Premium
The Effect of Limited Liability on the Market Response to Disclosure *
Author(s) -
FISCHER PAUL E.,
VERRECCHIA ROBERT E.
Publication year - 1997
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1111/j.1911-3846.1997.tb00539.x
Subject(s) - earnings , leverage (statistics) , equity (law) , debt , capital structure , liability , monetary economics , economics , limited liability , business , financial economics , accounting , finance , machine learning , computer science , political science , law
. We formalize the effects of an earnings disclosure on security prices under an assumption of limited liability. We derive various nonlinear relations between equity prices and earnings under a variety of capital structure assumptions and. if possible, we tie the relations attained to results from the existing empirical literature. We also characterize how debt prices respond to earnings when holders of debt have limited liability. Finally, we analyze how changes in the degree of leverage and conversion features of debt affect the relation between price and earnings.