Faculty & Research

Ray Ball

Sidney Davidson Distinguished Service Professor of Accounting

Phone :
773 834-5941
Address :
5807 South Woodlawn Avenue
Chicago, IL 60637

Ray Ball studies corporate disclosure, earnings and stock prices, international accounting and finance, market efficiency and investment strategies. He is coauthor of "An Empirical Evaluation of Accounting Income Numbers," an article published in the Journal of Accounting Research in 1968 that won the American Accounting Association's inaugural award for seminal contributions in account literature. This article revolutionized the understanding of the impact of corporate disclosure on share prices, and of earnings releases in particular. It laid the foundation for much of the modern accounting literature. Ball also is the author of "Anomalies in Relationships between Securities' Yields and Yield surrogates," published in the Journal of Financial Economics in 1978, the first academic reference to systematic anomalies in the theory of efficient markets.

Ball is Coordinating Editor of the Journal of Accounting Research and a member of the editorial board of the Australian Journal of Management. He is a member of the Board of Trustees of Harbor Funds and Chair of its Audit Committee. He also serves on the Advisory Group for the Financial Reporting Faculty of the Institute of Chartered Accountants in England and Wales (ICAEW). He has served on the Financial Accounting Standards Advisory Council (FASAC) of the Financial Accounting Standards Board (FASB), and on the Shadow Financial Regulation Committee.

Ball served as the Wesray Professor in Business Administration at the William E. Simon Graduate School of Business Administration at the University of Rochester prior to rejoining Chicago Booth in 2000. He has served as a professor at the European Institute for Advanced Studies in Management, and has taught at the London Business School, the Australian Graduate School of Management, and the University of Queensland.

He received a bachelor's degree in accounting from the University of New South Wales in Australia, and an MBA in 1968 and a PhD in economics in 1972 from Chicago Booth. Ball was awarded honorary degrees by the Helsinki School of Economics, the Katholieke Universiteit Leuven, the University of Queensland, the University of London, and the University of New South Wales. He was elected to the Accounting Hall of Fame in 2009. The American Accounting Association honored him as its 2012 Presidential Scholar (together with Philip Brown) and in 2014 with its FARS Lifetime Achievement Award.

His interests include reading, cooking, wine, and clocks. Ball has been a Chicago Bulls fan for over 40 years.

 

2013 - 2014 Course Schedule

Number Name Quarter
30800 Financial Accounting 2013 (Fall)
30902 Empirical Research in Accounting 2014 (Spring)

2014 - 2015 Course Schedule

Number Name Quarter
30000 Financial Accounting 2015 (Spring)
30902 Empirical Research in Accounting 2015 (Spring)

Other Interests

Reading, cooking, wine, clocks, still a Bulls fan.

 

Research Activities

Financial reporting and disclosure; earnings and stock prices; international accounting and finance; market efficiency; the institutions of a market economy.

With Philip Brown, "An Empirical Evaluation of Accounting Income Numbers," Journal of Accounting Research (1968), which received the American Accounting Association's inaugural award for Seminal Contributions to the Accounting Literature. "Anomalies in Relationships Between Securities' Yields and Yield-Surrogates," Journal of Financial Economics (1978).

With S.P. Kothari and J. Shanken, "Problems in Measuring Portfolio Performance: An Application to Contrarian Investment Strategies," Journal of Financial Economics (1995).

With A. Robin and J.S. Wu, "Incentives Versus Standards: Properties of Accounting Income in Four East Asian Countries," Journal of Accounting and Economics (2003).

“Market and Political/Regulatory Perspectives on the Recent Accounting Scandals,” Journal of Accounting Research (2009).

For a listing of research publications please visit ’s university library listing page.

