Published Article Review Sheet

Title and Author(s): Ball, R., & Brown, P. (1968). An Empirical Evaluation of Accounting
Income Numbers. Journal of Accounting Research, 6(2), 159-178. doi:10.2307/2490232

Statement of the Articles Research Problem:

Are the earnings per share useless in the decision making process of investors because
firms value them differently?

Goals, Purpose and Significance of the Article:

The paper aims to examine and assess the usefulness of existing accounting income
numbers by examining their information content and timeliness. Ball and Brown gives evidence
that there is information content in accounting income number announcements.

Framework & Findings of Prior Published Research Reviewed by the Article:

The article shed a light on a study by Canning (1929) that concluded that accounting
income numbers can not be defined substantively and lack meaning and are doubtful of utility.
Also, net income reflected in financial statements is useless since it lacks theoretical framework
and are just a set of procedures that an accountant applies. The computation of net income is only
based on a set of procedures because policies are only developed when new accounting issues
arise. The article also reveals that the studies of Gilman (1939), Paton and Littleton (1940),
Vatter (1947), Edwards and Bell (1961), Chambers (1964, 1966, and 1967), Lim (1966), Ijiri
(1967), and Sterling (1967) is similar to the framework of Cannings. The article shares another
approach perused by Beaver (1968) to use the investment decision to be reflected in transactions
volume for a predictive criterion. Also, Blume (1968) questioned the magnitude of industry
effects and based on the observation that the significant attached to industry effects depends on
the assumptions made by parameters. Lastly, Samuelson (1965) stated that wherein it stated that
capital markets are unbiased for market prices adjust to useful information, which leads to
fluctuating prices.

Framework of the Article:

Ball and Brown question the accuracy of the framework of Canning. They also compared
the unexpected accounting income number with the firm specific stock component to determine
the usefulness of accounting income numbers.

Research Design and Method:

Type of Inquiry
Qualitative Research
Quantitative Research
Both Qualitative and Quantitative Research

Research Design
The study collected the contents of the income reports of the population, dates of the
report announcement and the movement of security prices around the announcement dates and
used regression models and the nave model to analyze their information. The income numbers
was obtained from Standard and Poors Compustat tapes for years 1946 through 1966. The
annual report announcement dates were taken from the Wall Street Journal, which publishes the
forecasts of the years income, preliminary reports, and complete annual report. The stock prices
are obtained from tapes constructed by the Center for Research in Security Prices.

The Articles Research Population and How It Drew Upon This Population in Conducting
Its Research Inquiry:

Firms that would be included in the study should meet the following criteria: 1) earnings
data available on the Compustat tapes for each of the years 1046-1966; 2) fiscal year ending
December 31; 3) price data available on the CRSP tapes for at least 100 months; and 4) Wall
Street Journal announcement dates available.

Research Data Collected and Analysis Used:

Ball and Brown utilized their data by used regression models for the analysis of Earnings
per Share and Net Income and a nave model applied only to the Earnings per Share. The firms
used by the article summed up to 261 files.

Summary of the Results:

By comparing both the firm specific stock component and the unexpected accounting
income number, the article reveals that the accounting income numbers are not timely or
announce too late. However, some of the information is already released and is already part of
firm specific component therefore considerable thus still being useful in decision making

Conclusions:
At the moment of the announcement, the information is already valued at the stock prices
of the shares. Ball and Brown concluded that the information of the accounting numbers is still
useful not because of the timeliness but because of the content. The announcement of accounting
income numbers or earnings per share should not scare or affect the decisions of the investor.

Recommendations/ Areas for Further Study:

Improving the timeliness of the accounting income numbers may be the object of
investigation for further studies. The article only covered twelve months of information. Other
researchers may use a different time period such as an interim period to see if the usefulness of
the accounting income numbers changes under difference circumstances. The relationship
between magnitude of the unexpected income change and associated stock price adjustment
could also be investigated.