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Do investors understand really dirty surplus?

Landsman, W R and Miller, B L and Peasnell, K V and Yeh, S (2011) Do investors understand really dirty surplus? The Accounting Review, 86 (1). pp. 237-258. ISSN 0001-4826

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    Abstract

    This study addresses whether firms’ share prices correctly reflect two accounting measures: dirty surplus and really dirty surplus. Dirty surplus is readily observable from the financial statements, but really dirty surplus, which arises from recognizing equity transactions such as employee stock option exercises at other than fair market value, is not. Findings show that dirty surplus and really dirty surplus are irrelevant for forecasting abnormal comprehensive income. However, findings also indicate that investors appear to undervalue really dirty surplus. Hedge returns are insignificant when portfolios are formed based on dirty surplus, but are significantly positive based on really dirty surplus. Really dirty surplus positive hedge returns are robust to a variety of sensitivity tests. Taken together, the findings are consistent with either investors over-valuing firms that have large negative really dirty surplus or really dirty surplus being correlated with an unmodeled risk factor.

    Item Type: Article
    Journal or Publication Title: The Accounting Review
    Subjects:
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 45610
    Deposited By: ep_importer_pure
    Deposited On: 11 Jul 2011 19:35
    Refereed?: Yes
    Published?: Published
    Last Modified: 09 Apr 2014 22:34
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/45610

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