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Accounting Research Center, Booth School of Business, University of Chicago

The 1993 Tax Rate Increase and Deferred Tax Adjustments: A Test of Functional FixationAuthor(s): Kevin C. W. Chen and Michael P. SchoderbekReviewed work(s):Source: Journal of Accounting Research, Vol. 38, No. 1 (Spring, 2000), pp. 23-44

Published by: Wiley on behalf of Accounting Research Center, Booth School of Business, University ofChicago

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Journal of Accounting ResearchVol. 38 No. 1 Spring 2000Printed in US.A.

The 1993 Tax Rate Increase andDeferred Tax Adjustments: A Testof Functional FixationKEVIN C. W. CHEN" AND MICHAEL P. SCHODERBEKt

1. IntroductionThis paper uses a sample of 158 deferred tax adjustments resultingfrom the Omnibus Budget Reconciliation Act of 1993 (OBRA) to explorethe magnitude and nature of analysts' and investors' functional fixationon reported accounting numbers. The 1993 OBRA,passed on August 10of 1993, included a provision that raised the corporate tax rate from34% to 35%. GAAPrequires companies to adjust their deferred tax assetsand liabilities to recognize the income effects of tax changes in the pe-

riod of the tax change (SFASNo. 109 [1992]). In this case, the effects ofthe tax rate increase on deferred taxes would be included in the incometax expense component of 1993 third-quarter earnings.1*Hong Kong University of Science and Technology; tRutgers University. The authorsacknowledge IIBIEIS nc. for providing earnings forecast data and the School of Business ofRutgers University for providing funding on this study. For their helpful comments and sug-gestions we thank Rashad Abdel-khalik, Gary Biddle, Carla Hayn, John Hand, YawMensah,Dave Mest, Eric Noreen, and the workshop participants at Georgetown University, HongKong University of Science and Technology, National Cheng-Chi University, National Tai-wan University, Rutgers University, Temple University, and the University of Maryland.We also thank Brian Yokley of the FASB, Jack Ciesielski of R.G. Associates, Inc., and PatMcConnell and Janet Pegg of Bear, Stearns & Co. for their technical insights and assis-tance. A previous version of this paper was presented at the Seventh Annual Conference onFinancial Economics and Accounting held at Rutgers University.l The new tax rate was applicable to taxable income in excess of $10,000,000, retroac-tive to the beginning of the year for corporations with taxable years beginning on or afterJanuary 1, 1993.

23Copyright ?, Institute of Professional Accounting, 2000

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24 JOURNAL OF ACCOUNTING RESEARCH, SPRING 2000Because this one-period adjustment could have been estimated usingdeferred tax information in the notes to financial statements, fully ratio-

nal investors would be able to react to it as a transitory earnings compo-nent. In contrast, functionally fixated investors would not distinguishbetween the various components of reported earnings. Our analysis at-tempts to test these two competing descriptions of investor behavior. Wealso explore how financial analysts handled the adjustment in their fore-casts of third-quarter earnings per share (EPS).We find that analysts generally did not include these adjustments intheir earnings forecasts. This finding is not sensitive to the size or sign(income increasing or decreasing) of the adjustment or proxies for ana-lysts' sophistication.We also find that when 1993 third-quarter earnings were announced,the deferred tax adjustment was mapped into security prices at the samerate as unexpected earnings excluding the tax adjustment, and that thismispricing was more severe for firms with income-increasing tax adjust-ments. This result may stem from the asymmetric reporting requirementsfor deferred tax assets and deferred tax liabilities under the accountingstandards superseded by SFASNo. 109. The results also suggest that mis-pricing of the tax adjustment was more likely for firms that did not dis-close the adjustments in their third-quarter earnings releases, perhapsbecause investors would have had to estimate the adjustment for thesefirms (recall that tests on analysts forecast errors indicated that analystsdid not make these estimates).Section 2 discusses the relation of this study to the literature on mar-ket efficiency and functional fixation. Section 3 explains the sample se-lection procedures, provides summary statistics of the deferred taxadjustments, and compares the actual adjustments to available estimates.Section 4 includes the main results. Section 5 explores cross-sectionaldifferences in functional fixation of analysts and investors. A concludingsection follows.2. Deferred Tax Adjustments and the Functional FixationHypothesis

In an efficient market, stock prices reflect all publicly available infor-mation. Alternatively, investors might interpret accounting informationwithout regard to the rules used to produce it. This "functional fixa-tion hypothesis" (FFH) predicts that the stock prices will be mechani-cally related to reported earnings numbers.Some research has concluded that investors can "see through" theeffects of different accounting methods (e.g., Beaver and Dukes [1973]).More recently, this conclusion has been challenged. As summarized byBernard [1993], evidence inconsistent with market efficiency suggestseither an incomplete initial response to earnings announcements (Ber-

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1993 TAX RATE INCREASE AND DEFERRED TAX ADJUSTMENTS 25nard and Thomas [1989]) or an overreaction (Ou and Penman [1989]) orfunctional fixation. For example, Dietrich [1984] and Hand [1990] findanomalous positive reactions to accounting gains from debt-for-debt anddebt-for-equity swaps, respectively. Both results contradict market effi-ciency, because the gains from the debt swaps either had been previouslyannounced or could be calculated from public information prior to theearnings release. Hand attributes his findings to unsophisticated inves-tors' fixation on reported accounting numbers. Ball and Kothari [1991],however, note that Hand's proxy for "investor sophistication," the per-centage of noninstitutional ownership, is correlated with firm size andsuggest that Hand's result is indistinguishable from the other firm sizeearnings/return anomalies previously documented. Hand [1991] refutesthis claim by providing additional analyses showing that his data do notexhibit a reliable firm-size effect.Our study follows the same general approach as that used in Dietrich[1984] and Hand [1990]. However, because the swap gains they exam-ined are reported as extraordinary items, they generally are not in-cluded in analysts' forecasts (Philbrick and Ricks [1991]). The deferredtax adjustment, on the other hand, is part of income tax expense, so it isincluded in income from continuing operations. Thus, our setting per-mits a more powerful examination of analysts' sophistication in analyz-ing earnings components.In addition, the swap gains analyzed by Dietrich and Hand were theresult of a voluntary financial transaction that was publicly announcedbefore the release of quarterly earnings containing the swap gains. Incontrast, the deferred tax adjustments we study were imposed exoge-nously by SFASNo. 109 and the tax rate change. Thus, we believe theanalysis of tax adjustments required considerable expertise. In fact, SFASNo. 109was issued just one year prior to 1993, and for many companies,OBRA was the first opportunity to apply the provisions regarding taxrate changes. Stories in the financial press (Ciesielski [1993] and Berton[1993]) proposed that investors and analysts might be unaware of theeffects of this new rule on 1993 third-quarter earnings.2Finally, in contrast to swap gains, the deferred tax adjustments couldbe either income increasing or income decreasing, depending on theprior deferred tax balance. This, along with the fact that some firms didnot separately disclose the tax adjustment while most did, allows us totest for cross-sectional differences in functional fixation.

