Stock market reactions to activity-based

costing adoptions
Lawrence A. Gordon
, Katherine J. Silvester
Department of Accounting, Room 4471, Robert H. Smith School of Business, University of
Maryland ± College Park, College Park, MD 20742, USA
Lally School of Management and Technology, Rensselaer Polytechnic Institute, USA
The use of activity-based costing (ABC) has been steadily, if not rapidly, spreading
on an international level. This fact notwithstanding, the economic bene®t associated
with adopting ABC is suspect, at best. In an e€ort to shed additional light on this
apparent dilemma, this paper empirically investigates the stock market e€ects of an-
nouncing the adoption of an ABC system. The research methodology includes both
parametric and non-parametric tests for excess market returns from a seemingly unre-
lated regressions model with a matched pairs sample of ®rms. The analysis indicates that
the installation of an ABC system in the United States is not associated with a signi-
®cant (either positive or negative) stock market reaction. Ó 1999 Elsevier Science Inc.
All rights reserved.
1. Introduction
Ever since the 1980s, it has been widely argued that cost management sys-
tems are in need of major change (e.g., Johnson and Kaplan, 1987, pp. 1±18).
Journal of Accounting and Public Policy 18 (1999) 229±251
The authors wish to thank Wolfgang Bessler, Kwok Leung, Eric Noreen, Albert Paulson, Steve
Loeb, Kimberly Smith, Krishnamoorthy Surysekar, Jerold Zimmerman, and the participants at the
research workshops of The University of Essex, London Business School, University of
Manchester, The University of Toronto, and Rensselaer Polytechnic Institute for their comments
on earlier drafts of this paper.
Corresponding author. Tel.: +1-301-405-2255; fax: +1-301-405-0359; e-mail: lgor-
Ernst & Young Alumni Professor of Managerial Accounting.
0278-4254/99/$ ± see front matter Ó 1999 Elsevier Science Inc. All rights reserved.
PII: S0278- 4254( 99) 00009- 5
One change, which has received widespread attention, concerns the allocation
of indirect costs via activity-based costing (ABC). In fact, ABC has become an
issue of increasing and fundamental concern to numerous researchers and
practitioners around the world. In response to this concern, numerous ®rms
have either implemented, or are considering implementing, ABC.
For example, a 1997 survey by the Cost Management Group (1998, p. 1) of
the Institute of Management Accountants notes that 39% of its member or-
ganizations have ``at least approved ABC implementation.'' A survey of UK
®rms (Innes and Mitchell, 1995, p. 141) shows that almost 19.5% of the re-
spondents were using ABC and that 27.1% were considering its adoption. A
survey of 134 Finnish manufacturing units (Lukka and Granlund, 1996, p. 17)
found that 5% were in the process of implementing ABC and another 24% were
considering its use. Although ABC has only been sparsely used by Japanese
®rms in the past, there are many ®rms in Japan that are seriously considering
introducing ABC systems, with a particular emphasis on activity-based man-
agement concepts (Sakurai, 1995, p. 26). Hence, while US companies may have
taken the initial lead, there is clearly a signi®cant international movement to-
ward adopting ABC.
Despite this movement toward adopting ABC, its bene®ts have been as-
serted largely through anecdotal, self-reported survey data, and case study
evidence (see the next section). Accordingly, it is not surprising that many
researchers question the inherent value of an ABC system. For example,
Bromwich and Bhimani (1989, p. 3) note that the evidence does not suggest
that the adoption of ABC will improve pro®ts, while Dopuch (1993, p. 617)
observes that the payo€ from an ABC system might not justify its imple-
mentation costs. Shields (1995, pp. 159±161) shows that the bene®ts derived
from implementing and using ABC vary greatly among ®rms and depend upon
several behavioral and organizational dimensions. Innes and Mitchell (1995,
p. 150) argue that it may be dicult to separate the real bene®ts of ABC from
the claimed bene®ts, since those claiming the bene®ts are often the individuals
responsible for the adoption and development of the ABC systems within their
own companies (i.e., a vested interest issue is present). Some have even gone so
far as to challenge the basic logic underlying the use of ABC (e.g., Piper and
Walley, 1991, p. 42; Piper and Walley, 1990, p. 54) and ABC's relevance to
operational decisions (Johnson, 1992, p. 141). In a recent survey-based em-
pirical study by Foster and Swenson (1997, p. 136), it was concluded that the
way ABC's success is measured has an e€ect on studies regarding the derived
bene®ts of ABC.
As indicated by the above, we seem to be on the horns of the following
dilemma. On the one hand, the number of ®rms adopting ABC seems to be
spreading rapidly into a multitude of countries. On the other hand, there is
good reason to doubt whether the adoption of an ABC system results in an
economic bene®t to a ®rm. In fact, mounting evidence suggests that many of
230 L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251
the ABC systems implemented in the late 1980s and early 1990s were failures
(e.g., Roberts and Silvester, 1996, p. 23; Malmi, 1997, p. 460). Accordingly, the
purpose of our study is to empirically investigate the performance e€ects as-
sociated with the adoption of an ABC system. Our study di€ers signi®cantly,
however, from other work published in the area in that the stock market e€ect
of announcing the installation of an ABC system is assessed. Thus, our mea-
sure of success is based on publicly available stock market data. Further, the
identi®cation of when a ®rm introduced ABC is also based on publicly avail-
able information.
The results of our study indicate that, in general, the announcement of the
adoption of an ABC system among US-based ®rms did not have a signi®cant
(either positive or negative) stock market e€ect. These ®ndings are particularly
relevant to organizations that are considering, but have not yet implemented,
an ABC system.
The remainder of our paper will proceed as follows. In Section 2, the main
hypothesis of the empirical study is developed. Section 3 describes the empirical
study conducted to test this hypothesis, including methodological concerns.
The results and implications of the study are discussed in Section 4 of the
paper. Section 5 o€ers some concluding comments.
