Capital Asset Prices and the Temporal Resolution of Uncertainty*

Epstein, Larry G.; Turnbull, Stuart M.

doi:10.1111/j.1540-6261.1980.tb03488.x

Cited by 36 publications

(27 citation statements)

References 34 publications

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“…4 Second, this article articulates how earnings quality affects price and consumption and production in a parametrical model. That earnings quality affects consumption and production builds on Epstein and Turnbull (1980), Kunkel (1982), Christensen and Feltham (1988), and Yee (2006a). Epstein and Turnbull prove that the timing of uncertainty resolution affects price.…”

mentioning

confidence: 95%

Using accounting information for consumption planning and equity valuation

Yee

2007

Rev Acc Stud

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This article develops a consumption-based valuation model that treats earnings and cash flow as complementary information sources. The model integrates three ideas that do not appear in traditional valuation models: (i) earnings provide information about future shocks to cash flow; (ii) earnings contain indiscernible transient accruals; and (iii) investors use cash flow and earnings to make allocation and consumption decisions and set price. Accordingly, the quality of earnings affects production and consumption as well as price. Among other implications, the model reveals that a valuation coefficient is not just a capitalization factor; it is the product of a capitalization factor and a structural factor reflecting earnings quality and accounting bias. JEL Classifications

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confidence: 95%

Using accounting information for consumption planning and equity valuation

Yee

2007

Rev Acc Stud

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“…The implications of TRU in a symmetric information setting have been studied before, e.g., Robichek and Myers (1966a,b), Epstein (1980), Epstein and Turnbull (1980), Nabar et al (1988), and Ross (1989). However, a study of TRU in a setting of asymmetric information may provide answers to various questions about corporate financing decisions.…”

Section: Introductionmentioning

confidence: 94%

“…Epstein and Turnbull (1980) show that in the case of jointly normal distributions, the correlation coefficient is a sufficient statistic for the informativeness of the experiment: an experiment X 1 is said to be more informative about θ than another experiment Y 1 is if corr (X 1 , θ) ≥ corr(Y 1 , θ). This role of ρ is best seen if we consider the proportion of the uncertainty of θ that is resolved by observing X 1 or Y 1 : 1− var(θ|X 1 ) /var(θ) = ρ m 2 and 1 − var(θ|Y 1 ) /var(θ) = ρ b 2 .…”

Section: Model and Assumptionsmentioning

confidence: 99%

“…We define "temporal resolution of uncertainty" in much the same way as Epstein and Turnbull (1980): the prior uncertainty about cash flows is said to be resolved earlier (later) if the signal concerning the final cash flows is more (less) informative. Epstein and Turnbull (1980) show that in the case of jointly normal distributions, the correlation coefficient is a sufficient statistic for the informativeness of the experiment: an experiment X 1 is said to be more informative about θ than another experiment Y 1 is if corr (X 1 , θ) ≥ corr(Y 1 , θ).…”

Section: Model and Assumptionsmentioning

confidence: 99%

“…They show that the return on an asset over a given time period is related to the fraction of uncertainty that is resolved in that time period. A later work by Epstein and Turnbull (1980) shows that when the uncertainty about a cash flow is resolved earlier (in the sense that more information is available about it at an earlier date), the return demanded by investors who have a CARA utility function in an environment where returns are multivariate normal is larger than the riskless rate: the expected release of information has rendered the holdings risky. However, Epstein and Turnbull's discussion is restricted to studying the effect of temporal resolution of uncertainty on equilibrium market prices and on the optimal production of information.…”

Section: Introductionmentioning

confidence: 96%

See 2 more Smart Citations

Temporal resolution of uncertainty, disclosure policy, and corporate debt yields

John

Reisz

2010

Journal of Corporate Finance

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Bad news for announcers, good news for rivals: Are rivals fully seizing transition‐period opportunities following announcers' top management turnovers?

Burchard

Proelss

Schäffer

et al. 2020

Strategic Management Journal

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Research summary This study analyzes whether and how the disruption of top management turnovers can affect not only turnover firms but also their intra‐industry rivals. It thus adds to the literature on both leader life cycles and competitive dynamics. Using a U.S. sample of 857 CEO turnovers, we find a period of relative stagnation for announcing companies following top management turnovers. We also find that intra‐industry rivals can use this period to their advantage. Semi‐structured interviews with seasoned CEOs, CFOs, and a board member from large publicly listed firms, as well as an extensive news search, support this notion. Intra‐industry rivals gain a competitive advantage that can result in positive abnormal stock returns and accounting performance. The intra‐industry outperformance is greater for forced turnovers. Managerial summary The departure of a company's CEO, forced or not, is usually a disruptive event for a company, as the successor must adapt to the new environment before undertaking any major strategic changes. Rivals can seize an opportunity during the transition period of the announcing company because they remain fully operational. They can thus actively exploit the relative inability of turnover companies to react by, for example, launching sales initiatives or increasing M&A activity. This interpretation is supported by internal and external evidence. Investors on average also recognize this situation, and stock prices react accordingly.

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Capital Asset Prices and the Temporal Resolution of Uncertainty*

Cited by 36 publications

References 34 publications

Using accounting information for consumption planning and equity valuation

Using accounting information for consumption planning and equity valuation

Temporal resolution of uncertainty, disclosure policy, and corporate debt yields

Bad news for announcers, good news for rivals: Are rivals fully seizing transition‐period opportunities following announcers' top management turnovers?

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