2 Ciesielski [1993] and Berton [1993] were published about two weeks prior to the endof the third quarter of 1993 (September 15 and 17, respectively). Only negative effects onearnings were mentioned in the Berton article, even though the effects could be positive ifa company had a net deferred tax asset balance. Based on the article, it is reasonable tosuggest that the investing public was generally not knowledgeable about the intricate ac-counting rules on deferred taxes.

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26 KEVIN C. W. CHEN AND MICHAEL P. SCHODERBEK3. The Income Effects of the 1993 Deferred Tax Adjustment3.1 SELECTION OF FIRMS WITH 1993 DEFERRED TAX ADJUSTMENTS

Our sample consists of firms with deferred tax adjustments in the notedisclosures to the annual 1993 financial statements and third-quarter10-Qs. We assume that ex post selection bias from using 10-K and 10-Qreports is eliminated by paragraph 45 of SFASNo. 109, which requiresfirms to report all significant tax adjustments, positive or negative.3Firms with tax adjustments were identified through a keyword searchof the "financial footnotes" fields of CompactDisclosure, NAARS, and Com-pustat Text.4Sample firms also had to have earnings forecasts availableon the IIBIEISmonthly forecast summaries, returns data available onCRSP,and disclosures of the tax adjustments in their 1993 third-quarter10-Qs. This search yielded 200 sample firms.Eliminating deferred tax adjustments less than 0.1% of market valueas of September 1993 reduced the sample to 160 firms.5 Finally, 2 firmswere deleted because they were subsidiaries of other sample firms, re-sulting in a final sample of 158 firms.6 These sample selection proce-dures are summarized in panel A of table 1.Panel A also shows that 43 firms had positive (income-increasing) de-ferred tax adjustments and 115 had negative (income-decreasing) taxadjustments. The former are associated with net deferred tax asset posi-tions and the latter with net deferred tax liabilities.The 158 sample firms represent a cross-section of 39 two-digit SICindustries. The largest concentrations are 17 firms in industry 63 (Insur-ance Carriers) and 14 firms in industry 26 (Paper and Allied Products).Industry 67 (Holding and Other Investment Offices) has 12 firms andindustry 13 (Oil and Gas Extraction) has 10. No other industry hasmore than 8 firms.7

3We considered other sampling approaches, including using Compustat o identify firmswith large deferred tax balances prior to the tax change. However, Compustat ombines de-ferred tax assets with "other assets" (data 69), and its balance in deferred tax liabilities in-cludes deferred taxes from foreign, state, and local taxes as well as federal taxes. The 1993deferred tax adjustment relates to the federal portion only.4A variety of keyword combinations relating to deferred taxes were used in the search,including "tax rate," "deferred tax," "increase," "34%,"and "35%,"etc. For CompactDisclo-sure and NAARS,the search was conducted on firms' 1993 10-K reports. For Complustat ext,the search was on firms' 10-Q reports.

5Three firms with deferred tax adjustments less than 0.1% of market value were re-tained in the sample because estimates of their tax adjustments were provided in Berton[1993].6One hundred thirty-one of the sample firms were listed on the NYSE or AMEX in1993, and the other 27 were on NASDAQThe number of NASDAQ irms is limited becausemany of the databases used in the study, including NAARS, CompustatText, JIBIEIS, ndDowJonesNewsRetrieval,cover only a subset of NASDAQ irms.7To investigate whether there is event date and industry clustering in our sample, we

examined announcement dates by industry. There were five return days in which more

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1993 TAX RATE INCREASE AND DEFERRED TAX ADJUSTMENTS 27TABLE 1

Sample Selection and the Deferred Tax Adjustment Compared with Earnings and Market ValuePanel A: Sample Selection Procedures

Numberof FirmsFirms with Deferred Tax Adjustments Identified in the Financial Footnotes

Field of Compact Disclosure, NAARS, or Compustat Texta 200Deferred Tax Adjustment Less Than 0.1 % of Market Valueb ( 40 )Subsidiary of Other Sample Firms ( 2 )

Final Sample 158Firms with Income-Increasing Deferred Tax Adjustments 43Firms with Income-Decreasing Deferred Tax Adjustments 115

Total Sample 158Panel B: The Deferred Tax Adjustment Compared to Earnings and Market Value

Percentile10th 25th 50th 75th 90th

Absolute Value of DeferredTax Adjustment (MM$)C 0.80 1.70 4.00 15.10 36.00

Absolute Adjustment as a Percentageof Absolute Value of 1993 Third-QuarterEarningsd 7.82 11.46 22.47 51.95 148.40

Absolute Adjustment as a Percentage ofMarket Value 0.13 0.19 0.29 0.54 0.91

Market Value (MM$)e 283 584 1,444 4,599 8,442aFirms were identified in these databases using a variety of keywords such as "tax rate increase,""deferred tax,""34,"and "35,"etc. The sample was limited to firms that (1) were covered by IIBIEIS, 2)had return data available on CRSP,and (3) disclosed the deferred tax adjustments in their 1993 third-quarter 10-Qs.bMarket Value is measured as firms' common stock price at the end of September 1993 times num-ber of common shares outstanding. Three firms with deferred tax adjustments less than 0.1 % of mar-ket value were retained in the sample because estimates of their tax adjustments were provided inBerton [1993].cDeferred tax adjustments are obtained from 10-Q reports.dEarnings are defined as income from continuing operations.eMarket Value is computed as firms' common stock price two days prior to the announcement of1993 third-quarter earnings times number of common shares outstanding.

3.2 INCOME EFFECTS OF THE 1993 DEFERRED TAX ADJUSTMENTGiven the August 1993 corporate tax rate increase from 34% to 35%,GAAPrequired firms to remeasure their deferred tax assets and liabili-ties and determine a net deferred tax adjustment. SFASNo. 109 (para. 27)

provides that the net adjustment should be included in income fromcontinuing operations during the quarter of the tax rate change.SFASNo. 109 was passed in February 1992, with adoption required asof the beginning of 1993; however, 90 of our 158 sample firms adopted

than ten sample firms announced their third-quarter earnings. However, on only one ofthese days did five firms in the same industry announce, and on only two days did threefirms in the same industry announce. Thus, cross-sectional dependence does not appearto be a threat to the inferences we draw.

