Ken V. Peasnell

Lancaster University | LU · Lancaster University Management School

Previous studies of analysts’ valuation methods show that sell-side analysts often rely on multiples-based relative valuation methods in deriving target price forecasts, predominantly earnings-based multiples. However, little is known about how analysts actually arrive at the earnings multiples that they apply in their valuations. Based on extant v...

A key output of sell-side analysts is their recommendations to investors as to whether they should, buy, hold or sell a company's shares. However, relatively little is known regarding the determinants of those recommendations. This study considers this question, presenting results that suggest that recommendations are dependent on analysts’ short-t...

Purpose – The purpose of this paper is to explore the effects of appointing foreign directors on the foreign acquired Turkish banks. Based on the developments in the Turkish banking system and the distinctive features of the Turkish market, the authors examine the appointment of foreign directors in three different levels: as a CEO, chairman and bo...

This study addresses two related research questions concerning a new requirement in the United Kingdom that auditors disclose the materiality thresholds they apply when conducting the audit of listed companies. First, are cross-sectional differences in materiality thresholds associated with differences in the demands of financial statement users fo...

When producing IFRS financial standards, one of the IASB’s main goals was to create a set of standards which were more useful to investors as a predictive tool. We assess the success of the IASB in this goal by investigating the effects of the introduction of IFRS on the relative information content of reported earnings and forecasted earnings unde...

Barth, Hodder, and Stubben examine how the risk and expected return of existing shares varies as a function of the amount of outstanding employee stock options (ESOs), finding that the association is a negative one, consistent with ESOs being equity-like in character. They suggest that their approach could be used to address the question of how bes...

SYNOPSIS In this paper, we discuss the accounting for repurchase transactions, drawing on how repurchase agreements are characterized under U.S. bankruptcy law, and in light of the recent developments in the U.S. repo market. We conclude that the current accounting rules, which require the recording of most such transactions as collateralized loans...

SYNOPSIS This paper summarizes changes that have taken place in banking, the attendant financial innovations, and the challenges these innovations pose for accounting standard setters and regulators. We focus on asset securitizations and the difficulties in accounting for such transactions, in particular their option-like features, and discuss how...

Following the work of Basu in 1997, the excess of the sensitivity of accounting earnings to negative share return over its sensitivity to positive share return (the Basu coefficient) has been interpreted as an indicator of conditional accounting conservatism. Although this interpretation is supported by substantial evidence that the Basu coefficien...

The internal rate of return (IRR) is a widely used benchmark for assessing the reliability of the accounting rate of return (ROA) as a measure of economic profitability. We turn this reasoning process on its head by demonstrating that a suitable (weighted average) aggregation of ROAs better captures what is generally meant by economic profitability...

The collapse of the securitization market during the 2007-2008 Financial Crisis resulted from investors’ concern with the value of securitized assets and securities issued by special purpose entities (SPEs). Research has shown that prior to the Crisis, investors valued equity of sponsor-originator banks (S-Os) as if there were an implicit guarantee...

We report results consistent with the existence of a Big Six premium in the UK during the period 1985-1995. We find little evidence that this premium can be attributed to industry specialisation by auditors, no matter how this is specified. We find evidence to suggest that non-audit fees earned by auditors from their audit clients are positively re...

Following Basu (1997), the difference between the sensitivity of accounting earnings to negative equity return (proxy for bad news) and its sensitivity to positive equity return (proxy for good news) is interpreted as an indicator of conditional accounting conservatism. However, there is concern that the earnings-sensitivity difference (ESD) may be...

This paper assesses the capital market effects of investor relations activities during a period of high-profile corporate scandals. We find no support for the prediction that an established reputation for effective investor relations helped shield US firms from a perceived decline in management credibility and financial reporting integrity associat...

SYNOPSIS: This paper reviews the contribution of the late Philip Bell to accounting thought. He is best known for his joint work with Edgar O. Edwards, The Theory and Measurement of Business Income. This seminal work is put in context by exploring Bell's earlier work as an economist and his later work, in which he developed applications and extensi...

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...

Existing empirical evidence suggests that residual income valuation models based on historical cost accounting considerably underestimate equity values. One possible explanation is the use of historical cost accounting under inflationary conditions. In this paper, we use a residual income framework to explore theoretically how historical cost accou...

