Commemorating the 50‐Year Anniversary of Ball and Brown (1968): The Evolution of Capital Market Research over the Past 50 Years

• Published date: 01 December 2019
• Author: S. P. KOTHARI,CHARLES WASLEY
• Date: 01 December 2019
• DOI: http://doi.org/10.1111/1475-679X.12287

DOI: 10.1111/1475-679X.12287

Journal of Accounting Research

Vol. 57 No. 5 December 2019

Printed in U.S.A.

Commemorating the 50-Year

Anniversary of Ball and Brown

(1968): The Evolution of Capital

Market Research over the Past

50 Years

S. P. KOTHARI

∗AND CHARLES WASLEY

†

Received 18 December 2018; accepted 10 July 2019

ABSTRACT

We commemorate the 50th anniversary of Ball and Brown [1968] by chron-

icling its impact on capital market research in accounting. We trace the evo-

lution of various research paths that post–Ball and Brown [1968] researchers

took as they sought to build on the foundation laid by Ball and Brown [1968]

to create a body of research on the usefulness, timeliness, and other proper-

ties of accounting numbers. We discuss how those paths often link back to the

groundwork laid and questions originally posed in Ball and Brown [1968].

∗U.S. Securities and Exchange Commission, MIT Sloan School of Management; †Simon

Business School, University of Rochester.

Accepted by Douglas Skinner. Weacknowledge the comments and suggestions of Ray Ball,

Sudipta Basu, Phil Brown, Dan Collins, Christian Leuz, Bryce Schonberger, Joe Weber, Jerry

Zimmerman, Luo Zuo, and an anonymous referee. John Yang and especially Ray Gao and Yifei

Lu provided research assistance. The Securities and Exchange Commission disclaims respon-

sibility for any private publication or statement of any SEC employee or Commissioner. This

paper expresses the authors’ views and does not necessarily reflect those of the Commission,

the Commissioners, or other members of the staff.

1117

CUniversity of Chicago on behalf of the Accounting Research Center, 2019

1118 S.P.KOTHARI AND C.WASLEY

JEL codes: G10; G14; M40; M41

Keywords: Ball and Brown; earnings; earnings-return relation; earnings

usefulness; earnings timeliness; asymmetric timeliness; conservatism; asso-

ciation study; event study; information content; value relevance; positive

economics; efficient markets hypothesis; market efficiency; post–earnings-

announcement drift

1. Introduction

This paper commemorates the 50th anniversary of Ball and Brown [1968]

(hereafter, BB68). Accounting researchers readily acknowledge the semi-

nal impact BB68 has had and continues to have on capital market research

in accounting (CMRA).1,2 We assess BB68’s impact by analyzing how it has

affected the evolution of CMRA over the past 50 years. We do so by iden-

tifying the various research paths that post-BB68 researchers pursued as

they sought to build on the foundation laid by BB68 to create a body of

research on the usefulness, timeliness, and other properties of account-

ing numbers. We discuss how various branches of research and underlying

papers often have intellectual roots in BB68. This is not to imply that post-

BB68 researchers did not come up with new and innovative questions of

their own (they did!). Our approach is simply a way to organize how post-

BB68 research built on the foundation of BB68 in creating a new body of

accounting research. We illustrate the intellectual roots by quoting from

various articles when researchers state the pivotal role of BB68 in motivat-

ing their studies or when they describe how BB68 otherwise influenced

their research.

Our paper is not designed to offer a detailed review of the past 50 years of

CMRA. Rather, we seek to identify the various research avenues that origi-

nated from BB68. We use a two-pronged approach to analyze BB68’simpact

on CMRA. We begin with BB68’s Web of Science and Google Scholar cita-

tions, which we then use to identify the research paths that unfolded after

BB68’s publication.3These paths are defined based on the research ques-

tions motivating each cluster of papers. However, because citations alone

will invariably understate BB68’s broader impact, we add papers that do

1For example, Ohlson [1991, p. 1] writes: “Without exaggeration, it can be said that the

Ball-Brown [1968] paper has had an enormous influence on modem empirical accounting

research.” In addition, in 1986, BB68 was the first paper awarded the American Accounting

Association’s Seminal Contributions to Accounting Literature Award.

2Although not as widely cited as BB68, Beaver [1968] shares some of the same qualities. As

discussed in Ball and Brown [2019] (hereafter BB2019), while BB68 and Beaver [1968] have a

1968 publication date, publication of BB68 actually preceded Beaver [1968]. A contemporary

of BB68 and Beaver [1968] was Benston [1967]. As discussed in BB2019 (p. 426), “the im-

pact of Benston’s paper was adversely affected by limitations of the research design, the small

sample and the non-result for earnings.”

3We distinguish articles citing BB68 from those that do not by placing the former (latter)

in bold (normal) font.

A50-YEAR PERSPECTIVE ON BALL AND BROWN 1119

not cite BB68, but that fall in a given research path, and arguably have in-

tellectual roots in BB68 (e.g., they build on a paper that cited BB68). Our

approach provides evidence of BB68’s impact across the entire spectrum of

CMRA over the past 50 years. For example, it identifies the research areas

and topics that were most influenced by BB68; it identifies major innova-

tions in the literature with roots in BB68; and it uncovers trends in CMRA

over time, for example, where various literatures have been and where they

may be heading. An added benefit is that papers building on BB68 often

turn out to be highly cited themselves, and identifying them helps us fulfill

our objective of documenting BB68’s overall impact.4

Our paper is organized as follows. Section 2 briefly discusses the genesis

of BB68.5Section 3 describes our approach to assess the past and ongo-

ing impact of BB68. The heart of our paper is section 4, where we iden-

tify research paths and underlying research streams to describe how CMRA

evolved subsequent to BB68. Section 5 contains our concluding remarks.

2. A Brief History

2.1 WHY DID BALL AND BROWN [1968] ARISE WHEN IT DID?

Toprovide the necessar y backdrop for our commentary,the natural start-

ing point is: Why did BB68 emerge when it did? The answer is that the pre-

vailing view in the accounting profession at the time BB68 was written was

that accounting numbers were meaningless; that is, they did not possess use-

ful information (BB68, BB2014,BB2019,Watts and Zimmerman [1986]).

The debate’s normative tone meant it lacked evidence about the factors or

forces rendering accounting numbers meaningless or those that might in

fact make them useful. Fortunately, BB68 changed all of that by providing

evidence on a controversial issue at the time, namely, “are accounting earn-

ings useful?” BB68 did so by introducing a positive economics approach

to accounting research (Friedman [1953]), by exploiting the economic

underpinnings of the “efficient market hypothesis (EMH)” (Fama [1965],

Mandelbrot [1966], Samuelson [1969]) to use security prices as a measure

of the economic effects of accounting numbers, and by introducing the

association-study and event-study methodologies (Benston [1967], Beaver

[1968], Fama et al. [1969]) as empirical tools to study accounting phenom-

ena.6BB68 also took advantage of monthly stock return data becoming

4Other studies of BB68’s contributions include Fargher and Wee [2019] and Clinch, Lyon,

and Pinnuck [2019]. The former uses secondary-level citation analysis and the latter focuses

solely on BB68’s impact on research in the Asia-Pacific Basin. Updated evidence on some of

BB68’sresultscanbefoundinBB2019 and Nichols and Wahlen [2004, 2019].

5Although a first-hand account of this appears in Ball and Brown [2014] (hereafter

BB2014)andBB2019, we briefly discuss this and related issues to provide the necessar y back-

drop for our commentary.

6A key difference between BB68 and Fama et al. [1969] is the former conducted statistical

tests whereas the latter used figures with no corresponding statistical tests.