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28 KEVIN C. W. CHEN AND MICHAEL P. SCHODERBEKTABLE 2

Components of Deferred Tax BalancesPanel A: Deferred Tax Assets (43 Firms)Most Important Component of Deferred Tax a Number of FirmsLoss Reserves (Excluding Loan Losses) 15Postretirement Benefits 11Employee Benefits 5Loan Loss Reserves 3Claim Reserves 3Othersb 2Components Not Disclosedc 4Total 43Panel B: Deferred Tax Liabilities (115 Firms)Most Important Component of Deferred Tax Number of FirmsDepreciation 52Base of Property, Plant & Equipment 22Acquisition Costs of Assets or Policies 17Oil and Gas Exploration 3Deferred Costs 2Leases 2Long-Term Contracts 2Others 5Components Not Disclosed 10Total 115

aThe component of deferred tax cited in the firm's 1992 10-Ks (or 1993 first-quarter 10-Qs) as com-prising the largest dollar amount of its total deferred tax balance.b"Others" ndicates that the component was specified but was not cited by any other sample firms asthe most important component.c"Component Not Disclosed" indicates that the income tax footnotes did not disaggregate deferredtaxes.

during 1992. The deferred tax balances of the sample firms were allmeasured using current rates prior to the August 1993 tax rate change.The magnitude of the tax adjustments for the 158 sample firms aresummarized in panel B of table 1. The median, absolute adjustment is$4 million, about 22.5% of EPS. As a percentage of market value, themedian absolute adjustment is 0.29%. Thus, although the tax adjust-ments are an important part of quarterly earnings, in general they are avery small percentage of equity value. Finally, the last row of panel Bprovides the distribution of the sample firms' market values. The me-dian market capitalization is $1,444 million, while the 10th (90th) per-centile capitalization is $283 ($8,442) million.8Table 2 summarizes the components of firms' deferred tax balances.These components provide qualitative evidence on the cash flow im-plications of the deferred tax adjustment. We collected information onthe largest dollar component of deferred taxes from disclosures in 1992

8The difference between means of the absolute values of tax adjustments (as a percent-age of market value) of the income-increasing and income-decreasing groups is not sig-nificantly different from zero (t = -0.33).

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1993 TAX RATE INCREASE AND DEFERRED TAX ADJUSTMENTS 29TABLE 3

Comparison of Actual and Estimated Deferred Tax Adjustments for 158 FirmsPanel A: Difference between Estimated and Actual Deferred Tax Adjustments a

Distribution of the Absolute Value of the Difference between theEstimated and Actual Tax Adjustment Divided by Actual Tax AdjustmentFrequency Percentage Cumulative Percentage

Less Than 10% 48 30.4 30.4Between 10% and 20% 35 22.2 52.5Between 20% and 30% 20 12.7 65.2Between 30% and 50% 28 17.7 82.9Greater Than 50% 27 17.1 100.0Panel B: Correlation between Estimated and Actual Deferred Tax Adjustments

Spearman RankBasis Pearson Correlation CorrelationAdjustment Per Share 0.97 0.97Adjustment Divided by Market Value 0.97 0.94

aActual deferred tax adjustment = reported amount in the 1993 third-quarter 10-Q. Estimateddeferred tax adjustments = beginning net balance of deferred tax assets (liabilities) x 1/34 (- 1/34).

10-K reports and 1993 first-quarter 10-Qs, for 1993 adopters of SFASNo. 109. For the 43 firms with net deferred tax assets, the most impor-tant components of deferred tax assets are loss reserves (15 firms, ex-cluding loan loss reserves) and postretirement benefits (11 firms). Forthe 115 firms with net deferred tax liabilities, 52 cited depreciationmethods and 22 cited the depreciation base of plant assets as the largestcomponent.Some components of deferred taxes reported in table 2, such as post-retirement benefits, should reverse over fairly long periods. Others, suchas those related to depreciation, may never reverse if capital expendi-tures increase and there is no change in depreciation methods. Thus,the cash flow implications from the 1993 deferred tax adjustment aregenerally distant. This, together with the small average percentage of de-ferred tax adjustment relative to equity value reported earlier, indicatesthat the tax adjustments should have a negligible effect on firm value.3.3 ESTIMATION OF THE DEFERRED TAX ADJUSTMENT

We estimate the tax adjustment by multiplying the beginning balanceof deferred tax assets (liabilities) by 1/34 (-1/34). Deferred tax balancesare collected from tax disclosures in 1992 financial statements (or from1993 first-quarter 10-Qs for 1993 adopters of SFASNo. 109). All our esti-mates had the same sign (i.e., positive or negative) as the actual tax ad-justments. We calculated absolute "estimate errors" of the deferred taxadjustment by taking the absolute difference between the estimated andactual deferred tax adjustments and then dividing by the absolute valueof the actual tax adjustment. As indicated in panel A of table 3, thedifference between the estimated adjustment and the actual adjustment

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30 KEVIN C. W. CHEN AND MICHAEL P. SCHODERBEKis less than 10% for 48 (30.4%) of the 158 sample firms. For approxi-mately two-thirds (65.2%) of the sample, the scaled estimate errors areless than 30%; for only 27 firms did the estimate errors exceed 50%.

The sign of the estimate errors (obtained by subtracting the actual taxadjustment from the estimate) is positive for 84 (53.2%) of the samplefirms. The mean of the signed estimate error as a percentage of the ab-solute value of the tax adjustment is 9.16%. This mean is significantlydifferent from zero (t = 2.00, p < 0.05). Measurement error in the esti-mates is unavoidable, since tax disclosures generally do not disaggregatedeferred tax balances by foreign, state, local, and federal taxes. Theresult is a positive bias in the estimates.Correlation coefficients between the estimates and the actual deferredtax adjustments are presented in panel B. The Pearson and SpearmanRank correlations between the estimated adjustments per share and ac-tual tax adjustments are both 0.97. When both are deflated by marketvalue, the correlations are 0.97 and 0.94, respectively. Thus, we believethat analysts and investors could have formed estimates of the deferredtax adjustments using public information available prior to the third-quarter earnings announcement.