REVISION: Deflating Profitability
Date Posted: Aug  15, 2014
Gross profit scaled by book value of total assets predicts the cross-section of average returns. Novy-Marx (2013) concludes that it outperforms other measures of profitability such as bottom-line net income, cash flows, and dividends. One potential explanation for the measure's predictive ability is that its numerator - gross profit - is a "cleaner" measure of economic profitability. An alternative explanation lies in the measure's deflator. We find that net income equals gross profit in predictive power when they have consistent deflators. We show that deflating profit by the book value of total assets interacts profitability with the ratio of the market value of equity to the book value of total assets, which is priced. We then construct an alternative measure of profitability, operating profitability, which better matches current expenses with current revenue. This measure exhibits a far stronger link with expected returns than either net income or gross profit. It predicts ...

New: Fama, Fisher, Jensen and Roll (1969): Retrospective Comments
Date Posted: Feb  16, 2014
This commissioned essay provides a retrospective view of one of Gene Fama’s many seminal papers, Fama, Fisher, Jensen, and Roll (1969). The paper was like none before it. Its contributions include (listed in what I regard as increasing order of importance): documenting share price behavior around the time of splits; implementing the first control for the market factor, hence creating the precursor to the influential Fama-French models; conducting the first event study; providing the first direct test of market efficiency; and demonstrating the wisdom and validity of Fama’s (1965) framing of stock price behavior in terms of information. The paper’s impact has been enormous, because at the time the research was conducted it was instrumental in reframing how we think about asset prices.

New: Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism
Date Posted: Nov  28, 2013
A substantial literature investigates conditional conservatism, defined as asymmetric accounting recognition of economic shocks ("news"), and how it depends on various market, political, and institutional variables. Studies typically assume the Basu [1997] asymmetric timeliness coefficient (the incremental slope on negative returns in a piecewise-linear regression of accounting income on stock returns) is a valid conditional conservatism measure. We analyze the measure's validity, in the context of a model with accounting income incorporating different types of information with different lags, and with noise. We demonstrate that the asymmetric timeliness coefficient varies with firm characteristics affecting their information environments, such as the length of the firm's operating and investment cycles, and its degree of diversification. We particularly examine one characteristic, the extent to which "unbooked" information (such as revised expectations about rents and growth ...

REVISION: Ball and Brown (1968): A Retrospective
Date Posted: Sep  15, 2013
This essay provides a retrospective view on our co-authored paper, Ball and Brown (1968). The retrospective was commissioned by Gregory Waymire, then President of the American Accounting Association. It describes how we both came to be PhD students at the University of Chicago and set about researching the relation between earnings and share prices. It outlines the background against which we conducted the research, including the largely a priori accounting research literature at the time and the electric atmosphere and radical new ideas then in full bloom at Chicago. We describe some of the principal research choices we made, and their strengths and weaknesses. We also describe the reception our research received and how the related literature subsequently unfolded.

New: Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism
Date Posted: Aug  02, 2013
A substantial literature investigates conditional conservatism, defined as asymmetric accounting recognition of economic shocks (“news”), and how it depends on various market, political and institutional variables. Studies typically assume the Basu (1997) asymmetric timeliness coefficient (the incremental slope on negative returns in a piecewise-linear regression of accounting income on stock returns) is a valid conditional conservatism measure. We analyze the measure’s validity, in the co

REVISION: Mandatory IFRS Adoption, Fair Value Accounting and Accounting Information in Debt Contracts
Date Posted: Jul  29, 2013
A significant fall in accounting-based debt covenants and increase in non-accounting covenants follows mandatory IFRS adoption. Covenant substitution increases in the difference between prior domestic GAAP and IFRS. No such effects are observed in a non-adopting country control group. We attribute these results primarily to the IASB’s fair-value orientation. We argue that fair valuing adds transitory shocks to earnings that make it an inferior variable in the context of long term debt agreemen

REVISION: Accounting Informs Investors and Earnings Management is Rife: Two Questionable Beliefs
Date Posted: May  15, 2013
This short essay is based on a presentation at the panel discussion on “The Most Incorrect Beliefs in Accounting” at the American Accounting Association Meetings in 2012. It addresses the inordinate amount of attention given in the literature to accounting’s role in providing new information for equity investors, and to allegedly rampant “earnings management.”