2. Hypothesis development
Conventional costing systems often allocate indirect costs using a single
base, with direct labor hours or direct labor dollars being the most common
choice of an allocation base (Gordon, 1998, p. 63). In contrast, ABC systems
utilize the equivalent of a multiple base approach to allocating indirect costs
via a two-stage process. In stage 1, the signi®cant activities that cause the or-
ganization to incur indirect costs are identi®ed and the costs of these activities
are assigned to homogeneous cost pools. In stage 2, a quanti®able cost driver is
identi®ed for each activity, which is then used to allocate the costs of the given
activity to the organization's products (or any other cost objective) (Gordon,
1998, p. 137). Where the number of activities are numerous, an optimal (on a
cost/bene®t basis) number of cost drivers may be derived, as discussed by
Babad and Balachandran (1993, p. 565). Other characteristics of a typical ABC
system include the fact that the costs of many activities are associated with
non-volume related cost drivers, and non-manufacturing indirect costs are
often included in the allocation scheme for deriving product costs (for mana-
gerial rather than ®nancial reporting purposes).
Conceptually, an ABC system could aid in shifting indirect costs to direct cost categories (where
the cost object is a product's cost by uncovering previously unidenti®ed relationships between the
factors of production and the products being produced).
L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251 231
ABC systems have many potential bene®ts, including: (1) helping to identify
non-value added activities, (2) improving the ability of managers to make
pricing, production, and investment decisions through the provision of more
accurate product and process costs, and (3) improving the integration of the
strategic and operating/production processes of the organization (Gordon,
1998, p. 142). Case studies supporting these claimed bene®ts are plentiful (e.g.,
Bhimani and Pigott, 1992; Cooper et al., 1992a,b; Cooper and Turney, 1989;
Kaplan, 1990; Innes and Mitchell, 1990, 1991; Turney and Anderson, 1989).
Despite the above, empirical evidence on the value of ABC is limited. Foster
and Gupta (1990, p. 327), for example, found that non-volume cost drivers add
little explanatory power to the behavior of indirect costs,
while Banker and
Johnston (1993, p. 587) show both volume-based and operations-based cost
drivers to be statistically signi®cant within the US airline industry. Spicer
(1990, p. 143) notes that ``we do not as yet have any real systematic evidence
that relate the use of ABC systems to improved internal and external perfor-
mance measures.'' Bromwich and Bhimani (1989, p. 3), while noting that ``. . .
activity costing changes product costing substantially'', also argue that there
``is little to suggest that it enhances pro®ts.'' Noreen (1991, p. 165) also points
out that ``. . . the widespread and rapid adoption of ABC systems is an inter-
esting phenomenon in and of itself ± particularly since it is not obvious that on
balance ABC systems as implemented provide greater bene®ts relative to costs
than any other possible costing systems.'' Shields (1995, p. 159), in a survey of
143 ®rms, found a wide variation across ®rms in terms of the bene®ts derived
from ABC. Innes and Mitchell (1995, p. 150), while noting that ``those
adopting ABC considered its application had been successful,'' pointed out
that the ``survey respondents had a vested interest in their ®rm's ABC appli-
Innes and Mitchell (1995, p. 151) argue that there is a need for more em-
pirical (and objective) research on the topic. Young and Selto (1991, p. 296),
Anderson (1995, p. 48), and Shields (1995, p. 154) also call for further empirical
research on the performance e€ects of ABC. Shank (1989, p. 47) points out
that there is nothing conceptually new in activity-based accounting. Hence, the
question regarding the net value of ABC remains unresolved, in large part due
to the limited systematic and objective empirical evidence regarding its per-
formance e€ects. Nevertheless, as noted earlier, the use of ABC systems is
steadily, if not rapidly, spreading on an international level.
In constructing an objective empirical analysis of the net bene®ts of an ABC
implementation, the methodology should be based upon a conceptual frame-
Although only volume-related cost drivers were signi®cant in their study, Foster and Gupta
(1990, pp. 335,336) warn against generalizing from their results due to data limitations (i.e., all of
their data were from 37 facilities of a single electronics company).
232 L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251
work that links such systems to organizational performance. The economic
analysis approach of Gonedes and Dopuch (1979, pp. 386±391) to accounting
techniques provides such a framework. Their (Gonedes and Dopuch, 1979,
p. 390) basic argument is that ``accounting techniques are, in general, among
the determinants of accounting numbers' systematic properties, both because
the techniques constitute accounting numbers' computational speci®cations
and because there may be connections between the techniques and manage-
ments' operating and ®nancing decisions.'' Accordingly, to the extent that
accounting techniques, of which ABC is one, a€ect the observed values of
accounting numbers and the ®rm's decision-making processes, such techniques
can potentially have an e€ect on the ®rm's value.
A pictorial representation
of these e€ects is provided in Fig. 1.
Fig. 1. Accounting techniques and ®rm value.
In a related study, Nair (1979, pp. 239±241) has empirically shown that accounting techniques
can have an e€ect on the relative ranking of economic investment models.
L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251 233
As illustrated in Fig. 1, accounting techniques do not solely a€ect the ob-
served values of accounting numbers. Accounting techniques can also a€ect the
cash ¯ows and, thus, the net present value (NPV) of a ®rm via their interactive
e€ects with the various operating, investment and ®nancing decisions of the
As noted earlier, the adoption of an ABC system may materially change
product costs, which in turn may cause changes in a ®rm's decisions related to
pricing, project or product selection, and process improvement.
Therefore, to
the extent that ABC reduces the noise in the information environment and
reveals potential areas for operational and productive eciencies, a ®rm has
the opportunity to eliminate waste and, thereby, to reduce the economic costs
of production. Ceteris paribus, cash out¯ow can be reduced for a given level of
production. Such changes could yield improved ®rm performance and, thus,
increased ®rm value.
