Book Reviews

Philip Brown, along with Ray Ball and William Beaver, is one of the founding fathers of capital markets research in accounting. It is therefore very useful to have access to a collection of essays and re-published papers that document the intellectual and personal development of one of these important figures.Following an informative Foreword by Stephen Zeff, the series editor, the book lists the many papers and books published by Brown. There are about 90 items spanning the period 1967 to 2011, an average of roughly two items a year. Of these, Brown has published around 62 journal articles. The Introduction to the book nicely links the history of the academic outputs to the life and travels of the author. Young academics will be especially interested in this, as it will help them to think about how to plan their career as a whole, taking into account the demands of leadership and administration. It shows how accidents of history can have a big impact on your career, provided that you are smart enough to capitalize on them. It also shows how it is possible to be a successful author while making significant contributions to the more general, and often under-rewarded, aspects of academic life. It is also good to see that it is possible to return to serious research following a period of intense management activity, such as the setting up of the Australian Graduate School of Management. The importance of the considered use of sabbatical leave for self-development is also apparent.Brown's work straddles the areas of accounting, corporate governance, and finance. Among other things, his career shows why it does not make sense to attempt to separate off accounting from finance. Accounting academics have a lot to learn from finance, and finance ignores accounting at its peril (witness the Enron scandal, and the recent financial crisis).Part I focuses on the very important work which Brown launched along with Ray Ball on the relation between stock returns and earnings news. The landmark paper is Ball and Brown (1968). This paper established a remarkably robust research design for showing that annual positive and negative earnings surprises predict abnormal stock market returns. They show that, if you had known the earnings surprise at the start of the year, you could have made an abnormal return of around 16 percent by buying (shorting) the positive (negative) earnings surprise portfolio. The paper showed that earnings capture about 50 percent of the share price news relating to the firm during the year. However, it also shows that around 85 to 90 percent of the news is anticipated by the market in advance of its official public announcement. The remaining chapters of this part document the wide-ranging effects of this landmark paper on accounting research, focusing especially on the period up to 1989.Part II contains a mixture of papers mostly concerned with aspects of stock market efficiency. One paper, co-authored with Ball, looks at current cost accounting from an efficient markets point of view. The other papers examine themes that are also highly relevant today. One paper examines whether financial experts are able to beat the market, and finds that they are pretty good at picking losers, but not winners. This chimes with modern research that shows that short selling constraints can prevent bad news from getting into prices in a timely way. There is a chapter on the long-run under-performance of firms making SEOs (seasoned equity offerings), also a current research theme. Finally, there are Brown's early thoughts on reporting for financial instruments and fixed asset revaluations. The book does not contain Brown's work on market anomalies, though these are listed in the bibliography, including two co-authored papers published in the Journal of Financial Economics in 1983.Part III contains a selection of papers that reflect Brown's long-standing interest in policy relevant research. One paper studies how the introduction of new criminal and civil sanctions on the voluntary disclosures of ASX (Australian Stock Exchange) changed disclosure practices, and the impact of the these changes on the properties of analysts' earnings forecasts and share price anticipation of earnings. This paper nicely illustrates how combining a variety of research designs helps to provide a clearer picture of the overall effect of a policy initiative. The second paper in this part extends the methods of the first paper, to consider whether better governed firms produce more informative disclosures. This work has subsequently grown into a major international study of governance outcomes. A feature of this work is the investment that Brown and his co-authors have put in to devising measures of corporate governance quality that are reasonably comparable across jurisdictions.The remaining papers of Part III bring together Brown's contributions to research on accounting standard setting. These papers will be of interest to policy makers, and students of accounting outside the relatively narrow confines of market-based accounting research. A paper with Bryan Howieson, written in 1998, provides an insightful discussion of the limits and potential of capital markets research for informing accounting standard setting. This paper also highlights corporate regulation, international harmonization, research and development, goodwill accounting, and equity accounting as key areas where capital markets research can influence the thinking of standard setters. To this list one might add accounting conservatism and fair value accounting.A paper with Greg Clinch, published in 1998, anticipates many of the issues surrounding the widespread adoption of IFRS in the first decade of this century. It provides a useful overview of the literature on the