University of North Carolina at Chapel Hill, Chapel Hill, NC, p. 31.
Extract from Table 4 (DIV>0) |
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Mean coefficients and associated t-statistics from annual cross-sectional OLS regressions of the market value of common equity MVE on independent variables in Ohlson’s model when other information v is assumed to be zero. Time period is 1974– 1996. |
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(5) MVEit = a0t + a1tBVit + a2tCORENIit + a3tDIVit + a4tNETCAPit + eit |
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Mean BV CORENI DIV NETCAP MVE/DIV adj. R2 Years |
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Theoretical Value |
|
|
|
|
– 1 |
|
|
Magnitude Prediction |
0.86 |
1.34 |
–0.14 |
–0.14 |
|
|
|
3.28 0.82 23 (6.8)b a The t-statistic is calculated versus a null hypothesis of zero, based on the simple standard error of the year-by-year coefficient estimates. b The t-statistic is calculated versus a null hypothesis of – 1, based on the simple standard error of the year-by-year coefficient estimates. |
Required:
Describe the derivation of Ohlson’s Unbiased Accounting Model and comment
on the significance of equations (1) and (2) for this derivation.
[20 marks]
How does Ohlson’s Unbiased Accounting Model compare with the Simple Earnings Capitalisation Model?
[5 marks]
How does Hand and Landsman’s regression model in (5) relate to Ohlson’s Unbiased Accounting Model in (4)? Why have Hand and Landsman chosen
Ohlson’s Unbiased Accounting Model to investigate the pricing of dividends?
[10 marks]
Interpret the empirical findings in Table 4. What explanation do Hand and Landsman offer for the significantly positive slope coefficient on dividends, DIV?
[15 marks]
Total 50 marks
Question 4
Huang Teoh & Zhang (2014) examine whether and when US firms manage the tone of words in earnings press releases.
Explain how (and why) Huang Teoh & Zhang (2014) separate tone into a discretionary and a non-discretionary element.
[17 marks]
What are the findings in Huang Teoh & Zhang (2014) regarding whether and when firms manage the tone of words in the earnings press release?
[17 marks]
According to Huang Teoh & Zhang (2014) how do US equity investors react to tone management in the earnings press release?
[16 marks]
Total 50 marks
2022-01-21