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ACCT 332 - Accounting Thought and Practice The Measurement Perspective and Applications
ACCT 332 - Accounting Thought and Practice The Measurement Perspective and Applications
Information Perspective:
Measurement Perspective
Low R2
Based on R-square
Auditor Liability
Under info perspective, all we need to do is provide the information. Full disclosure is key, and it
doesnt matter how we report it so long as the information is provided.
Constant sample should be healthier firms, as they are firms which have survived from 1978 to 1996.
a2
Non-earnings information
Shows potential to earn abnormal returns after earnings announcements, reflecting market inefficiency
Sloan (1996)
E.g. Company A
has Cash Sales of
100, COGS 50
Cash +100, Sales
Revenue +100,
COGS +50,
Inventory -50
Net Income 50 =
Accruals of -50 +
Cash Flows of 100
Sloan created a
trading strategy
where he, for the
same amount of
overall net income,
bought firms with
the most CF, and
shorted firms with
the most accruals,
and found that he
could obtain
abnormal earnings.
Net Income 50 =
Accruals of 50 +
Cash Flows of 0
Even though net income is the same for the two examples, because cash flows are more persistent, the rational choice
should be to invest in the firm in B. However, Sloan found that investors did not differentiate between them.
Behavioural finance
Start with the value that is in the balance sheet and then add the value
that is not recognized
The basic idea: firms create extra !value" when they generate a return
on assets that is greater than their cost of capital (i.e. have positive
abnormal earnings)
In the past, when book value was largely based on historical cost and therefore lower, there were higher abnormal earnings
Now, as book values are largely based on current values and therefore higher, there are lower abnormal earnings
Value-in-Use
Relevance: high
Reliability:
Error and possible bias in estimating inputs
Management may change the intended use of the
assets
Purchased intangibles
Self-developed intangibles
Fair Value
Definition
Relevant
Many financial instruments traded on well-working
markets reasonable reliability
Trading
- Fair valued, gains/losses in net income
Available-for-sale
- Fair valued, gains/losses in OCI
Summary
Group Questions