3.4 DISCLOSURE OF THE 1993 DEFERRED TAX ADJUSTMENTSThe separate disclosure of deferred tax adjustments at the time 1993third-quarter earnings were announced will affect our measures of earn-ings components for the capital market tests in sections 4.2 and 5.2. Inan efficient market, an information item that is public (or estimable) willbe impounded in prices. If the tax adjustment is not disclosed alongwith the earnings adjustment, rational investors will base their estimateon public information,9 and these investors will also separate the taxadjustment from recurring earnings. We argue that this separation re-quires a rigorous understanding of accounting (relative to that requiredto understand a separately disclosed adjustment). To the extent inves-tors cannot or do not make this separation, the probability of functionalfixation is higher when the tax adjustment is not separately disclosed.Thus, we partition our sample based on public disclosure of the tax ad-justment to test for cross-sectional differences in the market reaction toearnings announcements.We also control for the disclosure of other unusual or nonrecurringitems that are included in 1993 third-quarter earnings in our empiricaltests. Panel A of table 4 shows that the deferred tax adjustment was dis-closed separately on DowJones News Retrieval(DJNR,including the BroadTapeand PressReleaseFile) for 124 of the 158 sample firms, while 54 firms

9Under the assumption that investors do not observe company disclosures of the taxadjustments in press releases, tests in section 4.2 replace actual tax adjustments with esti-mates in regressions of cumulative abnormal returns on earnings components.

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1993 TAX RATE INCREASE AND DEFERRED TAX ADJUSTMENTS 31TABLE 4

Disclosure of the Deferred Tax Adjustment and Unusual Items (UI) on Dow Jones Nezvs RetrievalPanel A: Number of Firms Disclosing DTADJ and UI on DowJones News Retrieval

Deferred TaxAdjustment Unusual ItemsNumber of Firmsa 124 54Total Sample Firms 158 158Panel B: Disclosure of Positive and Negative DTADJson DowJones News RetrievalbDisclosure No Disclosure TotalPositive DTADJ 24 19 43Negative DTADJ 100 15 115Total 124 34 158

-2 = 17.97 (p < .001)aNumber of firms with deferred tax adjustments/unusual items reported separately from 1993third-quarter earnings on DowJonesNews Retrieval(including the Broad Tapeand the Press ReleaseFile).bPositive deferred tax adjustments are income increasing and result from net deferred tax assetpositions. Negative deferred tax adjustments are income decreasing and result from net deferred taxliability positions.

reported unusual items.10Thus, the actual amount of the tax adjustmentwas available to the public at the time of the earnings announcement forall but 34 of the firms. Investors, even if unaware of the deferred tax ad-justments prior to the earnings announcement, would have the opportu-nity to separate them out from other earnings components when theyreacted to the announcement. For the 34 firms without disclosure of taxadjustments, estimates of the tax adjustments are used instead of actualadjustments in regressions of abnormal returns on earnings components(sections 4.2 and 5.2).Panel B of table 4 shows a 2 x 2 contingency table of positive and neg-ative deferred tax adjustments disclosed in press releases. Nineteen ofthe 34 firms that did not disclose the adjustment had positive adjust-ments, even though positive adjustments comprise just 27% of the totalsample. A chi-square test indicates that managers of firms with positivetax adjustments were less likely to include the adjustment in their pressreleases than were firms with negative adjustments (X2 = 17.97, p

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32 KEVIN C. W. CHEN AND MICHAEL P. SCHODERBEK4. Empirical Results

This section presents our main tests of functional fixation on the partof analysts (section 4.1) and investors (section 4.2). Section 4.1 examinesthe relation between analysts' forecast errors and deferred tax adjust-ments; section 4.2 regresses security price changes surrounding third-quarter earnings announcements on earnings components, including thetax adjustment.4.1 ANALYSTS' FORECAST ERRORS, UNUSUAL ITEMS, AND THEDEFERRED TAX ADJUSTMENT

To provide evidence on whether analysts rationally impounded esti-mates of the deferred tax adjustment (DTADJ) in their forecasts, whilecontrolling for unusual items (UI), we provide two versions of our firstregression in expressions (1A) and (1B):FEi = ao + a1DTADJi + a2UIi = ei, (1A)

and:FEi = al + a"PE(DTADJi)+ a"PE(UHi)+ ei, (1B)

where FEi is the forecast error (actual third-quarter EPS from continu-ing operations announced on DJNRminus the most recent IIBIEIShird-quarter EPS forecast) and PE(.) is our proxy for analysts' expectationsof DTADJiand UHi, espectively. In (1A), DTADJis the actual tax adjust-ment reported in firms' 10-Qs and UHis the unusual items reported onDJNRat the time of the earnings announcement. In (1B), PE(DTADJi) sour estimate of the tax adjustment, computed by multiplying the be-ginning balance of deferred tax assets (liabilities) by 1/34 (-1/34) (fromsection 3.3). PE(HUi)was derived from a search on DJNRfor separatedisclosures of UImade prior to the earnings announcement. Of the 54firms that included unusual items at the time earnings were announced,only 10 provided the information beforehand on DJNR Thus, in regres-sion (1B), the variable PE(UHi) akes on nonzero values for only 10 firms.For those without predisclosure of UI, we assume analysts' expectation tobe zero. In estimating (1A) and (1B), all the variables are converted toa per share basis and deflated by the price per share of common stocktwo days prior to the earnings announcement.We assume that analysts attempt to include transitory items in theirforecasts so their earnings predictions are as close as possible to reportedincome from continuing operations. Under this assumption, in (1A) and(1B), the null hypothesis is that analysts incorporated rational expecta-tions of the tax adjustment and unusual items in their earnings forecasts.In (1A), since rational expectations imply that actual values of DTADJandUI are equal on average to forecasts, the forecast errors should not becorrelated with the realized values of DTADJand UI, i.e., a, = a2 = 0. In(1B), we assume that analysts rely on simple estimating rules and public

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1993 TAX RATE INCREASE AND DEFERRED TAX ADJUSTMENTS 33TABLE 5RegressionofForecastErrors FE)on theDeferredTaxAdjustment DTADJ) nd Unusual Items(UI)a

Eq. (1A): FEi = a0 + aiDTADJi + a2Ui + ebEq. (1 B): FEi = a" + a"PE(DTADJi)+ a' PE(Uhi) + ei

aO (%) a1 a2Equation (t-Statistic) (t-Statistic) (t-Statistic) Adjusted R2 (%(1A) 0.03 0.90 0.92 75.8(0.44) (7.47) ** (21.93)*(1B) -0.12 0.43 0.80 45.9

