Question 1 (17 points)
Consider the article “A day late, a penny short” from Bagnoli, Kross, and Watts (2002) from the
required reading list. On the next page (page number 2) you find Table 6 of this article.
a. What are the two roles of financial reporting and which of these roles is studied in this
article? Shortly explain/describe the two roles and explain your anwers. (4 points)
b. i. What does the ERC (Earnings Response Coefficient) measure? (2 points)
ii. What coefficient or combination of coefficients gives the ERC for earnings
announcements with positive Unexpected Earnings that are late? (2 points)
iii. Does the ERC change when the earnings announcement is a day late, compared to
earnings announcements that are in time? (2 points)
c. Does the market react symmetrically to positive UE and negative UE that are announced on
time? Explain your answer with explicit reference to the coefficients in the Table. (3 points)
d. The Adjusted R2 of the first regression is 0.044. Someone states that this illustrates that
accounting information (earnings) have quite low information content and therefore is not
relevant from an information perspective. How would you defend the relevance of
accounting information from this perspective? (4 points)
Question 2 (15 points)
Ahmed, Kilic, and Lobo (2006) consider the rule change of SFAS 133 that requires fair values of
derivative financial instruments to be recognized instead of only disclosed. Consider banks that
disclosed the fair values prior to the rule change and recognized the fair values after that.
a. Suppose banks on average had fair value losses on these derivatives. How would the (three)
components in the final equation in the Feltham/Ohlson model change in an efficient
market? (4 points)
b. The title of the paper is: “Does recognition versus disclosure matter?”. What would your
answer be to this question based on the results of Table 3 (see page 3 of this exam)? Explain
your answer? (4 points)
c. Are recognized derivatives after the rule change valued differently compared to other assets
and liabilities valued at fair value? (3 points)
d. Assume that research showed that changes in the value of goodwill that are disclosed in the
footnotes are not value relevant, but that such changes are value relevant when they are
recognized in earnings. How can this be explained under the assumption of (semi-strong)
efficient securities markets based on the role of the auditor? (4 points)
1
, TABLE FOR QUESTION 1
2
Consider the article “A day late, a penny short” from Bagnoli, Kross, and Watts (2002) from the
required reading list. On the next page (page number 2) you find Table 6 of this article.
a. What are the two roles of financial reporting and which of these roles is studied in this
article? Shortly explain/describe the two roles and explain your anwers. (4 points)
b. i. What does the ERC (Earnings Response Coefficient) measure? (2 points)
ii. What coefficient or combination of coefficients gives the ERC for earnings
announcements with positive Unexpected Earnings that are late? (2 points)
iii. Does the ERC change when the earnings announcement is a day late, compared to
earnings announcements that are in time? (2 points)
c. Does the market react symmetrically to positive UE and negative UE that are announced on
time? Explain your answer with explicit reference to the coefficients in the Table. (3 points)
d. The Adjusted R2 of the first regression is 0.044. Someone states that this illustrates that
accounting information (earnings) have quite low information content and therefore is not
relevant from an information perspective. How would you defend the relevance of
accounting information from this perspective? (4 points)
Question 2 (15 points)
Ahmed, Kilic, and Lobo (2006) consider the rule change of SFAS 133 that requires fair values of
derivative financial instruments to be recognized instead of only disclosed. Consider banks that
disclosed the fair values prior to the rule change and recognized the fair values after that.
a. Suppose banks on average had fair value losses on these derivatives. How would the (three)
components in the final equation in the Feltham/Ohlson model change in an efficient
market? (4 points)
b. The title of the paper is: “Does recognition versus disclosure matter?”. What would your
answer be to this question based on the results of Table 3 (see page 3 of this exam)? Explain
your answer? (4 points)
c. Are recognized derivatives after the rule change valued differently compared to other assets
and liabilities valued at fair value? (3 points)
d. Assume that research showed that changes in the value of goodwill that are disclosed in the
footnotes are not value relevant, but that such changes are value relevant when they are
recognized in earnings. How can this be explained under the assumption of (semi-strong)
efficient securities markets based on the role of the auditor? (4 points)
1
, TABLE FOR QUESTION 1
2
