Risk, Information, and the Effects of Special Accounting Items on Capital Market Equilibrium

Abstract

Equilibrium prices of firms' ownership shares are dependent upon assessed distribution functions of the dollar returns per share. Such distribution functions are, in turn, dependent upon the available information on firms' production-investment (operating) and financing decisions. This dependency provides the basis for the many available studies (e.g., Ball and Brown [1968] and Gonedes [1974b]) on the kinds of things that reflect new information pertinent to establishing firms' equilibrium values. This report provides evidence on another potential source of information, namely, the annual special accounting items disclosed by firms in their annual reports and filings with the Securities and Exchange Commission (S.E.C.). The disclosure of such items has attracted the attention of both the S.E.C. and the accounting profession. One of the reasons motivating this attention turns on the alleged effects of special items on capital market agents' assessments. The evidence presented below provides some insights into the extent to which that motivation for additional disclosure regulation-by either the S.E.C. or the accounting profession-is consistent with available evidence. In addition to empirical results, this report provides a new perspective on testing for information effects. To date, analyses of the effects of potential sources of information on capital market equilibrium have assumed that the equilibrium prices of all types of securities are affected in the same way by a