(-1.23) (2.77)** (11.47)**aThe total number of firms included in each regression is 158. The definitions of variables are:FEi:forecast error in earnings (= actual earnings - forecasted earnings for the third quarter of1993).DTADJi:deferred tax adjustment reported in 1993 third-quarter 10-Qs.UIi: unusual items reported on Dow Jones News Retrieval at the time of the earnings announce-ment.PE(.) refers to the proxy of the market expectations for UI and DTADJ,respectively. PE(UI) isderived from firms' disclosures of UI made on DJNRprior to the earnings announcement(number of observations = 10 firms), and PE(DTADJ) is the deferred tax adjustment esti-mated by multiplying the beginning net balance of deferred tax assets (liabilities) by 1/34(- 1/34).bAllvariables are converted to per share basis and deflated by the price per share of common stocktwo days prior to the announcement of 1993 third-quarter earnings.*"Significant at a level of 0.01 (one-tailed test).

information to form their expectations of DTADJ and UI. Under this as-sumption, a' = a' = 0.

Row 1 of table 5 shows that both a, and a2 are significantly differentfrom zero (p < 0.01). The adjusted R2 of the regression is 75.8%, ofwhich 26% is contributed by DTADJ (measured by the partial correla-tion). In addition, the coefficient on DTADJh(0.90) is not significantlydifferent from one (F = 0.737, p < 0.39), suggesting that few analysts in-cluded the rational expectations of DTADJin their forecasts.Row 2 of table 5 reports the results of estimating (1B). The adjustedR2 of the model is 45.9%, and a' and a' are 0.43 and 0.80, respectively.Since both coefficients are significantly different from zero (p < 0.01),it appears that analysts did not include estimated DTADJ and prean-nounced UI in their forecasts of 1993 third-quarter earnings either.

The 0.43 coefficient on PE(DTADJi) in equation (1B) is less than the0.90 coefficient on DTADJi in (1A). There are two reasons for this differ-ence. First, the results of (1B) are highly affected by the zero observationsof UI (those not preannounced on DJNR). In an additional regression ofFEi on PE(DTADJi) and actual UHi not reported in table 5), the coefficienton the estimated tax adjustment is 0.74, and the model adjusted R2 is74.7%. Thus, PE( Uhi) is a poor proxy for actual Uhi. Second, the estimatesof the tax adjustment have an upward bias (see section 3.3). The biasoccurs because the tax adjustments were estimated using the total bal-ance of deferred taxes, while the 1993 OBRA relates to the federal por-tion only. Since the estimated tax adjustments are biased upward, thecoefficient is biased downward.

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34 KEVIN C. W. CHEN AND MICHAEL P. SCHODERBEKTaken together, the results in this section suggest that analysts gener-ally did not include the estimates of the deferred tax adjustment in theirforecasts of 1993 third-quarter earnings.

4.2 SECURITY RETURNS SURROUNDING EARNINGS ANNOUNCEMENTSAnalysts' apparent failure to include the deferred tax adjustment intheir earnings forecasts will not affect share values if investors made thisadjustment, perhaps using the detailed press releases which reportedthe tax adjustment for 124 of our sample firms. (Recall that analysts didnot have access to this information when making EPS forecasts.)To test whether investors have the same functional fixation as ana-lysts, we examine security price responses to announcements of 1993third-quarter earnings. The security price reaction is defined as the risk-adjusted two-day cumulative abnormal return (CAR) on days (0, +1),where (0) is the day of the Broad Tape earnings announcement. If theannouncement came after 4:00 P.M., then day 0 is the following day.Market model parameters to compute CARiare estimated over the 200days beginning on day (-206) and ending on day (-7) prior to the third-quarter earnings announcement. Daily stock returns and value-weighted

market returns were collected from the CRSP iles.We partition the forecast error metric, FEi (reported EPS - forecastedEPS), into three components: Ui, DTADJi,and an adjusted forecast errorthat excludes Ui and DTADJi (denoted as BTFEi). We expect that BTFEiconsists mostly of recurring earnings components.We test for functional fixation around earnings announcements usingregression (2A):CAR= bo + b1DTADJi+ b2Uh + b3BTFEi + ei, (2A)

where DTADJiand UHiare the deferred tax adjustments and unusualitems respectively reported on DJNR at the time of the earnings an-nouncement. If DTADJiwas not reported separately on DJNR (see sec-tion 3.3), we used the estimate. All three independent variables areconverted to a per share basis and deflated by price per share two daysprior to the earnings announcement.Similar to (1A), (2A) is based on predictions of rational expectationsthat investors' expected value of DTADJ quals its realized amount. If in-vestors impounded DTADJinto their expectations of 1993 third-quarterearnings, b1 = 0. In addition, rational investors should discount DTADJiand BTFEi into security prices at different rates (i.e., b1 < b3), whilefunctionally fixated investors will not distinguish between these two earn-ings components (i.e., b1 = b3).Alternatively, we can assume that (parallel to (1B)) investors usedsimple rules and public information to form their expectations of UIand DTADJUnder this assumption, an alternative specification of (2A)

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1993 TAX RATE INCREASE AND DEFERRED TAX ADJUSTMENTS 35TABLE 6SummaryStatistics or VariablesUsed n Regressionof CumulativeAbnormalReturns (CAR) on Earnings Componentsa

(SampleSize: 158 Firms,All ValuesAre in Percentages)Variableb Mean Std. Dev. Median N> OC )CARi 0.01 4.20 -0.20 74 (46.8%)PE(DTADJi) -0.22 0.57 -0.24 43 (27.2%)PE(Uli) -0.11 1.27 0.00 1 (0.6%)DTADJi -0.21 0.54 -0.24 44 (27.8%)Uhi -0.16 1.43 0.00 21 (13.3%)BTFEi 0.07 0.77 0.04 90 (60.0%)

aDefinition of variables:CARi: the two-day abnormal return on days (0, +1), where (0) is the day earnings wereannounced on DowJonesNews Retrieval.DTADJi: the deferred tax adjustment reported on Dow Jones News Retrieval at the time of theearnings announcement (estimated adjustment is used if actual DTADJnot disclosed).UIi: unusual items reported on Dow Jones News Retrieval at the time of the earnings announce-ment.BTFEi: unexpected earnings excluding UIiand DTADJi = FEi- UIi- DTADJi)PE(.) refers to the proxy of the market expectations for UI and DTADJ,respectively. PE(UI) isderived from firms' disclosures of UI made on DJNR prior to the earnings announcement(number of observations = 10 firms), and PE(DTADJ)is the deferred tax adjustment esti-mated by multiplying the beginning net balance of deferred tax assets (liabilities) by 1/34(- 1/34).bAll variables are converted to per share basis and then deflated by price per share of common

stock two days prior to the earnings announcement.cN> 0 indicates the number of positive observations for each variable, with percentages in paren-theses (out of 158 total sample firms).