We use equity market reactions to the announcement of impairments of retained interests arising from asset securitizations made by financial institutions during the Financial Crisis of 2007-2008 as a means of obtaining insights into the nature of the implicit guarantees associated with this form of financing. We use the market reaction to announcem...

  Recent research uses the degree of stock returns co-movement as a measure of the quality of a country's information environment. It has been argued that stronger property rights, better corporate governance regimes and more efficient enforcement mechanisms lead to prices incorporating more firm-specific information and, therefore, co-moving less...

Recent research uses the degree of stock returns co-movement as a measure of the quality of a country's information environment. It has been argued that stronger property rights, better corporate governance regimes and more efficient enforcement mechanisms lead to prices incorporating more firm-specific information and, therefore, co-moving less wi...

The present paper reviews the research evidence on the impact of changes in pension accounting methods on pension provision. We show that decisions to freeze, terminate or convert defined benefit (DB) plans have been driven primarily by a desire to limit contributions, though financial reporting has played a part as well. The introduction of accrua...

Previous research has argued that the degree of co-movement of stock returns (the R� of a market regression) at country-level can be explained by the interaction of firmspecific and market-wide information. The R� measure has been used to investigate a number of issues of potentially great importance to accounting, such as whether countries with po...

This paper examines the effects on UK audit market concentration and pricing of mergers between the large audit firms and the demise of Andersen. Based on data over the period 1985-2002, it appears that mergers contributed to a rise in concentration ratios to levels that suggest concern about the potential for monopoly pricing. The high concentrati...

The pricing effects of changes in market concentration in the audit market

This paper examines the methods currently employed to assess investment performance in the light of recent developments in the theory of capital asset pricing. There have been a considerable number of studies in the last decade on whether or not mutual funds' are able to achieve superior investment performance ("beat the market" in some sense). The...

This paper provides estimates of monthly risk premia required by investors on shares, corporate bonds and government gilts during the period 1969–1987, based on the CAPM and using deviations between past actual returns and the model's forecast returns as inputs. Ex-ante risk premia increased dramatically during the 1970s and again on equities in th...

ABSTRACT This paper is a response to the exposure draft of proposed amendments to IAS 1 Presentation of Financial Statements published by the International Accounting Standards Board (IASB) in March 2006. The objective is to bring to the standard setter's attention research that is relevant to the issues raised in the exposure draft. We review anal...

Our study attempts to determine whether, and if so why, the large auditing firms are able to earn a premium on their audit work in the UK. We start by confirming the apparent existence of a Big Firm premium during the period 1985-2002. We examine industry specialisation, non-audit service fee and monopoly pricing explanations for the premium. The r...

This study addresses whether asset securitizations are really asset sales or a form of secured borrowing, by estimating cross-sectional equity valuation regressions to assess whether the stock market treats securitized assets and liabilities held by a special purpose entity (SPE) as assets and liabilities of the sponsor-originator (S-O). Overall, w...

We use a residual income valuation framework to compare equity valuation implications of four approaches to employee stock options (ESOs) accounting: APB 25 “recognize nothing”, SFAS 123 (revised) “recognize ESO expense”, FASB Exposure Draft “recognize and expense ESO asset” and “recognize ESO asset and liability”. Theoretical analysis shows only g...

The introduction of a new accounting standard for financial instruments, has raised a number of issues related to the application of fair value principles. This paper discusses some of these issues which are generally related to the fact that "fair values" are not always easily defined or readily available. It concludes that the application of fair...

This paper examines whether the incidence of earnings management by UK firms depends on board monitoring. We focus on two aspects of board monitoring: the role of outside board members and the audit committee. Results indicate that the likelihood of managers making income-increasing abnormal accruals to avoid reporting losses and earnings reduction...

Watts and Zimmerman, in a widely acclaimed article, concluded that accounting theories serve to supply excuses for policies determined by political processes. This paper presents a critical review of Watts and Zimmerman's hypothesis, and in return, suggests that the academic reward system in the leading universities does not encourage that kind of...

The question of Depreciation is one upon which so many articles have been written, and so many opinions expressed, that there would not appear to be much more which could profitably be said upon the subject. (John H. Armstrong, The Accountant, 8 August 1903.)

