This paper examines the valuation implications of greenhouse gas (GHG) emissions allowances. We posit that the value of a firm's bank of emission allowances has two components that are likely to be positively valued by the capital market: (1) an asset value component; and (2) a real option value component. Since the necessary data to examine this research hypothesis in the setting of GHG emission allowances is not yet available, we test our conjecture by examining the value relevance of sulfur dioxide (SO2) emission allowances held by US electric utilities. Empirical results reveal that the capital market assigns a positive price to a firm's bank of SO2 emission allowances, consistent with the argument that emission allowances have, at least, an asset value component that is assigned a positive price by the market. We also find weak evidence consistent with the market assigning a real option value to the allowance banks.

Executives face potentially severe (non-financial) personal risks if firm environmental performance is below industry best practice. We examine the relation between CEO compensation and the non-financial risk associated with environmental exposure, and how use of environmental performance as an explicit determinant of compensation affects this relation. We find evidence that CEOs are compensated for exposure to environmental risk, even after controlling for financial risk. We also find that this premium is reduced when the CEO has greater opportunities to improve the firm’s environmental performance.

We investigate the potential uncertainty-reducing role of accounting information in the context of contingent Superfund liability valuation. We first develop theoretical arguments for the way reduction of uncertainty regarding these contingent liabilities is expected to affect security prices. Empirical proxies are developed for two types of uncertainty surrounding contingent Superfund liabilities: site uncertainty and allocation uncertainty. In a valuation framework, we then investigate whether financial statement disclosures and accruals reduce uncertainty and thereby affect security valuation. Specifically, we analyze the interaction of private information contained in firm disclosures and accruals with inherent uncertainty surrounding contingent Superfund liabilities. Results suggest that in a regulatory environment allowing substantial reporting discretion, firm-provided financial statement information affects valuation of contingent Superfund liabilities by reducing uncertainty. Further, we find that information revealed through accruals versus disclosures is differentially effective at reducing site and allocation uncertainty.

This current GAAP determination of a going concern is shortsighted for two important reasons. The most important deals with creditors and other stakeholders involved with the business. Do they enter into contracts with the business or with the individual owner/manager? Currently, they contract with both since, in reality, they make no determination whether a separate firm (entity) exists. The second deals with valuing a business. If the business is not really a separate going concern, it would typically be valued as the sum of its individual assets instead of the present value of its future cash flows. Many times when buying a business, the acquirer is really just buying the assets to start his own business. This is particularly true in most service businesses. The purpose of this paper is to advocate reintroducing a qualification to the going concern audit opinion when an entity separate from its owner/manager does not exist. Criteria for determination are also proposed. Arguably, this will make audited accounting statements more meaningful for closely-held firms. More important, this should produce information useful for potential creditors and outside owners. Traditionally, banks have extended loans to small, closely-held firms with only compiled statements; there was no need to provide audited statements. However, the process of lending is changing from a direct, face-to-face process between borrower and lender to an indirect one where credit scoring systems are used. Audited statements can provide better, higher quality information to lenders extending credit.

We examine several explanations drawn from prior academic research and current popular press anecdotes for the unprecedented level of underpricing in Internet IPOs. Our sample consists of 342 Internet firms that went public between 1988 and 1999 and a matched sample of 249 non-Internet IPOs. The desire to make a seasoned equity offer (SEO), the presence of high quality underwriters, and greater media exposure pre-IPO are uniquely associated with Internet IPO underpricing. Post-offer return performance is worse for hot Internet IPOs that receive more media attention before the IPO date. Matched IPOs backed by high quality underwriters perform relatively well in the post-offer period although there is no association between underwriter quality and the long-run performance of Internet IPOs.

Three explanations are commonly offered for the unprecedented levels of underpricing in recent IPOs by Internet firms: (1) media hype drives underpricing; (2) Internet firms leave money on the table to be able to follow up underpriced IPOs with follow on financing offers; and (3) underpricing is a branding event designed to increase consumer awareness of the Internet company. We examine the relation between the extent of Internet IPO underpricing and proxies to test the three explanations. We measure media hype as the extent of media exposure pre IPO. The desire to return to the market is proxied by the rate at which the firm burns through its IPO offer proceeds on operating and investing activities. Proxies for branding include whether the firm is a Business to Consumer company (B2C) and the extent of revenue increase post IPO. Results indicate that media hype and the desire to return to the capital market are strongly associated with Internet IPO underpricing. Although underpricing is higher for B2C firms, sales increases post IPO are not significantly related to the extent of underpricing. Finally, there is at best weak evidence to suggest that post offer return performance is worse for Internet IPOs with greater underpricing.

We examine the role of earnings management by issuers prior to making initial public offerings (IPOs). Our results indicate that pre-IPO abnormal accruals are positively related to initial firm value. Entrepreneurs may seek to increase their offering proceeds, temporarily deceiving investors by opportunistically manipulating earnings through accruals management before going public. This would imply a negative relationship between abnormal accruals around the offer date and subsequent firm performance. Confirming earlier studies, we find that abnormal accruals during the offer year are significantly negatively related to subsequent firm stock returns. In addition, we find that abnormal accruals in the preceding year are also significantly negatively related to subsequent performance. Moreover, this result persists even for returns that are risk-adjusted using the multifactor CAPM of Eckbo, Masulis, and Norli (2000). Thus, it appears that aggressive pre-IPO earnings management both increases IPO proceeds and decreases subsequent returns to investors.

