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

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  • Audrey Wen-hsin Hsu
  • Steve Lin

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.

Suggested Citation

  • Audrey Wen-hsin Hsu & Steve Lin, 2013. "A test of the market's pricing of nontransitory dirty surplus flows," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 20(2), pages 118-143, June.
    • Handle: RePEc:taf:raaexx:v:20:y:2013:i:2:p:118-143
    DOI: 10.1080/16081625.2012.719855
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    1. Frederic S. Mishkin, 1983. "A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models," NBER Books, National Bureau of Economic Research, Inc, number mish83-1, March.
    2. Frederic S. Mishkin, 1983. "Introduction to "A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models"," NBER Chapters, in: A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models, pages 1-6, National Bureau of Economic Research, Inc.
    3. Douglas L. Kruse, 1993. "Profit Sharing: Does It Make a Difference?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number ps, November.
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