ACC 610 - Assignment 1b (for Thursday, August 27)

Read article on Blackboard: Decision Usefulness and Accelerated Filing Deadlines

by Doyle and Magilke (DM)

1. What is the purpose (objective of the study)?

2. Why is it important to examine this issue?
3. What was the SECs argument in favor of accelerating the deadlines for
quarterly and annual filings?
4. Why is it preferable to enable investors to make more informed investment
and valuation decisions more quickly?
5. What is representational faithfulness as it applies to financial reporting?
6. How do authors (DM) measure the overall usefulness of 10-K filings?
7. What do they mean by three-day market reaction to the 10-K filing?
8. Why would investors react to 10-K filings?
9. Why use absolute value of the market reaction (i.e., why ignore whether
the reaction is positive or negative)?
10.What would be the market reaction to 10-K filings if investors believed that
the accelerated deadlines would cause substantial errors in companies
financial reports?
11.Suggest one way to test whether the accelerated deadlines caused more
errors in reporting companies financial statements.
12.Why would smaller companies be more likely to have errors in their financial
statements because of the accelerated deadlines?
13.At the bottom of page 553 the authors discuss other papers that find no
evidence of incremental information content in pre-EDGAR 10-K filings.
a. What is EDGAR? When was this system implemented?
b. Give one reason why investors may not have reacted to pre-EDGAR
10-K filings.
14.Read page 554
a. Does the SEC solicit comments from companies prior to adopting new
rules?
b. Do they always listen to these comments?
15.Read pages 554-556
a. The authors list five hypotheses (H1 H5a, 5b) to be tested. Do these
hypotheses seem intuitively reasonable?
16.Research Methodology
a. Does the sample period (2003 2007) seem reasonable to answer the
research question?
17.Refer to equation (1) on page 557.
The stock return for a firm i on any day t is computed as:
(Price of the stock at the end of day t Price of the stock at the end of day t-1)
Price of the stock at the end of day t-1

Googles stock price at close of August 23, 2015 was $612.48 and at the close of
August 24, 2015 was $589.61, what is the return to Googles stock for August 24,
2015?
a. What possibly caused Googles stock price to change on August 24,
2015?
b. How much of the information is specific to Googles stock?
Stock price changes can be caused by market-wide information (i.e., information
not just pertaining to Google). For example, changes in interest rates,
unemployment rates, consumer price index, etc. will generally affect stock prices of
all companies even when there is no firm-specific information (why?). Research in
finance shows that market-wide information has similar effects on companies of
similar size (market values). So if we want to isolate the stock price effect of firmspecific information we have to remove the market-wide effects from that
companys stock return. How do we compute the return to a portfolio of stocks of
similar size? For example, assume that Google is similar in size to the top 100
companies in market value (the portfolio). What is the return to this size-portfolio
on August 24? Compute the value of this portfolio (assuming you hold one share of
stock in each of the 100 companies) at the end of August 23. Do the same at the
end of August 24. Then compute return on the portfolio (R p) as:
(Value of the size-portfolio at the end of day t Value of the size-portfolio at the end
of day t-1)
Value of the size-portfolio at the end of day at the end of day t-1
19.If the value of the size-portfolio (similar market value as Google) is $60,000 at
the end of August 23, and is $57,000 at the end of August 24, what is R p for
August 24?
20.Now, what is the abnormal return (RApple - Rp) for Google for August 24? Is
Googles firm-specific news for August 24 likely good or bad news?
21.Why do the authors use the three-day market reaction rather than just the
day of the 10-K filing?
22.Assume that Kellogg accelerated its filing from 90 days to 75 days for its
fiscal 2003 year. The market reaction (Mktreaction) to its 2002 10-K filing
(pre-acceleration) was 3% and Mktreaction to its 2003 filing (after
acceleration) was 3.8%. Can we conclude that the deadline acceleration
increased overall usefulness to market participants (H1)?
23.What if General Mills filed within 60 days in both 2002 and 2003 and their
Mktreaction was 2.1% in 2002 and 2.9% in 2003? Will this change our
conclusion above?
Table 2 (page 562) is the simplest, but compelling evidence of the authors findings.
24.What can we conclude from Panel A about small accelerated filers?
25.What can we conclude from Panel B and C about large accelerated filers?
You can skip tables 3 and 4 and discussion on pages 566-567 if you want to.

26.What does the evidence in Table 5 suggest about reliability of financial

reporting?
27.Skip Tables 6 and 7 and related discussions. What is the inference form the
evidence in Table 8?

Skim rest of paper. We can discuss relevance / implications of results in class.