Of course, the improved performance (value) argument noted above takes
the position of ABC proponents (e.g., Kaplan, 1992, pp. 58±60). In contrast,
opponents argue that ABC is one of those accounting techniques that will have
either no performance e€ects (i.e., the cost of the system implementation will be
o€set by the cost savings derived from the improved information system) or, in
the worst case scenario, have a negative e€ect due to the additional costs of
implementing the technique (e.g., Bromwich and Bhimani, 1989, p. 3; Dopuch,
1993, p. 617). At the ®rm level, these contrasting views regarding the expected
bene®ts from an ABC implementation could be objectively investigated by
testing the e€ects of adopting an ABC system on the security returns of the
®rm. That is, if a ®rm's adoption of an ABC system could be publicly identi-
®ed, the following general null hypothesis could then be tested.
Hypothesis H
: The adoption of an ABC system is not associated with a se-
curity market reaction.
3. Empirical study
3.1. Sample identi®cation
In order to test the above hypothesis, it is necessary to identify a sample of
®rms that have publicly announced the adoption of ABC. Unfortunately, as a
general course of business, ®rms do not make public announcements about the
One of the primary alleged bene®ts of ABC is its explicit di€erentiation of process/activity costs.
Such recognition of the cost of production processes can play a crucial role in the elimination of
non-value added activities or ineciencies (Kelly, 1991, p. 43).
234 L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251
adoption of internal cost accounting methods. A search of standard database
services con®rmed this fact. However, one notable exception was a Business
Week article entitled ``The Productivity Paradox'' by Port et al. (6 June 1988,
pp. 100±114). The major focus of Port et al., 1988 was on explaining the reason
why investments that were intended to increase productivity in US corpora-
tions do not appear to be performing as well as expected. Port et al. (1988,
p. 100) argued that the more corporations try to become productive, the more
dicult it is for them to achieve such productivity. The key explanation o€ered
for this paradox was that conventional cost accounting systems provide mis-
leading information (Port et al., 1988, p. 108). Although the article referred to
many cost and operations management programs, it emphasized the virtues of
new cost management systems, with speci®c reference to ABC, to capture and
facilitate the bene®ts of investments in new technologies and productivity
programs (Port et al., 1988, p. 108, 112). The article went on to mention 16
European and US ®rms that either had already adopted or were planning to
adopt ABC. Of the 16 ®rms, 14 had already adopted an ABC system, one was
utilizing improved cost management techniques (which included ABC), and the
other hoped to adopt ABC (Port et al., 1988, p. 108).
3.2. Link between capital markets and ABC announcements
Theoretically, the ability of an announcement to in¯uence market prices is
heavily dependent upon the assumption that the news content is both infor-
mative and generally available to, and understood by, the market. Although
there are admittedly no absolute distinctions among the various levels of
market eciency, the inferences drawn regarding the information content of a
Business Week article seem to depend upon an implicit assumption of a semi-
strong type of market eciency (i.e., that the market eciently impounds the
information content of all obviously publicly available information).
Market power of non-traditional announcements. Market eciency should be
de®ned with respect to a speci®c information set. In this regard, Foster (1979,
p. 271) states that ``there is no clear-cut distinction between `publicly available'
and `non-publicly available' information sets.'' Although public announce-
ments in periodicals such as The Wall Street Journal have been stressed in most
market studies, this pervasive dependence upon such sources does not preclude
the use of public announcements from other sources. Indeed, previous research
evidence does identify signi®cant e€ects of non-traditional periodicals upon
market forces. In a study of the impact of Abraham Brilo€'s e€ect upon the
stock market, Foster (1979) utilized articles in Barron's, Commercial and Fi-
nancial Chronicle, and the New York Magazine to isolate an immediate and
permanent decline of approximately 8% in the market price of the a€ected
stocks. A more recent study (Dos Santos et al., 1993), concentrates upon the
market impact of announcements concerning investments in new information
L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251 235
technology. The Dos Santos et al. (1993) study isolates a positive and signi®-
cant market reaction to announcements concerning investments in innovative
technologies, by utilizing both traditional sources (The Wall Street Journal and
PR Newswire and non-traditional sources (American Banker, American Metal
Markets, Minneapolis Star, and Greenville News).
Interestingly, the Securities and Exchange Commission (SEC), itself, deems
it necessary to closely monitor the timing and e€ect of the release of such
periodicals because of their impact upon the market. Under Section 10(b) of
the US Securities Exchange Act of 1934 (US Congress, 1934 ), the SEC has
historically sought to (among other goals) ``guarantee that no single group of
traders enjoys unfair informational advantages over the rest of the market''
(Harpaz, 1985, p. 1036). Although originally targeted at scalping by journal-
the SEC has been fairly aggressive in attempting to extend the scope of
Section 10(b) to include a general duty by ®nancial reporters to the readership
(Harpaz, 1985, pp. 1035±1038).
Business Week has a policy that precludes selling advance copies of their
periodical before the ocial release date for each issue (see footnote 9). This
policy regarding no early releases, combined with SEC's timing concerns, prior
impact of similar periodical articles, and our veri®cation that the ABC adop-
tions were not previously revealed through another news medium, provide
substantiation that the Business Week article released new and potentially
valuable information to the market on the day of the announcement.
Analysis of reactions in the information market. Intuitively, it seems rea-
sonable to argue that movements in security markets should be a re¯ection of
the activity in the information markets. Indeed, as noted in Foster (1979, pp.
273±274), the existence of ``superior insight'' in analyzing public information
does not preclude an ecient market hypothesis. Therefore, one would expect
that the Business Week article (if informative to ®nancial markets) would also
have generated an immediate and corresponding amount of interest in the
general manufacturing and business community. The novelty of this article and
its impact have also been noted by Campi (1992, p. 5).
