5

EMPIRICAL RESEARCH: IMPLICATIONS

FOR Fl NANCIAL ST ATEMENT ANALYSIS

CHAPTER OUTLINE

INTRODUCTION Debt Covenant Hvpothesis

Political Cost Hypothesis
CLASSICAL APPROACH Summary of the Research
MARKET-BASED RESEARCH Empirical Research: A Mid-Course Evaluation
Critical Evaluation ofResearch Findings
Efficient Market Theory
Market Anomalies
Modern Po1ifolio Theory
Tests of the EMH versus the Mechanistic Hypothesis DIRECTION OF CURRENT RESEARCH: BACK
Ball and Brown Study TO THE FUTURE?
Information Content Studies Ball and Brown Revisited
Relationship Between Earnings and Stock Returns Contextual Approaches and Fundamental Analysis
Accounting Variahle Other Areas ofResearch
Market-based Variahle Coming Full Circle: From Edwards and Bell to Ohlson
Test ofthe Relationship Betv..•een thP Good News/Bad News Market (ln)e(ficiency and Accounting
Parameter and Abnormal Returns
IMPUCATIONS OF EMPIRICAL RESEARCH
POSITIVE ACCOUNTING RESEARCH FOR FINANCIAL STATEMENT ANALYSIS
Disclosure and Regulatory Requirements
Agency Theory
Bonus Plan Hypothesis

CHAPTER OBJECTIVES

The goals of this chapter are to:
1. Review the classical approach to accounting the­
ory and the framework that still underlies most ac­
counting standard-setting activities,
2. Survey market-based accounting research that exam­
ines the relationship between stock prices and finan­
cial reporting.
3. Explain "positive" accounting theory and its empha­
sis on the effect of financial reporting on manage­
ment, creditor, and regulatory decision making.
4. Examine the current trend of accounting research.
5. Discuss the relevance of empirical research to finan­
cial statement analysis.

Source: Analysis and Use of Financial Statements, White, Sondhi & Fried, 3rd ed. 163