The current definition of a "going concern" according to GAAP does not take into consideration whether an on-going business exists that is separate or separable from its owner/manager in a closely-held firm or is merely an extension of the individual as an entity. In this study, we propose two criteria that would facilitate making this financing decision as it creates a relevant distinction for potential creditors. Finally, we also recommend that a going concern qualification be reinstated in the attestation process to motivate implementing this new definition for small, closely-held firms.

The amount and timing of a firm's ultimate financial obligation for contingent liabilities is uncertain and subject to the outcome of future events. We decompose uncertainty about Superfund contingent liabilities into two sources: (1) uncertainty regarding site clean-up cost (site uncertainty); and (2) uncertainty regarding allocation of total site-clean-up cost across multiple parties associated with the site (allocation uncertainty). We hypothesize that when a firm's contingent Superfund liabilities are subject to relatively more site and allocation uncertainty, these liabilities will be viewed as relatively risky. This risk will affect the firm's cost of capital. Thus, market valuation of contingent Superfund liabilities will be negatively affected. To empirically test our hypotheses we employ a cross-sectional model of the relation between firm market value and book value of assets, book value of liabilities, and a contingent Superfund liability proxy interacted with proxies for our uncertainty constructs. We find differential results across industries. In the chemical industry, both site and allocation uncertainty are associated with differential valuation of contingent Superfund liabilities. The greater the uncertainty, the more negatively the contingent Superfund liability is valued. Results are insignificant, however, in the paper and machinery industries. Our results provide evidence, at least in the most heavily involved industry, that site-level information of a non-financial nature can be relevant to financial statement users. This is consistent with accounting regulators' incorporation of site-level Superfund enforcement data in guidance regarding financial reporting for contingent Superfund liabilities. The concepts of site and allocation uncertainty, however, may provide a useful way for organizing and evaluating alternative site-level data when considering financial reporting alternatives.

Abstract Many firms are finding that some of their most costly and challenging accounting problems are in the environmental area. Environmental accounting can be defined simply as understanding, recognition and incorporation of the impact of environmental issues upon a firm's traditional accounting sub-systems. This paper describes how environmental accounting issues can be incorporated into existing courses or made the focus of a new elective. Environmental accounting issues provide an interesting, contemporary and functionally integrative way to help students understand the relation among the different areas of accounting (i.e., financial, managerial, information systems, auditing and tax). Examples are included that describe environmental issues in each of these areas.

The amount and timing of a firms' ultimate financial obligation for contingent environmental liabilities is uncertain and subject to the outcome of future events. We decompose uncertainty about Superfund contingent liabilities into two sources: 1) uncertainty regarding extent of site contamination and clean-up (site uncertainty); and 2) uncertainty regarding allocation of clean-up costs across multiple parties associated with the site (allocation uncertainty). We hypothesize that site and allocation uncertainty surrounding contingent Superfund liabilities affect their market valuation. We find that site hazard level negatively affects valuation of contingent Superfund liabilities (increasing site uncertainty surrounding clean- up cost as hazard levels increase) and settlement activity has a favorable effect (reducing allocation uncertainty as resolution on sites is reached). We also investigate the valuation impact for different industries and across regulatory regimes. We find that contingent Superfund liabilities are valued differentially across industries and are more value-relevant following reauthorization of the Superfund Act.

This paper empirically examines the underinvestment problem and the use of dividends to expropriate lenders' wealth. Rather than analyzing the market's reaction to potential wealth-expropriating events, a different aspect of potential conflicts of interest is addressed: do managers who control dividends act in a manner consistent with wealth expropriation? If so, then debt issues should be followed by increases in dividends. Two samples of firms are used: those issuing straight debt and those issuing convertible debt. The study finds no evidence that firms manipulate dividend policy to transfer wealth from the bondholders to stockholders. Two possible explanations are suggested. First, wealth expropriation may be a potential problem, but existing bond covenants restricting a firm's ability to pay dividends are effective. Second, firms may believe that reputation has greater value than what can be transferred from creditors in a one-time expropriation of wealth. Since the paper fails to find support for the covenant argument, it concludes that reputation is the most plausible explanation.