Furthermore, as noted by Beaver (1981, p. 32), ``...empirical studies of
change in accounting methods are viewed as testing market eciency with
respect to more information than merely the knowledge that a change took
place.'' Therefore, to the extent that the market did not already fully under-
stand the implications of the adoption of ABC, the extensive Business Week
article would have conveyed valuable information to the market. Accordingly,
it is crucial to emphasize that the Business Week article by Port et al. (1988) not
Scalping is generally considered to occur when a journalist uses private advance information
about the content of forthcoming articles to personally take advantageous positions in the stock
236 L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251
only revealed the ABC adopting ®rms but also provided substantial discussion
regarding the initiation, utilization, and purported bene®ts of such costing
innovations. Ceteris paribus, it seems reasonable to argue that the market
impact of this extensive and substantive Business Week article concerning ABC
may actually be stronger than the announcements found in the traditionally
utilized release formats (e.g., The Wall Street Journal, corporate proxy state-
ments, etc.). In addition, the Business Week article reports on the adoption of
ABC by ®rms during the period when the costing methodology was receiving a
great deal of attention. Hence, if the market was ever to be sensitive to the
adoption of ABC by ®rms, the mid-to-late 1980s would have surely been the
time period for this to happen.
3.3. Validity of market study to assess ABC performance
In arguing the legitimacy and usefulness of the case study methodology,
many researchers have rejected the market methodology for ABC analysis
(e.g., Kaplan et al., 1990, pp. 30±32). However, rejection of this technique is (1)
a rejection of the market eciency hypothesis and prior similar research (e.g.,
Foster, 1979, pp. 271±273; Dos Santos et al., 1993, pp. 1±4) and/or (2) a
statement that the market and its analysts and investors are dismissing, not
interested in, or are ignorant regarding potential improvements that ¯ow from
new management techniques, such as ABC. Again, this latter position, in es-
sence, takes the stance of rejecting the market eciency hypothesis. An alter-
nate form of our same argument would be to consider whether the market, its
analysts, and investors are ignoring ABC and not translating potential pro®t
enhancements to price increases in the stocks of the innovative adopting ®rms.
This position also supports recent anecdotal and case evidence regarding the
prevalence of ABC implementation failures (Roberts and Silvester, 1996, p. 23;
Cooper et al., 1992b).
3.4. Matching procedure
Most empirical event studies achieve a reasonable level of control by virtue
of the fact that multiple announcements are made during di€erent time periods
for di€erent ®rms. However, our study has only a single announcement time
period for all ®rms (i.e., the Port et al., 1988 article released on 30 May 1988).
Therefore, to strengthen the reliability of the statistical analysis of the event, a
matched pairs analysis was also undertaken (Larcker, 1983, pp. 12±14; Haka et
al., 1985, pp. 665,666). Accordingly, the announcing ®rms were match-paired
with a sample of nonannouncing ®rms, with the former being referred to as the
experimental ®rms and the latter as the control ®rms.
Firms were matched on the Standard Industrial Code (SIC) from the 1988
Compustat Data Tapes to control for industry e€ects and on Total Net Assets
L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251 237
to control for size.
The matching procedure consisted of choosing the control
®rm within the same 3-digit or 4-digit SIC code as the experimental ®rm with
the closest match on Total Net Assets. There were actually 16 ®rms named in
the Port et al. (1988, pp. 108, 112) article. However, four of these ®rms were not
contained in the 1988 and 1989 CRSP tapes for the time period around the
event under consideration. Of the 12 usable experimental ®rms, matches were
obtainable for 10 of the ®rms.
A list of both the experimental ®rms and
matched control ®rms is provided in Table 1. Also included in Table 1 is a
statistical assessment of the quality of the matches. Based upon a Wilcoxon
Signed Rank Test, the experimental and control groups of ®rms do not di€er
signi®cantly (at a = 0:10, two-tailed) when matched on Total Net Assets as a
control for size.
3.5. Event and estimation period
The release date of the Port et al. (1988) article, for purposes of our study,
was Monday, 30 May 1988 (i.e., the day the 6 June 1988 issue of Business Week
was released to the general public via placement on the news stands).
The 31st
of May is the ®rst trading day following the release of Port et al. (1988) an-
nouncement on the 30 May holiday. Hence, we refer to 30 May as the release
date and 31 May as the announcement date. Since Business Week was released
to the general news stands while the market was closed on 30 May, the market
actually had two days (both 30 and 31 May) to assess the informational
content before impounding the value of the information in stock prices on 31
This Business Week issue may also have been released to a limited number
of selected news stands on Friday, 27 May 1988 (see footnote 9). To control for
this possibility, Friday, 27 May 1988 is also included in the event period.
Therefore, given the nature of the Business Week release, the event period
was constructed to contain four separate and consecutive trading days (i.e., one
trading day before, the trading day of the announcement, and two trading days
As an additional control, a review of the 1988 Wall Street Journal Index was made to check for
announcements concerning the ®rms. The review indicated that no sales or earnings announce-
ments were made by any of the experimental or control ®rms during the event period (27 May
1988±2 June 1988)
Of the 12 experimental ®rms, nine were matched on a 4-digit SIC code, one was matched on a 3-
digit SIC code, and two ®rms were unable to be matched. One unmatched ®rm did not have a
match at the 3-digit SIC code level, and the 2-digit SIC code was deemed inadequate as an industry
match. The second unmatched ®rm did not have a match even at a 2-digit level. In general, the size
of these two unmatched ®rms (as measured by Total Net Assets) far over-shadowed the size of any
potential industry-matched control ®rm.
This information was obtained from Business Week.
238 L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251
after the announcement): 27 May, 31 May, 1 June, and 2 June 1988 (28 and 29
May were weekend days, and 30 May was Memorial Day). The estimation
period used in the study contains 271 daily returns and covers the period 2 May
1988±31 May 1989.
Our study utilizes a forward-looking estimation period with the event period placed at the
beginning of the estimation period. Such a design allows us to abstract from the chaotic e€ects of
the 19 October 1987 stock market crash when the Dow dropped 508 points (22.6%) in a single day.
This forward-looking approach is not new, and it has previously been utilized in the SUR-based
event study literature (Binder, 1985b, p. 178).
Table 1
Experimental and control ®rms
Experimental ®rms Control ®rms
Firm number
and name
Total net
Firm number
and name
Total net
($000) ($000)
E1: Westing-
house Corp.