This paper explores the question of whether the residual income valuation relationship (RIVR) should be written in inflation-adjusted terms. This question is of particular interest in the light of Ritter and Warrs (2002) claim that the standard nominal historical cost formulation of RIVR misvalues firms because it fails to deal properly with inflat...

We use the residual income valuation framework to compare the equity valuation implications of four approaches to employee stock options (ESOs) accounting proposed by regulators: APB 25 "recognize nothing", SFAS 123 preferred "recognize ESO expense", FASB Exposure Draft "recognize and expense ESO asset" and "recognize ESO asset and ESO liability"....

This paper examines the linkage between the use of outside directors and managerial ownership. We conjecture there are two linkages: the standard incentive-alignment demand for monitoring when managers own little stock and an entrenchment-amelioration demand when managerial stock ownership is high. As a consequence, we predict the association betwe...

This study presents evidence on the characteristics of firms judged by the Financial Reporting Review Panel (FRRP) as having published defective financial statements. Relative to a pairwise-matched control sample, FRRP firms are associated with weak performance in the defect year. In contrast, their performance in the post-defect period is indistin...

This paper extends the residual income-based valuation framework to encompass an articulation between (i) value created for a firm's shareholders beyond the cost of their invested capital (excess value created) during a multi-period interval and (ii) a matching cumulation of the firm's residual incomes. We show that, absent an initial difference be...

Accountants have long disputed whether financial statements should report current values and the effects of price changes. Indeed, the two kinds of adjustment are often confused. This study examines the asset revaluation and Current Cost Accounting (CCA) disclosure decisions of UK firms in 1983, using a costly contracting framework. We find the two...

UK GAAP has traditionally allowed the write-off of purchased goodwill directly to reserves, resulting in the widespread depletion of book equity. Companies have also been permitted to revalue fixed assets at management's discretion. This study examines whether upward revaluations have been associated with the depletion of book equity and with other...

Central to both the Cadbury Committee's initial remit and its subsequent recommendations is the view that director integrity and board effectiveness play key roles in ensuring the quality and reliability of published financial statements. Using a constant sample, this paper tests whether the association between board composition and earnings manage...

This paper examines specification and power issues in relation to cross-sectional models used to estimate abnormal accruals. In addition to testing the standard-Jones (Jones, 1991) and modified-Jones (Dechow et al., 1995) models, we also develop and test a new specification, labeled the "margin model". Empirical tests suggest that all three models...

This study aims to further our understanding of the factors associated with low accounting quality. We examine a sample of 47 firms identified by the Financial Reporting Review Panel as having issued defective financial statements. Tests indicate that relative to a size-, industry-, and time-matched control sample, Review Panel firms are characteri...

This paper examines the association between the composition of the board of directors and earnings management activity for a period spanning the publication of the Cadbury Report (1992). Central to both the Cadbury Committee's initial remit and its subsequent recommendations is the view that director integrity and board effectiveness play a key rol...

Corporate law holds boards of directors responsible for the financial reporting process. This raises the possibility that boards will constrain earnings management activity. This paper tests for evidence of an empirical association between board effectiveness and earnings management, as proxied by abnormal working capital accruals. We measure board...

EVA is a variant of residual income marketed by Stern Stewart & Co., a New York consulting firm, with the purpose of promoting value-maximising behaviour in corporate managers. This paper reviews the EVA system in the light of this purpose. First, it outlines the rationale for the use of residual income in "value-based management", highlighting the...

Corporate law defines an explicit responsibility for boards of directors in the financial reporting process. In so doing it raises the expectation that boards will constrain earnings management activity. This paper tests for evidence of an empirical association between the composition of the board of directors and earnings management. The nature an...

This paper investigates the relationship between managerial stock ownership and thedemand for outside directors in the U.K. corporate-control process. Over moderateownership levels, the incentive-alignment effects of insider ownership suggest anegative association between managerial ownership and the demand for costlymonitoring in the form of outsi...

This paper provides an empirical comparison between two versions of a new accounting ratio devised by Kay and Davis (1990a, 1990b) and Kay (1993) and the traditional capital employed (ROCE) ratio. The new measures, ‘added value on inputs employed’ (AVIE) and ‘added value on net output’ (AVNO), are both based on a version of residual income they lab...