that uses proxies for the market's expectations of DTADJ and UI can beestimated:

CARi = b + bjPE(DTADJ1) + b PE(UhI) + b3BTFEi + ei, (2B)where PE(.) is the proxy for investor's expectations of DTADJMnd UhT,respectively (proxies defined in section 4.1). In equation (2B), BTFEi iscomputed as FEi - PE(DTADJi) - PE( UhT).If investors incorporated theex ante estimate of DTADJh(PE(DTADJh)) in their earnings expectations,bi should be zero.

Descriptive statistics, including means, standard deviations, and medi-ans of each variable used in equations (2A) and (2B), are reported intable 6 (all values stated in percentages).11 The pair-wise Pearson corre-lations of independent variables included in either (2A) or (2B), not re-ported, are generally small (none is larger than 0.20 in absolute value).

1 The 44 firms with positive tax adjustments reported in row 4 of table 6 are onegreater than the number reported in tables 1-5. This is because we collected tax adjust-ments in tables 1 to 5 from 10-Qs, and those in tables 6 to 8 from press releases. One firm,E. W. Scripps, reported a positive tax adjustment in its press release, but according to its10-Q, the positive adjustment related to other changes in tax laws. The actual tax adjust-ment due to tax rate increase was negative.

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36 KEVIN C. W. CHEN AND MICHAEL P. SCHODERBEKTABLE 7Regressionof CumulativeAbnormalReturns (CAR)Surroundingthe Announcementof 1993Third-QuarterEarnings on DifferentDecompositionof Unexpected arningsa

(SampleSize: 158 firms)Eq. (2A): CARi = bo + b1DTADJi b2Uli + b3BTFEi+ eiEq. (2B): CARi = b6+ biPE(DTADJi) + b'PE(Uhi) + b BTFEi+ eiCoefficient on

Intercept (%) DTADJi U1i BTFEi AdjustedEquationb (t-Statistic) (t-Statistic) (t-Statistic) (t-Statistic) R2 (%)(2A) 0.30 1.68 0.25 1.41 7.7(0.86) (2.70)** (1.09) (3.32)**(2B) 0.35 1.57 0.20 0.86 5.4(0.99) (2.62) ** (0.75) (2.90) **

aDefinition of variables:CAR1: the two-day abnormal return on days (0, +1), where (0) is the day earnings wereannounced on DowJonesNews Retrieval.DTADJi: the deferred tax adjustment reported on Dow Jones News Retrievalat the time of theearnings announcement (estimated adjustment is used if actual DTADJnot disclosed).UIi: unusual items reported on DowJones Retrievalat the time of the earnings announcement.PE(.) refers to the proxy of the market expectations for UI and DTADJ,respectively. PE(UJ) isderived from firms' disclosures of UI made on DJNR prior to the earnings announcement(number of observations = 10 firms), and PE(DTADJ) s the deferred tax adjustment estimatedby multiplying the beginning net balance of deferred tax assets (liabilities) by 1/34 (-1/34).BFTEi: unexpected earnings excluding UIi and DTADJi = FEi - UIi - DTADJi n equation (2A);= FEi- PE(Ui) - PE(DTADJi) n equation (2B)).bAllvariables are converted to per share basis and then deflated by the price per share of commonstock two days prior to the earnings announcement.n*Significantat a level of 0.01 (one-tailed test).

The results of estimating equation (2A) are in row 1 of table 7. Two ofthe three slope coefficients are significant. Specifically, b3 (the coeffi-cient on BTFEi, the recurring part of earnings) is 1.41 (t = 3.32, p

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1993 TAX RATE INCREASE AND DEFERRED TAX ADJUSTMENTS 37This suggests that investors, like most analysts, did not incorporate thesimple estimate of DTADJin their expectation of earnings.'2

In summary, the tests in this section provide support for the hypothe-sis that investors were functionally fixated with respect to the deferredtax adjustment as an income component.5. Cross-Sectional Variation in Analysts' and Investors'Sophistication

The next question is whether functional fixation varies across inves-tors and analysts. This section explores these issues by positing factorsthat determine the sophistication of analysts (section 5.1) and investors(section 5.2).5.1 EARNINGS FORECAST ERRORS AND CROSS-SECTIONAL DIFFERENCESIN ANALYSTS' SOPHISTICATION

We use the following regression to examine three factors posited toaffect analysts' sophistication or otherwise explain cross-sectional differ-ences in whether analysts included the tax adjustment in their forecasts:FEi = co + clDV] x DTADJi+ c2DV2x DTADJi+ c3Uhi+ ei. (3)Equation (3) expands equation (1A) to include dichotomous variables(DV1 and DV2) that allow for different slope coefficients for subsets ofthe 158 sample firms. Three versions of (3) are specified.The first factor predicted to affect the slope coefficient on DTADJ sHand's [1990] measure of "investor sophistication," calculated as thepercentage of firms' stock owned by institutions (from Standard& Poor'sStockGuide). In the first specification, DV1 equals one if firms' institu-

tional ownership is lower than the median of 54% (else DV1 = 0), andDV2 equals one if institutional ownership is higher than the median(else DV2 = 0). All other variables are as defined in section 4.1.The second factor predicted to affect the inclusion of DTADJin ana-lysts' forecasts is the size of the estimated tax adjustment relative to theanalyst's EPSforecast, under the assumption that larger tax adjustmentsare more likely to be incorporated into forecasts. Alternatively, the ben-efit of becoming proficient in SFASNo. 109 increases if the tax adjust-ment is large. Therefore, in our second specification of (3), DV1 equalsone if the estimated tax adjustment is smaller than the sample medianof 22.5% of forecasted EPS (else DV1= 0), and DV2 equals one if DTADJiis larger than the median (else DV2= 0).13'2The adjusted R2 (5.4%) of (2B) is lower than the R2 of (2A) (7.7%). This is to be ex-

pected, because as noted in section 4.1, PE(UIi) is a poor proxy for UI.13In ranking the deferred tax adjustments based on relative size, both the numerator

(i.e., the tax adjustment) and the denominator (i.e., the forecast of EPS) are taken at theirabsolute value.