3600 16,937,305 C1: Philips
3600 26,398,008
E2: Eaton Corp. 3714 3,033,800 C2: Dana
3714 4,786,379
E3: Northern
3661 5,878,199 C3: Harris
3663 1,643,719
E4: Northrop
3721 3,139,200 C4: Grumman
3721 2,565,984
E5: Unisys
3570 11,534,602 C5: Digital
3570 10,111,500
E6: General
Motors Corp.
3711 164,063,000 C6: Ford
Motor Corp.
3711 143,366,000
E7: United
3724 12,748,301 C7: Allied
Signal Corp.
3724 10,005,000
E8: Parker-
Hanni®n Corp.
3728 1,741,802 C8: Sunstrand
3728 1,567,030
E9: General
Dynamics Corp.
3721 6,118,098 C9: McDonnell
Douglas Corp.
3721 11,885,000
E10: Honeywell 3882 5,089,098 C10: Johnson
3822 2,013,099
Mean di€erence (the mean di€erences were computed by subtracting the total net assets of the
control ®rm from the total net assets of the experimental ®rm; the ®gures for the total net assets
were obtained from the 1988 CRSP tapes and represent the end-of-year numbers for that year).
Mean di€erence in the total net assets: $ 1,594,149, median di€erence in the total net assets:
$ 2,909,550, Wilcoxon Signed Rank Statistic: T=34, p-value of the two-tailed Wilcoxon statistic:
L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251 239
3.6. Validation of information release date
One of the key issues in evaluating the robustness of a study of this type is
validation of the actual dates of information release and ensuring that no early
pre-release of information took place. Therefore, we purposefully undertook
an extremely careful approach to these matters. First, we performed an ex-
haustive search of the existing literature (including The Wall Street Journal,
stock analysts reports, SEC reports, etc.) to ensure that once of the information
regarding ABC adoption or planned adoption was previously publicly released.
Second, we veri®ed that no confounding events occurred during the event
window (see footnote 7). Third, we veri®ed the actual date of the Business
Week release to the general public and obtained written con®rmation of the
release date from Business Week (see footnote 9). Fourth, we personally spoke
with representatives of ®rms active in ABC practice and in professionally
oriented ABC research and conferences to see if they knew of any previous
releases of the information. Our research indicated that the news released in
Port et al. (1988) article was, indeed, new to the market. Finally, we also have
made every attempt possible to statistically control for any possible event-date
confounding by de®ning the event period to consist of four separate and
consecutive trading dates.
3.7. Methodology
Accounting-related event studies have traditionally used the cumulative
abnormal returns (CAR) methodology to study the impact of new information
(such as earnings announcements) on stock market returns (Ball and Brown,
1968; Fama et al., 1969). The standard CAR methodology, which generally
uses Ordinary Least Squares (OLS), estimates regression parameters over a
pre-event time period utilizing one of the many return generating models, such
as the one-factor Capital Asset Pricing Model (CAPM) (Brown and Warner,
1980, p. 208). The abnormal returns are then calculated and tested as the
prediction errors (residuals) from the model. OLS assumes that the error terms
from the regressions are independent and identically distributed, have a mean
value of zero, and are homoscedastic (i.e., E(~ e
) = 0; E(~ e
; ~ e
) = 0;
E(~ e
; ~ e
) = 0; for all i ,= j; and E(~ e
= r
). In an event study of well-diver-
si®ed announcement dates, calendar times and event times are not the same
and, therefore, the above assumptions concerning the error terms may be valid.
However, the traditional CAR methodology and its assumptions are not
appropriate for our study because of the calendar clustering of ABC an-
nouncement dates, the potential industry e€ects, and the possibility of di€ering
levels of abnormal returns across ®rms as a result of di€erential impacts of
ABC adoption across ®rms. More speci®cally, in our study, event time and
calendar time are the same because of our reliance on the single announcement
240 L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251
in Business Week. This severe form of calendar clustering lessens the proba-
bility that the residuals will be independent because of their contemporaneous
cross-sectional correlation. In addition, independence of the residuals is also
thought to be lessened by industry e€ects within the sample. That is, many of
the sample ®rms operate in similar industries and, therefore, it is reasonable to
assume that their calendar-based residuals might be related to one another.
Finally, it is also possible that ABC may have di€erential impacts across ®rms
depending upon certain ®rm-speci®c factors. Therefore, the standard OLS
assumption of homoscedasticity may also be inappropriate.
In light of the foregoing and due to the methodological need for joint hy-
pothesis testing, a seemingly unrelated regressions (SUR) model will be used in
our study (Binder, 1985a, pp. 370±372; Binder, 1985b, pp. 170±171; Smirlock
and Kaufold, 1987, pp. 352±354).
The SUR model allows for contempora-
neous correlation of the error terms across ®rms, as well as non-constant
variance (heteroscedasticity) of the disturbance terms across ®rms. Utilizing
this approach, one can separate the basic market model into a system of
seemingly unrelated sets of ®rm regressions, which are (in reality) related via
contemporaneous correlation in their error terms.
The SUR model which is used to test the hypothesis underlying our study is
presented below.
= a
÷ a
÷ c
÷ c
÷ c
÷ c
÷ ~ e
= a
÷ a
÷ c
÷ c
÷ c
÷ c
÷ ~ e
= a
÷ a
÷ b
÷ c
÷ c
÷ c
is the return for a security for ®rm i, in period t, net of the risk-free
rate, i = 1; . . . ; N; t = 1; . . . ; T;
is the return for an equally weighted market
portfolio in period t, net of the risk-free rate; ~ e
is the random error term; DS
the announcement shift dummy variable; contains a 1 for every observation
Other SUR studies have utilized di€ering approaches to the control issue in calendar based
event studies. Binder (1985a,b), Rose (1985), and Schipper and Thompson (1983) used the existence
of multiple legislative announcements across all ®rms for their control mechanism. In a study of the
e€ect of the Mexican debt crises, Smirlock and Kaufold (1987) examined two separate and
di€erently sized portfolios of exposed and non-exposed banks. To the best of our knowledge, our
study is the ®rst matched pairs analysis performed within a SUR methodology. As indicated
previously, our methodology is driven by the ®nite number of ABC adopting ®rms, the single
adoption announcement, and the need to perform joint hypothesis testing.
