Gerald A. Feltham

Bio: Gerald A. Feltham is an academic researcher from University of British Columbia. The author has contributed to research in topics: Accounting information system & Valuation (finance). The author has an hindex of 28, co-authored 70 publications receiving 7107 citations. Previous affiliations of Gerald A. Feltham include Aarhus University & Odense University.

Valuation and Clean Surplus Accounting for Operating and Financial Activities

Abstract: . This paper models the relation between a firm's market value and accounting data concerning operating and financial activities. Book value equals market value for financial activities, but they can differ for operating activities. Market value is assumed to equal the net present value of expected future dividends, and is shown, under clean surplus accounting, to also equal book value plus the net present value of expected future abnormal earnings (which equals accounting earnings minus an interest charge on opening book value). A linear model specifies the dynamics of an information set that includes book value and abnormal earnings for operating activities. Model parameters represent persistence of abnormal earnings, growth, and accounting conservatism. The model is sufficiently simple to permit derivation of closed form expressions relating market value to accounting data and other information. Three kinds of analyses develop from the model. The first set deals with value as it relates to anticipated realizations of accounting data. The second set examines in precise terms how value depends on contemporaneous realizations of accounting data. The third set examines asymptotic relations comparing market value to earnings and book values, and how earnings relate to beginning of period book values. The paper demonstrates that in all three sets of analyses the conclusions hinge on the extent to which the accounting is conservative as opposed to unbiased. Further, the absence/presence of growth in operating activities is relevant if, and only if, the accounting is conservative. Resume. Les auteurs presentent sous forme de modele la relation entre la valeur marchande d'une entreprise et les donnees comptables relatives a ses activites d'exploitation et ses activites financieres. La valeur comptable est egale a la valeur marchande lorsqu'il s'agit d'activites financieres, mais elle peut etre differente dans le cas des activites d'exploitation. Les auteurs supposent que la valeur marchande est egale a la valeur actualisee nette des dividendes futurs prevus et demontrent que, lorsqu'on applique la methode du resultat global, la valeur marchande est aussi egale a la valeur comptable additionnee de la valeur actualisee nette des benefices extraordinaires futurs prevus (qui sont egaux aux benefices comptables diminues de frais d'interet implicites sur la valeur comptable nette). Un modele lineaire precise la dynamique d'un ensemble de donnees, incluant la valeur comptable et les benefices extraordinaires, relatives aux activites d'exploitation. Les parametres du modele traduisent la persistance des benefices extraordinaires, la croissance et le principe de prudence. Le modele est suffisamment simple pour permettre de deriver des expressions fermees qui mettent en relation la valeur marchande et les donnees comptables et autres. Du modele se degagent trois formes d'analyses. La premiere porte sur la valeur, dans sa relation avec la materialisation anticipee des donnees comptables. La deuxieme porte sur l'examen precis du lien entre la valeur et la materialisation actuelle des donnees comptables. Enfin, la troisieme porte sur l'examen des relations asymptotiques a travers lesquelles se comparent la valeur marchande, d'une part, et les benefices et la valeur comptable, d'autre part, ainsi que sur la facon dont les benefices se rattachent aux valeurs comptables du debut de l'exercice. Les auteurs etablissent que dans les trois formes d'analyses, les conclusions s'orientent vers la mesure dans laquelle, dans le domaine comptable, l'accent est mis sur la prudence par opposition a l'impartialite. En outre, l'absence ou la presence de croissance dans les activites d'exploitation n'est pertinente que si et seulement si le principe de prudence est applique a la comptabilite.

Performance Measure Congruity and Diversity in Multi-Task Principal/Agent Relations

Abstract: SYNOPSIS AND INTRODUCTION: Accounting numbers are frequently used in evaluating management performance, and performance evaluation is an important ingredient in motivating managers. Three significant factors generally create difficulties in developing performance measures for a given manager. First, the actions and strategies implemented by the manager are not observable directly, so the manager cannot be compensated directly for his input into the firm. Second, the full consequences of the manager's actions are not observable, in large part because the impact of those actions extend beyond his subunit of the firm and beyond his time as managerof that subunit. Third, uncontrollable events influence the consequences that are observed. The agency theory literature has explored extensively the implications of the nonobservability of the manager's actions and the fact that performance measures are influenced by unobservable, uncontrollable events. However, this literature has given only limited attention to the fact that performance measures frequently are incomplete or imperfect representations of the economic consequences of the manager's actions.1 On the other hand, discussions of performance evaluation in management accounting texts often raise issues regarding the incompleteness and imperfectness of the accounting numbers that are used as performance measures. For example,

