A test of the market's pricing of nontransitory dirty surplus flows

Audrey Wen-hsin Hsu and Steve Lin

Asia-Pacific Journal of Accounting & Economics, 2013, vol. 20, issue 2, 118-143

Abstract: This study examines whether the market correctly prices nontransitory dirty surplus flows. Unlike the US Generally Accepted Accounting Principle (GAAP) and International Accounting Standards, Taiwanese Company Law allows employees' bonuses under the profit-sharing scheme to be directly taken to retained earnings, bypassing the income statement. We find that these compensation costs are positively associated with share price and return, indicating that the market values the incentive effect of the profit-sharing scheme. More importantly, we find that the market correctly prices the persistence of these compensation costs. Overall, this study indicates that investors are able to correctly price nontransitory dirty surplus flows.

Date: 2013
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DOI: 10.1080/16081625.2012.719855

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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