L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251 241
between the ®rst day of the event period and the last day in the estimation
period inclusive; zero otherwise; c
is the abnormal returns (event) coecient
for ®rm i on day a of the event period, a = 1; . . . ; 4 corresponding to 5/27, 5/31,
6/1, 6/2; D
is the abnormal returns (event) dummy variable; contains a single
1 during day a of the event period, a = 1; . . . ; 4 corresponding to 5/27, 5/31, 6/1,
6/2; zero otherwise; a
is the intercept for ®rm i; a
is the intercept shift coef-
®cient for ®rm i; b
is the slope coecient on the equally weighted market
portfolio return, R
, for ®rm i; b
is the slope shift coecient for ®rm i.
Daily ®rm returns were gathered from the University of Chicago Center for
Research in Security Prices (CRSP) tape. The equally weighted daily market
index from the CRSP tape is used for
, as recommended by Brown and
Warner (1980, p. 239). Risk-free daily rates were obtained from the monthly
Federal Reserve Statistical Publication G.13 (1987±1988) for 3-month Trea-
sury Bills. In essence, the approach described above will test whether or not the
ABC announcement was associated with a statistically signi®cant stock market
reaction on any one (or more) of the four trading days in the announcement
period under consideration. Out estimation and testing of daily event coe-
cients follows the example of Smirlock and Kaufold (1987, pp. 352±354) in
their study of the Mexican debt crisis. This type of approach is appropriate
when the information release date can be exactly identi®ed; accordingly, it
allows for a more exact identi®cation and detailed analysis of the impact of
information on market returns than an analysis of cumulative abnormal re-
turns averaged over multiple event days.
3.8. Hypothesis testing
In the case where ®rms show stock market return reactions (i.e., have c
coecients on a given day a) of the opposite sign, a joint hypothesis test should
be more powerful than an average hypothesis test in detecting market reac-
tions. However, when all or most of the ®rms show reactions of the same sign
(on a given day a), an average hypothesis test may be more powerful than the
joint test. Accordingly, since it is not known ex ante whether the market would
impound the value of ABC adoptions to all ®rms in a similar manner, both
average and joint hypothesis testing are undertaken. Therefore, the main hy-
pothesis underlying the empirical study will be tested via the two operational
hypotheses noted below. In each case, the alternate hypothesis is the logical
Null joint Hypothesis 1A. All event coecient (c
) = 0 for day a = 27 and 31
May, 1 and 2 June; for all i, i = 1; . . . ; N.
Null average Hypothesis 1B. The average event coecient (1=N
) = 0 for
day a, a =27 and 31 May, 1 and 2 June; i = 1; . . . ; N.
242 L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251
The test statistic initially used in testing the joint and average hypotheses 1A
and 1B will be Theil's F statistic.
This test statistic allows for contempora-
neous correlation in the disturbance terms and has been used extensively in
prior calendar-based SUR event studies for testing of similar joint and average
hypotheses (Binder, 1985a, pp. 370±372; Binder, 1985b, pp. 171,172).
4. Results and implications
The results of estimating the four separate daily event parameters for each of
the control and experimental ®rms are presented in Table 2.
13 14 15
None of
Theil's (Theil, 1971, pp. 314,402) F statistic can be stated as follows.
NT ÷
(c ÷ C
¸ I)X[
(c ÷ C
(R ÷ X
¸ I)(R ÷ X
where c ÷ C
B the vector of linear constraints being tested, c the vector of dimension [q ×1[,
C of full row rank and is of dimension [q × (
B the estimated coefficient vector of dimension [
the number of parameters estimated in equation i,
N the total number of equations in the regression system,
T the number of observations in time,
q the number of restrictions tested,
X the matrix of independent variables of dimension [NT × (
R the vector of dependent variables of dimension [NT ×1[,
R the sample covariance matrix of disturbances of dimension [N × N[,
I the identity matrix of dimension [T × T[: Theil's statistic is exactly distributed, when the null
hypothesis is stated in terms of average market abnormal returns (Binder, 1985b, p. 173). In
general, Theil's F is asymptotically distributed F (q; NT ÷
Although not separately reported, the intercept, intercept shift, slope, and slope shift
coecients were also analyzed for signi®cance at the a = 0:10 level (two-tailed). For the
experimental ®rms, none of the intercepts, intercept shifts, or slope shift coecients were
signi®cant. For the control ®rms, none of the intercepts or intercept shift coecients
were signi®cant, but two of the slope shift coecients were signi®cant. Eight of ten slope
coecients were signi®cant for the experimental ®rms, and eight of ten slope coecients were
signi®cant for the control ®rms. These results on the signi®cance of the coecients resemble those
previously reported under a similar methodology (Smirlock and Kaufold, 1987, pp. 352±360)
The general non-signi®cance of the shift variables led us to re-estimate the models without the
intercept shifts and slope shifts. Doing so resulted in no material changes to any of the event
coecients, their signi®cance levels, or the hypothesis testing. However, it did cause swings in the
signi®cance levels of some of the basic slope and intercept estimates. Therefore, for control
purposes, the shift variables were retained in the regression system.
As is apparent from the SUR model structure, the independent variables are the same on the
right side of each regression equation. Under these circumstances, the parameter estimates and
standard deviations obtained under this system of equations are essentially identical to those
obtained via OLS. However, the use of SURs is still advantageous in that it allows for joint
hypothesis testing, which OLS would not allow.