Uncertainty resolution and the theory of depreciation measurement

Abstract: This paper examines how a firm's depreciation policy influences the relation between the resulting accounting numbers and the market value of the firm's equity.' Traditional financial accounting theory conceptualizes depreciation measurement as a cost allocation procedure that matches an investment's cost with the flow of benefits it produces. As has long been recognized, in a setting with certain future cash flows and zero net present value (NPV) investments, investment costs can be allocated using standard present value techniques to yield, at each date, book values equal to market values, and accounting earnings equal to economic earnings.2 The resulting book value and accounting earnings numbers are such that, for all periods, the book rate of return equals the cost of

Information Asymmetry, Corporate Disclosure and the Capital Markets: A Review of the Empirical Disclosure Literature

Abstract: Corporate disclosure is critical for the functioning of an efficient capital market. Firms provide disclosure through regulated financial reports, including the financial statements, footnotes, management discussion and analysis, and other regulatory filings. In addition, some firms engage in voluntary communication, such as management forecasts, analysts? presentations and conference calls, press releases, internet sites, and other corporate reports. Finally, there are disclosures about firms by information intermediaries, such as financial analysts, industry experts, and the financial press.

Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*

Abstract: . This study investigates firms subject to accounting enforcement actions by the Securities and Exchange Commission for alleged violations of Generally Accepted Accounting Principles. We investigate: (i) the extent to which the alleged earnings manipulations can be explained by extant earnings management hypotheses; (ii) the relation between earnings manipulations and weaknesses in firms' internal governance structures; and (iii) the capital market consequences experienced by firms when the alleged earnings manipulations are made public. We find that an important motivation for earnings manipulation is the desire to attract external financing at low cost. We show that this motivation remains significant after controlling for contracting motives proposed in the academic literature. We also find that firms manipulating earnings are: (i) more likely to have boards of directors dominated by management; (ii) more likely to have a Chief Executive Officer who simultaneously serves as Chairman of the Board; (iii) more likely to have a Chief Executive Officer who is also the firm's founder, (iv) less likely to have an audit committee; and (v) less likely to have an outside blockholder. Finally, we document that firms manipulating earnings experience significant increases in their costs of capital when the manipulations are made public. Resume. Les auteurs analysent les entreprises assujetties aux mesures d'execution prises par la Securities and Exchange Commission dans les cas de presomption de transgression des principes comptables generalement reconnus. Ils s'interessent aux aspects suivants de la question: i) la mesure dans laquelle les presomptions de manipulations des benefices peuvent etre expliquees par les hypotheses existantes de gestion des benefices; ii) la relation entre les manipulations de benefices et les faiblesses des structures de regie interne des entreprises; et iii) la reaction du marche financier a l'endroit des entreprises au sujet desquelles les presomptions de manipulation des benefices sont rendues publiques. Les auteurs constatent qu'un incitatif majeur a la manipulation des benefices est le desir d'obtenir du financement externe a moindre cout. Ils demontrent que cet incitatif demeure important meme apres le controle des motifs contractuels que mettent de l'avant les travaux theoriques. Ils constatent egalement que les entreprises qui manipulent les benefices sont: i) davantage susceptibles d'avoir des conseils d'administration domines par la direction; ii) davantage susceptibles d'avoir un chef de la direction qui joue simultanement le role de president du conseil; iii) davantage susceptibles d'avoir un chef de la direction qui est egalement le fondateur de l'entreprise; iv) moins susceptibles d'avoir un comite de verification; et v) moins susceptibles d'avoir un bloc de titres detenus par un actionnaire exterieur. Enfin, les auteurs etablissent le fait que le cout du capital, pour les entreprises qui manipulent les benefices, enregistre des hausses appreciables lorsque ces manipulations sont rendues publiques.

Disclosure level and the cost of equity capital

Abstract: The effect of disclosure level on the cost of equity capital is a matter of considerable interest and importance to the financial reporting community However, the association between disclosure level and cost of equity capital is not well established and has been difficult to quantify In this paper I examine the association between disclosure level and the cost of equity capital by regressing firm-specific estimates of cost of equity capital on market beta, firm size and a self-constructed measure of disclosure level My measure of disclosure level is based on the amount of voluntary disclosure provided in the 1990 annual reports of a sample of 122 manufacturing firms For firms that attract a low analyst following, the results indicate that greater disclosure is associated with a lower cost of equity capital The magnitude of the effect is such that a one-unit difference in the disclosure measure is associated with a difference of approximately twenty-eight basis points in the cost of equity capital, after controlling for market beta and firm size For firms with a high analyst following, however, I find no evidence of an association between my measure of disclosure level and cost of equity capital perhaps because the disclosure measure is limited to the annual report and accordingly may not provide a powerful proxy for overall disclosure level when analysts play a significant role in the communication process