REVISION: Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism
Date Posted: Jan  10, 2013
A substantial literature investigates conditional conservatism, defined as asymmetric accounting recognition of economic shocks (“news”), and how it depends on various market, political and institutional variables. Studies typically assume the Basu (1997) asymmetric timeliness coefficient (the incremental slope on negative returns in a piecewise-linear regression of accounting income on stock returns) is a valid conditional conservatism measure. We analyze the measure’s validity, in the co

REVISION: On Estimating Conditional Conservatism
Date Posted: Dec  03, 2012
The concept of conditional conservatism has provided new insight into financial reporting and has stimulated considerable research since Basu (1997) developed it. While the concept encapsulated in the adage “anticipate no profits but anticipate all losses” is reasonably clear, estimating it is the subject of some discussion, notably by Dietrich et al. (2007), Givoly et al. (2007), and Ball, Kothari and Nikolaev (2011). Recently, Patatoukas and Thomas (2011) report important evidence of possi

REVISION: Mark-to-Market Accounting and Information Asymmetry in Banks
Date Posted: Aug  21, 2012
We examine the relation between mark-to-market (MTM) accounting for securities and information asymmetry among bank investors. Relative to historical cost, MTM incorporates more timely information in financial statements. The primary effect of more timely disclosure most likely is to reduce information asymmetry. Nevertheless, models in which public information triggers private information acquisition imply some offsetting increase in asymmetry due to differential information production among in

New: The Information Value of the Annual Earnings Report
Date Posted: Aug  13, 2012
This working paper is the first draft of our co-authored publication, "An Empirical Evaluation of Accounting Income Numbers," Journal of Accounting Research 6, 1968, pp.159-78. While undated, it subsequently was presented at the November 1967 Seminar on the Analysis of Security Prices organized by the Center for Research in Security Prices (CRSP) at the University of Chicago. It was included in the November 1967 Proceedings of the Seminar on the Analysis of Security Prices. In 1986, the publi

New: Audited Financial Reporting and Voluntary Disclosure as Complements: A Test of the Confirmation Hypo
Date Posted: Nov  11, 2011
We examine the 'confirmation' hypothesis that audited financial reporting and disclosure of managers’ private information are complements, because independent verification of outcomes disciplines and hence enhances disclosure credibility. Committing to higher audit fees (a measure of financial statement verification) is associated with management forecasts that are more frequent, specific, timely, accurate and informative to investors. Because private information disclosure and audited financial

REVISION: Aggregate Earnings and Asset Prices
Date Posted: Aug  30, 2011
A principal-components analysis demonstrates that common earnings factors explain a substantial portion of …rm-level earnings variation, implying earnings shocks have substantial systematic components and are not almost fully diversifiable as prior literature has concluded. Furthermore, the principal components of earnings and returns are highly correlated, implying aggregate earnings risks and return risks are related. In contrast to previous studies, the correlation we report between the syste

REVISION: Audited Financial Reporting and Voluntary Disclosure as Complements: A Test of the Confirmation Hypo
Date Posted: Jul  04, 2011
We examine the “confirmation” hypothesis, that audited, backward-looking financial outcomes and disclosure of managers’ private forward-looking information are complements, because independent audit disciplines and hence enhances disclosure credibility. Committing to higher audit fees (a measure of the extent of financial outcome verification and thus the accuracy and freedom from manipulation of reported outcomes), is associated with management forecasts that are more frequent, specific, timely

REVISION: The Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned?
Date Posted: Dec  11, 2009
The sharp economic downturn and turmoil in the financial markets, commonly referred to as the “global financial crisis,” has spawned an impressive outpouring of blame. The efficient market hypothesis - the idea that competitive financial markets ruthlessly exploit all available information when setting security prices - has been singled out for particular attention. Like all good theories, market efficiency has major limitations, even though it continues to be the source of important and endurin