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38 KEVIN C. W. CHEN AND MICHAEL P. SCHODERBEKFinally, it is possible that the sign of the income effect of the tax ad-justment would affect the analyst forecasts. The financial press discussedonly the income-decreasing effects of the tax change and consideredthe tax adjustment a "penalty" (see Berton [1993]). This view may stemfrom the previous accounting standards on deferred taxes, APB No. 11(AICPA [1967]) and SFASNo. 96 (FASB [1987]). Because these standardsresulted in the recognition of no or very few net deferred tax assets, itis possible that analysts were more familiar with deferred tax liabilitiesand more likely to adjust for income-decreasing effects of the tax rateincrease. In our third specification of (3), DV1 equals one if the tax ad-justment is income increasing (43 firms) (otherwise DV] = 0), and DV2

equals one if the tax adjustment is income decreasing (115 firms) (other-wise DV2= 0). The results of these regressions are reported in panel A oftable 8.Two general patterns emerge from observing the three specificationsof (3) reported in panel A. First, in each specification, all slope coeffi-cients are significant at 0.05 or better. Second, the t-statistics on cl - c2for the three regressions (the last column) range from -0.65 to -1.29.None is significant at conventional levels. Thus, the probability of ana-lysts including the tax adjustment in their earnings forecasts does notvary due to the level of institutional holding or the magnitude or sign ofthe deferred tax adjustment.'4 These findings are to be expected sincetable 5 shows that most analysts did not incorporate the tax adjustmentsin their forecasts. As a result, there is little variation in analyst sophisti-cation to explain and the tests presented here probably have low power.5.2 SECURITY RETURNS AND CROSS-SECTIONAL DIFFERENCES ININVESTORS SOPHISTICATION

To test if there are cross-sectional differences in functional fixation byinvestors at the time of the earnings announcement, we estimate the fol-lowing expanded version of equation (2A) for four specifications of DV1and DV2:

CARi = lo + d1DV1 x DTADJi + d2DV2x DTADJi + d3UIi + d4BTFEi + ei. (4)

In the first specification, DV1 and DV2 are defined based on the per-centage of institutional ownership, as in section 5.1. Based on results inHand [1990], functional fixation concentrated among unsophisticatedinvestors implies d, > d2.

14Two additional measures were used in equation (3) to proxy for analysts' sophistica-tion: (1) number of analysts following the firm (median = 8), and (2) firm's market valueof common stock two days prior to the announcement of 1993 third-quarter results (me-dian = $1.444 billion). The t-statistics for c1 - c2 = 0 are -0.03 and 0.09 for these twospecifications, respectively. Both are not significant at conventional levels.

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1993 TAX RATE INCREASE AND DEFERRED TAX ADJUSTMENTS 39The second specification sets DV1equal to one if the absolute value oftax adjustment relative to market value is smaller than the sample me-

dian of 0.33% (else DV] = 0) and DV2equal to one if the size of the taxadjustment is larger than the median (else DV2= 0). This specification isintended to capture the benefits of processing the tax adjustment infor-mation. The third specification investigates whether the sign of thle taxadjustment affected investors' ability to interpret this transitory item.The coding of this variable is the same as in section 5.1, except that 44firms have positive tax adjustments (see n. 11).The fourth specification is based on the disclosure of the tax adjust-ment at the time of the earnings announcement. Not being able toobserve the tax adjustment at the time of the announcement would in-crease investors' difficulty in distinguishing it from permanent earnings.We set DV1equal to one if the tax adjustment was not disclosed as a sep-arate component of earnings (else DV1= 0) and DV2equal to one if thetax adjustment was separately disclosed (else DV2 = 0).The results of these four specifications are reported in panel B of ta-ble 8. In each of the first two specifications, d1 > d2. However, based onthe t-statisticsfor d1- d2 (reported in the last column) of 0.72 (p < 0.47)for the first specification and 1.45 (p < 0.15) for the second specifica-tion, this difference is not significant. So overall, institutional ownershipand the size of DTADJdid not affect functional fixation in our setting.'5In the third specification (row three), the coefficient on DTADJis notsignificant for firms with negative tax adjustments (t = -0.68 and p

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40 KEVIN C. W. CHEN AND MICHAEL P. SCHODERBEK

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42 KEVIN C. W. CHEN AND MICHAEL P. SCHODERBEKTable 4's results indicated that firms with positive tax adjustments werealso less likely to disclose them. To separate the effects of disclosure fromthe effects of the sign of the adjustment, we estimate equation (5):

CARi = go + g1DV1x DTADJZ g2DV2x DTADJZ g3DV3XDTADJZ+ g4DV4 x DTADJZ+ g5UIz + g6BTFE + ei. (5)

We use indicator variables to capture the relation between the sign ofthe tax adjustment and its disclosure. DVI equals one if the tax adjust-ment is income increasing and was not disclosed separately (else DV1 =0), DV2 equals one if the tax adjustment is income increasing and wasdisclosed separately (else DV2 = 0), DV3 equals one if the tax adjust-ment is income decreasing and was not disclosed separately (else DV3=0), and DV4 equals one if the tax adjustment is income decreasing andwas disclosed separately (else DV4 = 0). The estimated coefficients fromthis regression are shown below (t-statistics are in parentheses):CARi = -0.82% + 6.19 DV] x DTADJi + 3.24 DV2 x DTADJi + 0.78 DV3(-1.58) (4.04)** (1.81)* (0.41)

x DTADJi 0.80 DV4 x DTADJi+ 0.42 UIi + 1.91 BTFEi.(-0.78) (1.82)* (4.19)**The adjusted R2 of equation (5) is 12.5%. Coefficients g1 and g2 aresignificant at the 0.05 level (or better) and are not reliably differentfrom each other (t= 1.34). On the other hand, coefficients g3 and g4are not different from zero. Since DV1 and DV2 capture positive tax ad-justments, and DV3 and DV4 capture negative tax adjustments, the re-sults suggest that the effects from the sign of the tax adjustment onfunctional fixation dominate the disclosure effects. These results, how-

ever, must be interpreted with caution. The dichotomous variable DV1(+ DTADJand no DJNR) takes on the value one for only 19 firms (frompanel B of table 4), and DV2 (+ DTADJand on DJNR) equals one foronly 24 firms. Thus, the number of firms with nonzero values used toestimate these coefficients is small.166. Summary and Conclusions

We examine how analysts and investors assessed the income effects ofthe deferred tax adjustment caused by the August 10, 1993 increase inthe corporate income tax rate. SFASNo. 109 required firms to remeasuretheir deferred tax assets and liabilities and include the net adjustment intheir 1993 third-quarter earnings. Although it was possible to estimate16Equation (5) was also estimated after deleting "outliers" detected through Belsley,Kuh, and Welsch's [1980] DFFITSstatistic. Results were qualitatively the same as those re-ported. The same checks were performed for the results reported in tables 5, 7, and 8 with

no effects on inferences.