The present paper amends the two propositions in Peasnell (1995) concerning the fitness of J. R. Grinyer's «earned economic income» (EEI) model for its declared purpose of evaluating managerial performance in the light of comments in Grinyer (1995). Proposition I now includes the requirement that the profitability index is the same for each depreci...

This paper examines the theoretical properties of J. R. Grinyer's «earned economic income» (EEI) model. Features examined include the connection between EEI and residual income; the proportionality relationship between EEI book values and cost allocations and their present value and deprival value counterparts; the extent to which EEI is affected b...

The paper examines how the qualitative characteristic of reliability may be used to resolve the conflict over the choice of valuation basis (historical costs versus current value) which has been a fundamental concern for accounting standard setters in their efforts to create a generally acceptable conceptual framework for financial reporting. The c...

This paper examines the properties of J.R. Grinyer's 'earned economic income' (EEI) model. It reveals: (i) the connection between EEI and residual income; (ii) the proportionality relationship between EEI book values and cost allocations and their 'deprival value' counterparts: (iii) an hitherto unnoticed property which reduces the scale of the pro...

The purpose of this paper is to examine the case for capitalising interest on self-constructed and maturing assets. Three perspectives on interest capitalisation- cost matching, opportunity cost, and valuation—are compared and contrasted. The paper's principal contributions are twofold: (i) to show how interest capitalisation can be related to the...

Off-balance sheet financing schemes take a variety of forms. An important class involves offsetting liabilities and assets, a practice traditionally frowned upon by accountants, and for good reason. This paper argues that attempts to limit offsetting can, if taken too far, result in the elimination of reporting alternatives which are useful when vi...

The paper reports both the results of an empirical investigation into the effects of the decisions of 13 UK companies to include brands in their published balance sheets on the prices of their shares, and also an examination of the motivations for these decisions from a costly contracting perspective. Price gains appear to be positively associated...

Recent upheavals in the capital markets and the wider economy have presented accountants with a number of challenges. Economic downturns and increased competitive pressures have encouraged companies to adopt accounting methods which show their results in the best light, and this has led to increasing emphasis on rule‐making by the accounting profes...

This study investigates the impact of the experimental standard, SSAP16 (Current Cost Accounting), on share returns on the London stock market. Approximately 200 companies were examined between 1980–84. The experimental design specifies current cost as a supplementary signal to historical cost and employs two main statistical tools: ordinary least...

The proper treatment of debt finance in current cost accounting has been the subject of considerable debate in the literature, and there is considerable variation in the official standards issued in different countries. Opposition to making a‘gearing adjustment’against income seems to be due in part to doubts as to whether or not such treatment is...

This paper reports a number of results concerning the relationship between accounting numbers and economic values and yields. Some of the results have appeared previously in the literature and some are new. They have been collected together in a common analytical framework in order to demonstrate their formal, mathematical character. It is shown th...

The definition, calculation and interpretation of earnings per share is greatly complicated by the fact that company capital structures often include convertible debentures and share warrants. If these conversion and option rights are exercised, major changes in earnings per share (hereafter EPS) may result. The purpose of this article is to evalua...

Previous research has argued that the degree of co-movement of stock returns (the R² of a market regression) at country-level can be explained by the interaction of firm- specific and market-wide information. The R² measure has been used to investigate a number of issues of potentially great importance to accounting, such as whether countries with...

This paper examines the effects of audit firm mergers and the demise of Andersens on market concentration, competitiveness and audit pricing in the UK. Our results indicate that the large audit firms increased their market share between 1985 and 2002 by merging and expanding into new sectors. However, contrary to popular belief, the significant fee...

Abstract This study proposes a previously unexplored approach to the valuation of equity using accounting numbers. The valuation is carried out in two steps. First, a valuation anchor is provided by book value of equity or capitalized earnings. Second, a multiple based on a value driver of comparable firms,where the value driver might differ from t...

First draft There is considerable empirical evidence that after controlling for factors known to affect the level of audit fees, the large international firms earn an audit fee premium. In this paper, we estimate a Big Six premium of 10% to 23% for a large sample of UK clients. Recent studies contend that the development of brand name and industry...