L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251 243
the estimated event parameters on 27 May are signi®cant for either the ex-
perimental or the control ®rms. Similarly, only 1 out of the 20 estimated event
parameters on 2 June is signi®cant (a = 0:10, two-tailed). However, on the day
of the general announcement (31 May) and the day after the announcement (1
June), we see that a number of the estimated event parameters are signi®cant
for both the experimental and the control ®rms. Of particular note is the fact
that 9 of the 10 event coecients for the experimental ®rms are positive on the
day of the general announcement (31 May); this pattern is not repeated for the
control ®rms on 31 May. However, perhaps of more import is the fact that all
of the signi®cant coecients for both the control and the experimental ®rms
are positive on 31 May, and all of the signi®cant coecients for both the
control and the experimental ®rms are negative on 1 June. This sign and sig-
ni®cance pattern naturally raises the question of whether any real di€erences
Table 2
Estimated event parameters (c
Firms 27/5/88 31/5/88 1/6/88 2/6/88
Experimental ®rm
E1: Westinghouse Corp. 0.0045 0.0241
E2: Eaton Corp. ÷0.0020 ÷0.0063 0.0003 0.0070
E3: Northern Telecom 0.0030 0.0205 ÷0.0167 0.0047
E4: Northrop ÷0.0064 0.0110 ÷0.0191 ÷0.0095
E5: Unisys 0.0001 0.0014 0.0125 ÷0.0054
E6: General Motors ÷0.0002 0.0169 0.0078 ÷0.0056
E7: United Technologies ÷0.0162 0.0226
÷0.0055 0.0021
E8: Parker-Hanni®n ÷0.0149 0.0141 ÷0.0152 0.0046
E9: General Dynamics 0.0012 0.0087 ÷0.0285
E10: Honeywell ÷0.0024 0.0040 ÷0.0033 0.0058
Average ÷0.0033 0.0117
Control ®rms
C1: Phillips N.V. ÷0.0070 0.0226 ÷0.0125 ÷0.0136
C2: Dana Corp. 0.0121 ÷0.0273
÷0.0015 0.0157
C3: Harris Corp. ÷0.0114 0.0063 ÷0.0260
C4: Grumman ÷0.0170 ÷0.0176 ÷0.0111 0.0026
C5: Digital Equipment ÷0.0062 0.0243
0.0014 0.0012
C6: Ford Motor ÷0.0055 0.0278
÷0.0080 0.0091
C7: Allied Signal 0.0017 0.0317
÷0.0043 ÷0.0047
C8: Sunstrand 0.0079 ÷0.0120 0.0105 ÷0.0030
C9: McDonnell Douglas 0.0008 ÷0.0150 ÷0.0106 ÷0.0001
C10: Johnson Controls 0.0098 0.0004 ÷0.0150 0.0148
Average ÷0.0015 0.0096
÷0.0077 0.0034
Signi®cant at (two-tailed): *0.10 level, **0.05 level, ***0.01 level; number of observations: t =271;
system weighted R-square =0.1288.
244 L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251
exist between the experimental and control ®rms on the two days under dis-
The results of testing the average and joint hypotheses on both the
experimental and the control groups are contained in Table 3. For
the experimental group, the Average Hypothesis 1B is rejected on 31 May at
the a = 0:05 (two-tailed) and on 1 June at the a = 0:10 (two-tailed); the
Joint Hypothesis 1A is rejected on 1 June at the a = 0:05 (two-tailed). For
the control group, the Average Hypothesis 1B is rejected on 31 May
at the a = 0:10 (two-tailed) and is not rejected on 1 June at the a = 0:10
(two-tailed); the Joint Hypothesis 1A is rejected on 31 May at the a = 0:01
(two-tailed). Therefore, both the experimental and control groups
experienced signi®cant abnormal returns on the day of and the day
following the Business Week announcement. In particular, both the
control and experimental groups experienced positive and signi®cant
(at a = 0:10, two-tailed) average excess returns on the day of the
Table 3
Tests of joint and average Hypotheses 1A and 1B
27/5/88 31/5/88 1/6/88 2/6/88
Null hypothesis F value F value F value F value
Pr > F Pr > F Pr > F Pr > F
D.F. D.F. D.F.
Experimental group
Hypothesis 1A 0:4390 1:2335 1:9021 0:3754
All c
= 0 0:9280 0:2636 0:0403
for day given 10 10 10 10
5260 5260 5260 5260
Hypothesis 1B 0:4317 5:1952 2:7550 0:0351
Average c
= 0 0:5112 0:227
for day given 1 1 1 1
5260 5260 5260 5260
Control group
Hypothesis 1A 0:6856 3:0732 0:8176 0:6179
All c
= 0 0:7389 0:0007 0:6117 0:7999
for day given 10 10 10 10
5260 5260 5260 5260
Hypothesis 1B 0:1148 3:8278 2:4902 0:4976
Average c
= 0 0:7347 0:0505
for day given 1 1 1 1
5260 5260 5260 5260
Signi®cant at (two-tailed): *0.10 level; **0.05 level; ***0.01 level.
Degrees of freedom are presented with the numerator degrees of freedom followed vertically by
the denominator degrees of freedom.
L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251 245
However, given the matching process underlying the
experimental design, the question now arises as to whether the experimental
group signi®cantly outperformed the control group on the day of the an-
It is to this more focussed question that we now turn in our
4.1. Matched pairs analysis
Table 4 recaps the average daily estimated event parameter for each group
and reports the di€erence between the average estimated event parameters
(experimental average ± control average) for each day of the four day event
period. The table indicates that on the day before the Business Week an-
nouncement and the two days after the announcement, the control group av-
erage event coecient exceeds the experimental group average event coecient.
In other words, the control group appears to outperform the experimental
group (on average) on the day before and the two days Business Week an-
nouncement. However, on the day of the announcement (31 May), the ex-
perimental group average coecient value exceeds the control group average
coecient ± i.e., the experimental group appears to outperform the control
group. Although the signs are consistent with an instantaneous and positive
e€ect from the 31 May announcement, the di€erences are not statistically
signi®cant at conventional levels for the 10 pairs.
