The Effect of Limited Liability on the Market Response to Disclosure*

Paul E. Fischer · Robert E. Verrecchia

81 citations0/0 files storedContemporary Accounting Research

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Corporate Finance and Governance Financial Markets and Investment Strategies Auditing, Earnings Management, Governance

Abstract

Abstract. We formalize the effects of an earnings disclosure on security prices under an assumption of limited liability. We derive various nonlinear relations between equity prices and earnings under a variety of capital structure assumptions and. if possible, we tie the relations attained to results from the existing empirical literature. We also characterize how debt prices respond to earnings when holders of debt have limited liability. Finally, we analyze how changes in the degree of leverage and conversion features of debt affect the relation between price and earnings.

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References

1995The information content of losses 1994Market liquidity and volume around earnings announcements 1991Trading Volume and Price Reactions to Public Announcements 1992A Nonlinear Model of Security Price Responses to Unexpected Earnings 1988The Effect of Sequential Information Releases on the Variance of Price Changes in an Intertemporal Multi-Asset Market 1995Survival 1993Accounting income, stock price, and managerial compensation 1994Public disclosure, private information collection, and short-term trading

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2003Are Fundamentals Priced in the Bond Market?*2009Capital Market Prices, Management Forecasts, and Earnings Management 1999The effect of accounting-based debt covenants on equity valuation 2017Managing earnings using classification shifting: UK evidence 1999The Effect of Limited Liability on the Informativeness of Earnings: Evidence from the Stock and Bond Markets*2008Credit Ratings and Taxes: The Effect of Book/Tax Differences on Ratings Changes

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