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A reply by the authors is presented to commentary by Robert R. Sterling and William Harrison on the article "Capital Market Equilibrium, Information Production, and Selecting Accounting Techniques: Theoretical Framework and Review of Empirical Work," included within the issue. The authors' thoroughly restate and clarify their initial conceptual paradigm, asserting that Sterling and Harrison misattribute their position and research design goals.

In Gonedes, the results of an empirical analysis of accounting-based and market-based estimates of systematic risk were presented. These results suggested that there is, in general, a "statistically significant" relationship between accounting-based and market-based estimates of systematic risk at the level of individual securities, if the accounting-based estimates are conditional upon first-differences or scaled first-differences of the accounting numbers. The differencing transformation seemed to induce relatively better specified models for the accounting numbers. The purpose of this brief note is to present some additional evidence on the same issue, using the estimation results recently reported by Gonedes on the properties of alternative time series models for accounting numbers. The results presented below suggest, once again, that there is a "statistically significant" (but seemingly meager) association between accounting-based and market-based estimates of systematic risk. The strength of the relationship seems to be higher for the relatively better specified model for accounting numbers. [ABSTRACT FROM AUTHOR]

This paper explored several aspects of information-production and capital market equilibrium that seem to have been ignored in the available literature. It was argued that the prevalent use of a definition of capital market efficiency imposing strong conditions on the information market seems to have disguised the importance of explicitly analyzing the market for information. One consequence is that many assertions about what capital market efficiency implies--about, e.g., "superior" portfolio performance and the allocation of resources to information-production--appear to be misleading, because they do not deal with the relevant market. Moreover, it is usually not recognized that some evidence interpreted as being inconsistent with capital market efficiency is best viewed as pertaining to the market for information rather than the capital market. More generally, failure to explicitly consider the market for information may induce unwarranted inferences about the capital market. Finally, it was argued that, in general, the notion of capital market efficiency does not, taken by itself, provide a basis for fully understanding the connection between external accounting and capital market equilibrium, or any other potential source of information and capital market equilibrium. [ABSTRACT FROM AUTHOR]

The single-period two-parameter asset pricing model underlies a substantial amount of theoretical and empirical work on asset pricing. The conventional assumptions used in deriving this model include perfect capital markets, risk aversion, homogeneous expectations, and the assumption that returns on all assets are distributed according to a multivariate normal distribution. Since the early work of Sharpe [1964], Lintner [1965a] [1965b], and Mossin [1966], among others, considerable effort has been devoted to generalizing the conditions under which the two-parameter framework can be used to develop characterizations of capital market equilibrium. The work by Black [1972] and Fama [1970] are two examples of these kinds of efforts. A review of others is provided by Jensen [1972]. The present paper examines some implications of relaxing the assumption of homogeneous expectations (i.e., the assumption that agents' assessed distribution functions of returns are identical). This topic was investigated by, e.g., Eintner [1969]. Unlike the letter study, the present analysis imposes no special conditions on agents' utility functions, other than those already assumed in the two-parameter framework with homogeneous expectations. Instead, restrictions are imposed on the nature of agents' assessed distribution functions. [ABSTRACT FROM AUTHOR]

One important attribute of an efficient capital market is that current market prices fully reflect all available information and, thus, capital market equilibrium is conditional upon this information. There is, however, nothing in the efficient capital market model that provides theoretical insights on the nature or properties of the mechanism through which this conditioning information becomes available. In this paper, some properties and implications of one scheme for information-production were examined. The assumptions underlying this scheme are consistent with those that imply capital market efficiency. The production arid dissemination of information for use by capital market agents was handled via market game theory. Insofar as information about the allocation of real resources is concerned, it was shown that a Pareto optimal competitive solution (in the game-theoretic sense) is attained.[22] And, from the definition of this solution, one knows that the solution involves nonzero expenditures on information so long as at least one group of agents finds it desirable to invest in information-production. Moreover, it was shown that the returns (from information-production) to each agent converge to that agent's competitive allocation (in the classical sense). A basic idea used was as follows. The value of information to an individual was expressed in terms of a certainty equivalent. The certainty equivalents for the members of a coalition defined the payoff vector for that coalition. Then, it was shown that a core for the information- production game exists. The effects of information-production on the equilibrium production-investment decisions of firms whose securities are traded in the capital market were also examined. [ABSTRACT FROM AUTHOR]

The article attempts to provide empirical evidence on the information content of accounting numbers. The author states that estimates of systematic variability conditional upon market price data were gathered via the market model. He explains that analogous linear models were applied to accounting income numbers. He states that the documented income number series associated with a firm's operations can be treated in a manner that is similar to the manner in which the market model treats market-determined rates of return.

The purpose of this paper is to present the results of a statistical test of the equivalent-risk class hypothesis. The statistical test employed is the "Kruskal-Wallis One Way Analysis of Variance by Ranks." This test is a nonparametric test that may be used in order to evaluate the homogeneity of samples. Preceding the discussion of the results of the Kruskal-Wallis test, the authors review the results of another investigator's parametric statistical test of the equivalent-risk class hypothesis.

This paper deals with planning production of a single good over a prescribed finite interval of time [0, T]. The costs considered within the problem are production and holding costs; holding costs are incurred for negative inventory (caused by backlogged sales) and positive inventory (caused by production in excess of demand). The demand for the product is treated as a stochastic process. Problem formulation and optimization use tools from continuous-time stochastic variational calculus and control theory. Among its results, the paper proves the uniqueness of the optimal solution and provides an algorithm for the problem. [ABSTRACT FROM AUTHOR]

The article presents some empirical evidence on the influence of one kind of contemporary accounting message on investors' actions. Investors' actions result from investors' directed thinking processes. The objective of such processes is the construction of transformational strategies, each of which is a behavioral scheme that has some probability of transforming a problematic present state of affairs into a more desirable future state of affairs. The nature of the transformational strategies formulated by investors will be determined by the present beliefs, motives, attitudes, and expectations of investors. The transformational strategies formulated by an investor represent schemes for intervening in an empirical process in order to control his future experiences. During the construction of such strategies, events are predicted and the dimensions and scope of the control over empirical events that may be exercised by the investor are defined and evaluated. An investor's perceptual system is the medium with which the phenomena of the environment are noticed and registered in accordance with the network of concepts that governs the investor's perceptual processes.

A model based on an exponential decay function was formulated to deal with evaluation based on discrepancy. This evaluation concerns discrepancy based on attitudes and specifically hypothesizes that as discrepancy from one's ideal point increases, evaluation of a multidimensional stimulus object will decrease. The model was applied to experimental data dealing with the evaluation of political candidates and was found to give a very good fit for the obtained data. In addition, the parameters of the model were shown to be related to the intensity of an attitude, and it was further shown that the results could be interpreted in terms of the psychological concepts of latitudes of acceptance, rejection, and non-commitment. [ABSTRACT FROM AUTHOR]