In order to further investigate whether or not the abnormal excess returns for
the experimental ABC ®rms exceed the abnormal excess returns for non-ABC
matched control ®rms on a pair-by-pair rather than on an average basis, a non-
parametric one-tailed Wilcoxon Signed Rank Test was performed. The
In order to test for the potential and di€ering impact of information leakage e€ects versus
announcement e€ects, the model was also estimated with a di€erent speci®cation of the event
periods. Instead of four separate daily parameters, two event periods were structured for the
Business Week announcement. The ®rst period was 2-day information leakage period that included
26 and 27 May (the two trading days before the 31 May announcement). The second period was a
3-day announcement period that included 31 May, 1 and 2 June. None of the F statistics associated
with the hypothesis testing regarding the information leakage event parameter or the announce-
ment period event parameter were signi®cant at the a = 0:10 level (two-tailed) under this
speci®cation. This is not surprising given the opposite signs of the average reactions of the two
groups on 31 May and 1 June.
The potential for the market to completely impound the value of the ABC announcement on a
single trading day is strengthened by the fact that the information was physically on the market for
an additional non-trading day before the 31 May announcement date in our study.
Sign tests were not performed to assess the signi®cance of the trend because such tests are
reliant upon the assumption of statistical independence. This assumption is violated by the
contemporaneous correlation created by the calendar and industry clustering extant in the data set.
246 L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251
Wilcoxon Signed Rank Test Statistics
and p-values for the di€erences in the
estimated parameter values between the pairs of ®rms for each of the four days of
the event period are presented in Table 5. Although the p-value of the Wilcoxon
statistic on 31 May is substantially lower than on any of the other days of the
event period, the pairs comparison does not indicate a statistically signi®cant
di€erence between the experimental and control groups on any of the 4 days.
Although our ®ndings indicate no signi®cant market e€ect for the group of
®rms as a whole, that does not preclude the possibility that individual ®rms
may have gained from the new ABC system. Indeed, given the recent ®ndings
by Shields (1995, p. 159), there is strong reason to believe that the bene®ts of
ABC are contingent upon various behavioral and organizational factors.
Further, anecdotal and case study evidence indicates that a great variety of
ABC systems are in existence and that ®rms are experiencing signi®cant
The Wilcoxon Signed Rank Test is superior in this situation to a general sign test, because the
Wilcoxon utilizes both the signs of the di€erences between the pairs as well as size of the di€erences.
A general sign test (such as the Binomial Test) utilizes only the sign of the di€erences. While the
Wilcoxon is a distribution free test, it does assume that the true underlying distribution of
di€erences is symmetric about its median (see, e.g., Van Matre and Gilbreath, 1983, pp. 514±518).
Sensitivity analysis was also performed on the sample by conducting the Wilcoxon Signed
Rank Test on all 9-pair subsets chosen from the 10 pairs. None of these combinations indicated
signi®cantly higher experimental excess returns (as compared to the control excess returns) on any
of the four event days.
Table 4
Test of the di€erences between the experimental and control group average estimated parameters
Firm 27/5/88 31/5/88 1/6/88 2/6/88
Average experimental coecient ÷0.0033 0.0117
Average control coecient ÷0.0015 0.0096
÷0.0077 0.0034
Di€erence (Experimental less
÷0.0018 0.0021 ÷0.0008 ÷0.0044
(one-tailed) 0.3598 0.3405 0.4382 0.1986
Coecient averages are drawn from Table 2.
A folded F test of H
: r
= r
. The null hypothesis of the equality of the variances
of the two groups could not be rejected at the a = 0:10 level (two-tailed). In addition, t-tests of the
equality of the mean portfolio returns of the control and the experimental groups indicate that the
mean portfolio returns were not statistically di€erent during the estimation period (at the a = 0:10
level, two-tailed).
The p-value refers to a one-tailed t-test of the hypothesis that the average di€erence (experimental
coecient less control coecient) exceeds zero. Such OLS based t-tests are appropriate tests of
average coecients (even in the presence of contemporaneous correlation) when all independent
variables in the regressions are the same. As discussed previously, these OLS determined coecient
values are identical to the SUR determined values. However, the OLS t-test allows for the more
appropriate one-tailed test of the extant hypothesis, which a two-tailed F -test does not allow.
L.A. Gordon, K.J. Silvester/Journal of Accounting and Public Policy 18 (1999) 229±251 247
challenges in attempting to implement full-blown ABC systems (see, e.g.,
Roberts and Silvester, 1996, p. 23).
5. Concluding comments
The use of ABC is spreading on an international level. Nevertheless, the
evidence to date regarding the net bene®t of ABC has been mixed, at best. In an
e€ort to help resolve this issue, we have undertaken an empirical analysis of the
security market e€ect of announcing the installation of an ABC system by
several ®rms. The time when the announcement took place was the late 1980s,
which was a peak period for the advocation of ABC in the US. Thus, if a
security market reaction to the adoption of ABC was ever to occur, this would
seem to be the likely time period for it to happen. In other words, this time
period would seem to be biased in favor of ®nding a signi®cant market e€ect.
Nevertheless, the analysis indicates that the installation of an ABC information
system was not associated with a signi®cant stock market reaction (either
positive or negative). This ®nding should, at a minimum, caution organizations
currently considering the adoption of ABC to carefully consider the cost/
bene®t aspects of implementing such a system.
We recognize that an assessment of the ABC-®rm performance link via
stock market returns has limitations. Nevertheless, we believe that examining
the issue from a capital markets research perspective provides an important
complement to the other research in the area. Indeed, if a positive market e€ect
cannot ultimately be established for pro®t oriented organizations, the ABC
exercise needs to be seriously questioned. Viewed in this light, we hope that the
®ndings reported in this paper will become a catalyst for future market studies
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Table 5
Wilcoxon Signed Rank Test for di€erences in the event coecients between experimental and
control groups on a pair-by-pair basis
27/5 31/5 1/6 1l2/6
T value T value T value T value
p-value p-value p-value p-value
10 pairs 23 32 28 12
All ®rms 0.652 0.348 0.500 0.935
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