Dispersion in industry price changes and the relative association between alternative income measures and security returns; Professional adaptation

A study assesses whether the incremental information content of current cost (CC) income and constant dollar (CD) income is time-period specific. Based on work by Lim and Sunder (1990), it is predicted that CC (CD) income is more likely to exhibit incremental information content over CD (CC) income...

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Bibliographic Details
Published in:Journal of accounting, auditing & finance auditing & finance, 1995-04, Vol.10 (2), p.365
Main Authors: Linsmeier, Thomas J, Lobo, Gerald J, Kanaan, George K
Format: Article
Language:English
Subjects:
Accounting procedures
Earnings
Economic models
FASB statements
Financial reporting
Hypotheses
Regression analysis
Stock prices
Studies
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Summary:A study assesses whether the incremental information content of current cost (CC) income and constant dollar (CD) income is time-period specific. Based on work by Lim and Sunder (1990), it is predicted that CC (CD) income is more likely to exhibit incremental information content over CD (CC) income when the dispersion in annual price changes across industries is large (small). Evidence provided using FASB Statement 33 data is consistent with these predictions. That is, CD (CC) income is shown to exhibit incremental information content over CC (CD) income in the years 1980 and 1983 (1981 and 1982). This analysis is then extended to a disclosure environment that includes historical cost (HC) income, and it is found that CD (CC) income also has incremental information content over HC income in those same years - 1980 and 1983 (1981 and 1982). Thus, by identifying time periods when either CC income or CD income is the preferred income measure, the analysis is also able to provide sample-wide evidence that accounting data adjusted for changing prices of productive assets provide incremental information over HC income.
ISSN:0148-558X
2160-4061