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Three Patterns in Need of a Unified Theory

Steven Huddart

How earnings affect stock price, how earnings are formed from underlying events and management actions, and how pay affects performance are questions that have been prominent in the research agendas of many accounting scholars. Among the results of this extensive research effort are three striking empirical regularities: (1) stock returns are an S-shaped function of earnings; (2) the distribution of earnings is lumpy around benchmarks; and (3) pay for top executives is an increasing convex function of stock price. To my mind, these findings suggest a big unanswered question in accounting: Why are stock prices, earnings, and pay packages related in these ways? We have some explanations for these regularities in isolation and even a few explanations that address two of them simultaneously, but no model I know persuasively comprehends them all.

Accounting Horizons Volume 22, Number 4 (November 2008) 441-444.

DOI: 10.2308/acch.2008.22.4.441

Paper

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Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 865-3271
(814) 863-8393 fax
huddart@psu.edu
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