New: The Complementary Roles of Audited Financial Reporting and Voluntary Disclosure: A Test of the Confi
Date Posted: Oct  17, 2009
We examine the complementarity between voluntary disclosure and reporting audited financial statement outcomes. We test the “confirmation” hypothesis, that reporting audited, backward-looking outcomes disciplines and hence enhances the precision and credibility of managers’ disclosure of private forward-looking information. Using management earnings forecasts as the voluntary disclosure variable, we report that committing to higher audit fees (a measure of the extent of financial statement verif

How Naive Is the Stock Market's Use of Earnings Information?
Date Posted: Sep  04, 2009
Rendleman Jones and Latane (1987) and Bernard and Thomas (1990) report evidence supporting their hypothesis that investors use a "naive" seasonal random walk model in forming expectations of quarterly earnings. Using the Bernard and Thomas (1990) data we show that the market acts as if it: (1) does not use a seasonal random walk model; (2) does incorporate past earnings changes in forming expectations; (3) does use the correct signs in exploiting serial correlation in seasonally-differenced qu

REVISION: Aggregate Earnings and Asset Prices
Date Posted: Aug  02, 2009
A principal-components analysis demonstrates that common earnings factors explain a substantial portion of firm-level earnings variation, implying earnings shocks have substantial systematic components and are not almost fully diversifiable as prior literature has concluded. Furthermore, the principal components of earnings and returns are highly correlated, implying aggregate earnings risks and return risks are related. In contrast to previous studies, the correlation we report between the syst

REVISION: Market and Political/Regulatory Perspectives on the Recent Accounting Scandals
Date Posted: May  14, 2009
Not surprisingly, the recent accounting scandals look different when viewed from the perspectives of the political/regulatory process and of the market for corporate governance and financial reporting. We do not have the opportunity to observe a world in which either market or political/regulatory processes operate independently, and the events are recent and not well-researched, so untangling their separate effects is somewhat conjectural. This paper offers conjectures on issues such as: What c

New: Market and Political/Regulatory Perspectives on the Recent Accounting Scandals
Date Posted: Apr  29, 2009
Not surprisingly, the recent accounting scandals look different when viewed from the perspectives of the political/regulatory process and of the market for corporate governance and financial reporting. We do not have the opportunity to observe a world in which either market or political/regulatory processes operate independently, and the events are recent and not well-researched, so untangling their separate effects is somewhat conjectural. This paper offers conjectures on issues such as: What c

REVISION: Earnings Quality in U.K. Private Firms
Date Posted: Apr  26, 2009
UK private and public companies face substantially equivalent regulation on auditing, accounting standards and taxes. We hypothesize that private-company financial reporting nevertheless is lower quality due to different market demand, regulation notwithstanding. A large UK sample supports this hypothesis. Quality is operationalized using Basu's (1997) time-series measure of timely loss recognition and a new accruals-based method. The result is not affected by controls for size, leverage, indust

Accounting Depreciation and Product Prices
Date Posted: Mar  09, 2009
We argue that accounting depreciation either is the firm s calculation of the cost of a durable factor, or is information used in determining (implicitly or explicitly) the factor cost. Simple competitive-economic theory then implies a relation between accounting depreciation and product prices. We hypothesize that this relation is strengthened by various accounting techniques, including the inclusion of depreciation charges in standard costs, budgets and actual performance measures, as well as

Is Research On Trading Rules Implementable? The Case Of Short-Term Contrarian Strategies
Date Posted: Mar  09, 2009
Research on trading rule profitability usually simulates trading on historical data. These data usually are obtained from files such as CRSP, which estimate closing prices as the last trade (at the closing bid or the closing ask, or neither), or the bid-ask average (in the absence of a last trade). A trading rule could not normally be implemented at these prices, for even a smaller number of shares. A simulated contrarian strategy transforms noise in closing price estimates into return biases, b

Commitment, Historical Cost Accounting and Accounting Depreciation
Date Posted: Mar  09, 2009
We conjecture that accounting depreciation reduces the over- and under-investment problem in acquiring and utilizing fixed assets. By forcing the agent to cover depreciation charges of assets the agent proposes to buy, the agent commits to generate cash flows in excess of depreciation charges (through either additional revenues or cost savings). Moreover, the book value of undepreciated historical cost commits the agent to maintain the asset's productive capacity. Various accounting techniques,