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1993 TAX RATE INCREASE AND DEFERRED TAX ADJUSTMENTS 43the deferred tax adjustment using public information, our results suggestthat analysts generally did not incorporate the tax adjustment in their1993 third-quarter earnings forecasts. This finding was not influenced bythe relative size of the tax adjustment, the sign of the adjustment (i.e.,income increasing or income decreasing), or firms' institutional owner-ship, mostly because there was little variation in analysts' sophisticationto explain.

We also found that investors impounded the tax adjustment into se-curity prices at the same rate as recurring earnings, despite their differ-ent implications for future cash flows. This result is consistent with thefunctional fixation hypothesis. However, inconsistent with the functionalfixation hypothesis, investors appear to have separated unusual items fromrecurring earnings and not discounted them into security prices. Thiscould be due to the fact that unusual items are routinely disclosed andbetter known to investors than the tax adjustment.

Cross-sectional tests revealed that investor fixation was more pro-nounced for firms with income-increasing tax adjustments than for firmswith income-decreasing adjustments, perhaps because SFASNo. 109 was arelatively new standard and the predecessor standards (APB No. 11 andSFASNo. 96) rarely permitted recognition of net deferred tax assets. Onthe other hand, deferred tax liabilities, like unusual items, are betterknown to investors. Results also suggest that fixation was more likely forfirms that did not disclose the tax adjustments at the time of earningsannouncement; however, this finding could be due to the fact that mostnondisclosed tax adjustments are income increasing. Moreover, inconsis-tent with Hand [1990], we did not find the fixation to be affected by thelevel of investor sophistication.

Overall, this study suggests a degree of functional fixation on the partof analysts and investors with respect to the 1993 deferred tax adjust-ments. As Lev and Ohlson [1982] observed, many studies in the 1970sgenerally pointed to investors' ability to adjust for differences in "a fewwell-known and clearly disclosed accounting techniques," such as de-preciation and inventory methods. Our findings suggest that investorsmight not be able to adjust for accounting numbers that result frommore complex rules.

One caveat to our results is the possibility that investors may rationallydecide not to become informed of specific accounting rules. Althoughthe dollar amounts of the tax adjustments in our sample are generallysignificant in terms of quarterly earnings, they are rather small (less than1%) relative to market value.'7 Investors might have been aware of thedeferred tax adjustment but considered the estimation of the tax ad-justment not cost-beneficial. In addition, over time individuals need notbe proficient in specific accounting procedures because they can learn

17 In Hand's [1990] sample, the swap gains are generally less than 1% of market value(see Hand [1990, table 2, p. 750]).

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44 KEVIN C. W. CHEN AND MICHAEL P. SCHODERBEKby observing the behavior of stock prices. Thus, when similar tax ratechanges require deferred tax adjustments in the future, the functionalfixation behavior documented in this study might be corrected with learn-ing. Finally, our conclusions about analysts' sophistication are conditionalon the assumption that analysts attempt to forecast reported income fromcontinuing operations. If analysts deliberately exclude nonrecurringitems such as the deferred tax adjustment, further study will be necessaryto understand the degree of their sophistication.

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AccountingReview48 (July 1973): 549-59.BELSLEY, D. A.; E. KUH; AND R. E. WELSCH. RegressionDiagnostics IdentifyingInfluentialDataand Sourcesof Collinearity.New York:Wiley, 1980.BERNARD, V "Stock Price Reactions to Earnings Announcements: A Summary of RecentAnomalous Evidence and Possible Explanations." In Advances in BehavioralFinance, ed-ited by R. H. Thaler. New York:Rusell Sage Foundation, 1993.BERNARD, V, AND J. THOMAS. "Post-Earnings Announcement Drift: Delayed Price Re-sponse or Risk Premium?" Journal of AccountingResearch Supplement 1989): 1-36.BERTON, L. "New Tax Rate to Push Profits Below Forecasts." Wall Street ournal (September17, 1993): A2.CIESIELSKI, J. T. "34% + 1% > 35%? The New Clinton and FASB Math for CorporateTaxes." Analysts'Accounting Observer September 15, 1993): 1-7.DIETRICH, J.R. "Effects of Early Bond Refundings: An Empirical Investigation of SecurityReturns."Journal ofAccountingand Economics April 1984): 67-96.FINANCIAL ACCOUNTING STANDARDS BOARD. Statement of Financial Accounting StandardsNo. 96: AccountingforIncome Taxes.Stamford, Conn.: FASB, 1987.. Statement of Financial Accounting Standards No. 109: Accounting for Income Taxes.Stamford, Conn.: FASB, 1992.GIVOLY, D., AND C. HAYN. "Transitory Accounting Items: Information Content and Earn-ings Management." Working paper, Northwestern University, 1992.HAND, J. "ATest of the Extended Functional Fixation Hypothesis." TheAccountingReview65 (1990): 740-63.. "Extended Functional Fixation and Security Returns Around Earnings Announce-ments: A Reply to Ball and Kothari." The AccountingReview66 (1991): 739-46.HOSKIN, R. E.; J. S. HUGHES; AND W. E. RICKS. "Evidence on the Incremental InformationContent of Additional Firm Disclosures Made Concurrent with Earnings." Journal ofAccountingResearch24 (Supplement 1986): 1-32.LEv, B., AND J. OHLSON. "Market-Based Empirical Research in Accounting: A Review,Interpretation, and Extension." Journal of Accounting Research20 (Supplement 1982):249-322.Omnibus Budget Reconciliation Act of 1993. Public Law No. 103-66.OU, J., AND S. PENMAN. "Financial Statement Analysis and the Prediction of StockReturns."Journal ofAccountingand Economics March 1989): 295-330.PHILBRICK, D., AND W. RICKS. "Using ValueLine and I/B/E/SAnalyst Forecasts in AccountingResearch."Journal ofAccountingResearch29 (1991): 397- 417.