Accounting and Finance

This paper is based on a content analysis of contingency disclosures for 288 corporate 10Ks taken from Compustat Disclosure.  The purpose of the analysis is to discern the nature and content of reported contingency disclosures and to compare such disclosures with those cited in SFAS No. 5, Accounting for Contingencies.  The analysis reveals that some of the contingency items cited in SFAS No. 5 were rarely disclosed while others, not cited, were disclosed quite frequently.  In addition, litigation was rarely accrued unless it involved environmental matters, cases lost, or product recalls.  Finally more than six percent of the observations accrued amounts for self-insurance, which is a general and unspecified business risk.  Based on the analysis, the Board should consider specifying that all contingencies not covered by other disclosure requirements be self-contained in a single footnote.  Guidance should also be provided for disclosing information with regard to lines of credit, revolving credit agreements, and going concern situations.

This study evaluates the impact of capitalized operating leases on financial position and results of operations using a random sample of 290 10-Ks containing operating lease disclosures.  The impact on financial position and results of operations is evaluated by comparing four ratios:  long-term debt to equity, total debt to equity, current, and return on investment.  For each entity, the four ratios are first computed using the original financial statement data, and secondly using pro-forma data reflecting the constructive capitalization of the operating lease.  The primary results indicate that the constructive capitalization of operating leases has a significant impact on the long-term debt to equity and the current ratios.  The impact on the total debt to equity ratio is not significant and the impact on return on investment is neutral.  These results suggest that effects of non-capitalized operating lease information on decision making may be minimal when the total debt to equity ratio is used instead of the long-term debt to equity ratio.  Additionally, non-capitalized operating leases severely overstate the current ratio.

This study reports on the existence of a curious calendar effect--a relationship between stock market performance and the schedule of the U.S. Congress. Almost the entire advance in the market since 1897 corresponds to the periods when Congress is in recess. This is an impressive result, given that Congress is in recess about half as long as in sesskm. Furthermore, average daily returns when Congress is not meeting are almost thirteen times greater than when Congress is in session. Throughout the year, cumulative returns during recess are eight times that experienced while Congress is in session.

The relaxation of the Glass-Steagall Act (GSA), the Act which separates commercial and investment banking, is currently under debate. Central to this debate is the potential risk reduction of commercial banks due to diversification. This paper, through a thorough and complete examination of the diversification potential, establishes an upper bound of diversification benefits. The results do support a relaxation of the GSA as well as the allowable amount of investment banking and other securities activities by commercial banks.