Interperiod Tax Allocation And The Behavior Of Security Prices

The measurement of earnings has been of continuing concern to accountants and to users of accounting data. Because an unlimited number of possible reporting methods exists, and because the collection, storage, reporting and analysis of data are not costless activities, controversies have arisen concerning the relative merit of alternative income measurement rules. The relationship between measured earnings and security price be- havior is of special interest to such issues for several reasons: (1) If one is willing to accept the notion that securities’ markets are efficient and hence provide unbiased assessments of “true” wealth changes of the firm, security price behavior offers a normative basis for evaluating measured earnings and alternative methods of income measurement. More will be said about this later. (2) Even if one does not assume an efficient market exists, the relationship between earnings and security prices can still provide valuable insight. Such research can indicate in what ways, if any, measured earnings affect decision makers’ behavior as reflected in security price changes. Such positive knowledge constitutes a prerequisite for the development of any normative scheme of reporting rules (e.g., APB opinions). A further implication of rejecting the efficient market viewpoint is the possibility that abnormal returns can be obtained from a knowledge of re- lationships of earnings and security prices, although the authors do not personally subscribe to this view. I_x000B_1 In fact, evidence will be offered later in the paper that lends further support to the efficient market hypothesis. _x000B_