reasons for accounting diversity, how capital markets cope with diversity, the potential implications of harmonization for small national stock markets, and the potential costs and benefits of harmonization for firms and investors. This paper provides a handy prequel to the large body of empirical literature that has emerged since IFRS were more widely introduced.The widespread adoption of IFRS during the period 2001 to 2008, and especially EU adoption in 2005, has given rise to a large empirical literature aimed at identifying the realized costs and benefits of IFRS. Brown wrote a timely and instructive overview of this literature for the ICAEW'S 2010 Information for Better Markets Conference in 2010 (Brown 2011). Brown's conclusion was that the literature broadly indicates positive net benefits for a range of capital market indicators, though the results depend on the stage of development of the adopting country (especially where its own standards are weak and poorly understood internationally), the quality of enforcement at national level, the general quality of firm level corporate governance, and the incentives firms face to generate high quality accounting information.Accounting standard setting is a highly political process involving multiple interest groups, including regulatory bodies (often competing against each other for influence), politicians, companies, and users of the financial statements and the other disclosures required by accounting standards. A paper by Brown and Ann Tarca that appeared in Abacus in 2001 analyzes a regulatory episode that occurred in 1997 in Australia. The Corporate Law Economic Reform Program proposed the adoption of International Accounting Standards (IAS) by 1999. In addition, it proposed a major reform of the organizational architecture of accounting standard setting by establishing a Financial Reporting Council (FRC) to oversee the standard-setting process. Brown and Tarca show how public interest and interest group theories can be deployed to explain the outcome of these proposals: specifically why, in 1997–1998, Australia decided not to adopt IAS, and why the FRC proposal was broadly endorsed, potentially giving more local power to those responsible for Australian accounting. In the end, the votes of local vested interests won out. No surprise there then.Part III concludes with a paper by Brown and Tarca that appeared in Abacus in 2007. This paper examines the role of national independent enforcement bodies in achieving high quality financial reporting. Although many countries have now adopted IFRS, there is no single enforcement agency responsible for ensuring that the standards are implemented on a consistent basis. This issue is important because the potential comparability benefits of IFRS may fail to materialize if different countries operate enforcement mechanisms that vary in effectiveness. Also investors may be misled if they are led into believing that the quality of accounting is the same across all IFRS jurisdictions. The issue is exacerbated by the fact that IFRS are principles-based, thereby giving scope for different interpretations of what the standards actually require. The paper by Brown and Tarca traces the history of two important national independent enforcement bodies, i.e., the U.K.'s Financial Reporting Review Panel (FRRP) and the Australian Securities and Investment Commission. This paper shows that these two bodies, at least since around 2004,were reasonably successful in carrying out their duties, though questions remain about how to measure their effectiveness, and some commentators have expressed doubts about just how effective they have been. Such bodies are dependent to some extent on government funding, and this requires political will. Brown and Tarca provide a few pointers to the conditions necessary for effective enforcement. It would be of interest to study the extent to which these conditions apply in all of the jurisdictions that have adopted IFRS so far. Pursuing this line of thought, perhaps the IFRS Foundation should consider awarding some sort of official recognition to countries that have demonstrated a convincing commitment to faithful enforcement of IFRS. For example, the Blue Flag is a voluntary eco-label awarded to more than 3,850 beaches and marinas in 48 countries across Europe, South Africa, Morocco, Tunisia, New Zealand, Brazil, Canada, and the Caribbean (strangely, the list does not include Australia!!). Among other things, it provides an indication of locations where it is safe to swim. The IFRS could consider creating a similar award for jurisdictions where the local national enforcement mechanisms ensure that it is safe to rely on the IFRS-based accounting information produced by firms listed in that jurisdiction. Alternatively, perhaps, an international investor interest group might be willing to sponsor such an award.It seems that all good empiricists from time to time like to play with theory. Part IV contains a couple of theory papers by Brown. One of these conveys some thoughts on the optimum way to amortize goodwill. Time has passed this paper by, as the generally agreed view is that the routine amortization of goodwill fulfils no useful purpose. The more valuable contribution in this part is Brown's thoughts on the valuation of executive stock options containing features such as performance hurdles, and the possibility of early exercise. To add to the fun, Brown and his co-author also consider the impact of stochastic volatility on all of this. This paper shows off Brown's ability to identify and solve important practical problems.In summary, it is clear that Phil Brown has made major research contributions in accounting, corporate governance, and finance. 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