Abstract. This study examines empirically the role played by direct disclosure in the valuation of initial public offerings (IPOs). We investigate why some firms making an initial public offering in Canada include an earnings forecast in the offering prospectus and others do not, and, in particular, the role of such direct disclosures in IPO valuation. We explore several hypotheses motivated by the voluntary disclosure and signaling literatures. Our results are consistent with the hypotheses that (1) forecasters have “good news” to reveal about future earnings prospects relative to nonforecasters, (2) the earnings forecast signals are valuation relevant, and (3) the market is able to correct for expected forecast error or bias in the earnings forecast.Résumé. Les auteurs font une analyse empirique du rôle que joue la présentation directe d'information dans l'évaluation des premiers appels publics à lépargne. Ils se penchent sur les raisons pour lesquelles certaines sociétés qui font appel public à l'épargne au Canada intègrent à leur prospectus d'émission des prévisions de bénéfices, alors que d'autres ne le font pas, et ils s'intéressent en particulier au rôle de la présentation directe de ce genre d'information dans l'évaluation d'un premier appel public à l'épargne. Ils examinent plusieurs hypothèses inspirées d'ouvrages traitant de présentation volontaire d'information et d'indicateurs. Les résultats obtenus sont conformes aux hypothèses selon lesquelles 1) ceux qui font état de prévisions ont de l'information positive à communiquer au sujet des perspectives de bénéfices, contrairement à ceux qui ne font état d'aucune prévision, 2) les indicateurs que représentent les prévisions de bénéfices sont pertinents à l'évaluation et 3) le marché a la capacité de corriger l'information qu'il reçoit pour tenir compte des erreurs ou des distorsions anticipées dans les prévisions de bénéfices.

The voluntary use of regulatory accounting principles (RAP) by Savings and Loans (S&Ls) is predicted to be related to ownership structure, proximity to violation of net worth requirements, political factors, and prior use of RAP. We examine the decisions to both adopt and retain the use of several RAP: two ‘cosmetic’ RAP that are relatively independent of other economic decisions and two ‘noncosmetic’ RAP that directly interact with investment or financing decisions. S&Ls using RAP tend to: (a) be mutuals, (b) have low regulatory net worth, (c) be larger (for S&Ls adopting RAP), and (d) have used other RAP in the prior period.

Abstract. Recent empirical work by Krinsky and Rotenberg (KR) (1989a, b) suggests that the relationship between entrepreneurial ownership retention and initial valuation of unseasoned common shares may not hold in the Canadian environment. In this study, we replicate and extend KR's tests on our more recent Canadian sample of 180 IPOs that listed on the TSE between 1984 and 1987. We find empirical evidence that initial valuation is increasing in the ownership retention signal (α), even when retention is included with various other possible managerial or firm‐specific signals about future cash flows. Further, we find this result to be robust with respect to a number of different model specifications as well as across different definitions of who the entrepreneur is, different classes of common stock, and different types of offering units.Résumé. Les récents travaux empiriques de Krinsky et Rotenberg (1989a, b) donnent à penser que la relation entre la rétention par l'entrepreneur d'une participation dans l'entreprise et l'évaluation initiale d'actions ordinaires émises par une entreprise non solidement établie pourrait ne pas tenir dans le contexte canadien. Dans l'étude qui suit, les auteurs reprennent, en les élargissant, les tests de Krinsky et Rotenberg auprès d'un échantillon canadien plus récent de 180 premiers appels publics à l'épargne sur la bourse de Toronto, entre 1984 et 1987. Ils démontrent empiriquement que l'évaluation initiale des actions émises augmente au signal de rétention d'une participation (α), même lorsque la rétention fait partie de divers signaux possibles relatifs à la direction ou spécifiques à l'entreprise au sujet des flux monétaires éventuels. Les auteurs concluent en outre que la solidité de cette conclusion résiste à la modification des caractéristiques du modèle ainsi qu'à la modification des définitions de l'identité des entrepreneurs, des différentes catêgories d'actions ordinaires et des différents types d'unités émises.

Abstract. This study examines the volume of trading in the stock of 34 Canadian companies that initiated a policy of regular cash dividends during the period 1972–1982.Using a time‐series methodology linked to changes in Canadian tax legislation, we test whether the volume of trading surrounding first‐time dividend adoptions declined after 1978, a year when tax legislation changed the taxation of dividends toward tax neutrality for investors in high tax brackets. We observe a significant trading volume decline after 1978, which we interpret as implying that fewer investors wanted to dispose of initial dividend stocks after 1978. The result is inconsistent with dividend irrelevance theories and possibly points to tax clientele relevance in Canada.Résumé. Les auteurs examinent le volume de titres négociés pour 34 sociétés canadiennes ayant mis en place une politique de versement périodique de dividendes en espèces durant la période 1972–1982.À l'aide d'une méthodologie de séries chronologiques liée aux changements apportés à la législation fiscale canadienne, les auteurs vérifient si le volume des titres négociés dans le contexte de l'adoption initiale de cette politique de dividendes a décliné après 1978, année au cours de laquelle le fisc a modifié l'imposition des dividendes pour pencher vers la neutralité fiscale pour les investisseurs appartenant aux tranches d'impôt élevées. Ils observent un déclin appréciable du volume de titres négociés après 1978, déclin qui suppose, selon eux, qu'un moins grand nombre d'investisseurs ont voulu se défaire de telles actions après 1978. Ce résultat s'oppose aux théories de la non‐pertinence du dividende et pourrait indiquer la pertinence de la «clientèle fiscale» au Canada.