Pathbreaking Accounting Research Marks 40th Anniversary

Although the authors were just PhD students 40 years ago when the Journal of Accounting Researchpublished “An Empirical Evaluation of Accounting Income Numbers,” coauthors Ray Ball, MBA ‘68, PhD ‘72, Sidney Davidson Professor of Accounting, and Philip Brown, MBA ‘65, PhD ‘68, forever changed modern accounting research.

The paper showed how share prices behave in relation to earnings announcements with three principal results, Ball said. “First, most of the information in earnings is anticipated by the market well in advance. Second, there is some price reaction at the time of the announcement, because it does contain some new information. Third, while the market reaction to earnings announcements is relatively ‘efficient,’ it does continue for some time after,” he said. “This was the first documented evidence of what I later termed market ‘anomalies.’”

Ball admitted, “It seems strange in retrospect that no one had done this previously, but the GSB was the only place on earth at that time where all the ingredients were in place for it to happen.“ Richard Leftwich, Fuji Bank and Heller Professor of Accounting and Finance, said, “It was an outgrowth of the work Gene Fama, MBA ’63, PhD ’64, [Robert R. McCormick Distinguished Service Professor of Finance] was doing here at the time.”

Leftwich said the work was probably the most heavily cited empirical paper in accounting. He called the paper “a path-breaking piece” that set the standards for empirical work for generations to come. “It addressed accounting with the same rigorous techniques that other fields used. This is where modern accounting research really started.”

Ball said, “We knew we were onto something of lasting importance, because the results seemed so clear and so sensible—to us, at least. We did have doubts for a while, because there initially was a lot of hostility to the research. But over time the results have spoken for themselves. I’ve been told that our study has been replicated in over 60 countries, which is amazing. Though we were confident the paper would prove to be important, we had absolutely no idea that research would still be conducted in this area 40 years later.”

— Patricia Houlihan