Discussion of The SEC "Reversal" of FASB Statement No 19: An Investigation of Information Effects

Professor Smith conducts an interesting and creative study examining the security market reaction to the Financial Accounting Standards Board (FASB) Exposure Draft for Statement No. 19 and the subsequent "reversal" by the Securities and Exchange Commission (SEC) with the Accounting Series Release (ASR) No. 253. Two general sets of results are presented. First, there appears to be no aggregate share price response for full cost (FC) firms to the release of ASR No. 253. This result, coupled with that of Dyckman and Smith [1979], indicates that FC firms in the aggregate did not experience a security market reaction to either FASB No. 19 or ASR No. 253. Second, the reversal hypothesis is not supported using individual FC firms as the unit of analysis, but the reversal hypothesis may be supported when selected portfolios are used as the unit of analysis. Hence, these results provide additional empirical evidence to be integrated with the prior research of Collins and Dent [1979], Dyckman and Smith [1979], Haworth, Matthews, and Tuck [1978], Lev [1979], Collins, Rozeff, and Dhaliwal [1981], and Collins, Rozeff, and Salatka [1981]. The following comments on Smith's paper address three general areas of concern. First, the appropriateness of the reversal test is considered given the characteristics of the prediction errors at the test periods. Second, potential statistical and experimental design problems are considered. Finally, an alternative method of conducting reversal tests is proposed.