The Effect of International Institutional Factors on Properties of Accounting Earnings
Date Posted: Mar  09, 2009
International differences in the demand for accounting income predictably affect the way it incorporates economic income (dividend-adjusted change in market value) over time. We characterize the "shareholder" and "stakeholder" corporate governance models of common and code law countries respectively as resolving information asymmetry by public disclosure and private communication. Also, code law directly links accounting income to current payouts (to employees, managers, shareholders and governm

Incentives versus Standards: Properties of Accounting Income in Four East Asian Countries, and Impli...
Date Posted: Mar  09, 2009
The East Asian countries of Hong Kong, Malaysia, Singapore and Thailand provide a rare opportunity to study the interaction between the accounting standards under which financial statements are prepared and the incentives of managers and auditors who prepare them. Their accounting standards are largely derived from common law sources [UK, US and International Accounting Standards (IAS)], which are widely viewed as higher quality than code law standards. However, economic and political influences

Earnings Quality in U.K. Private Firms
Date Posted: Mar  09, 2009
UK private and public companies face substantially equivalent regulation on auditing, accounting standards and taxes. We hypothesize that private-company financial reporting nevertheless is lower quality due to different market demand, regulation notwithstanding. A large UK sample supports this hypothesis. Quality is operationalized using Basu's (1997) time-series measure of timely loss recognition and a new accruals-based method. The result is not affected by controls for size, leverage, indust

REVISION: Incentives Versus Standards: Properties of Accounting Income in Four East Asian Countries
Date Posted: Feb  07, 2009
The East Asian countries of Hong Kong, Malaysia, Singapore and Thailand provide a rare opportunity to study the interaction between the accounting standards under which financial statements are prepared and the incentives of managers and auditors who prepare them. Their accounting standards are largely derived from common law sources [UK, US and International Accounting Standards (IAS)], which are widely viewed as higher quality than code law standards. However, economic and political influences

REVISION: How Much New Information is There in Earnings?
Date Posted: Aug  21, 2008
We quantify the relative importance of earnings announcements in providing new information to the share market, using the r-squared in a regression of securities' calendar year returns on their four quarterly earnings announcement window returns. The r-squared, which averages approximately five to nine percent, measures the proportion of total information incorporated in share prices over a year that is associated with earnings announcements. We conclude that the average quarterly announcement i

REVISION: What is the Actual Economic Role of Financial Reporting?
Date Posted: Jun  01, 2008
This short essay is based on a presentation at the panel discussion on Big Unanswered Questions in Accounting at the American Accounting Association Meetings in 2007. It poses the question: what is the actual economic role of financial reporting? and discusses why this question is important, why it is unanswered, and what types of inventive research design are needed to help answer it. Examples are given of the types of questions involved.

New: What is the Actual Economic Role of Financial Reporting?
Date Posted: Feb  10, 2008
This short essay is based on a presentation at the panel discussion on "Big Unanswered Questions in Accounting" at the American Accounting Association Meetings in 2007. It poses the question "what is the actual economic role of financial reporting?" and discusses why this is an important question, why it is unanswered, and the types of inventive research design needed to help answer it. Examples of the types of questions involved are given.

REVISION: Is Financial Reporting Shaped By Equity Markets or By Debt Markets? An International Study of Timeli
Date Posted: Dec  17, 2007
We hypothesize debt markets - not equity markets - are the primary influence on association metrics studied since Ball and Brown (1968). Debt markets demand high scores on timeliness, conservatism and Lev's (1989) RSQ, because debt covenants utilize reported numbers. Equity markets do not rate financial reporting consistently with these metrics, because (among other things) they control for the total information incorporated in equity prices. Single-country studies shed little light on the relat

New: Earnings Quality at Initial Public Offerings
Date Posted: Dec  08, 2007
Financial reporting around the time of IPOs is consistent with listed firms reporting more conservatively than previously as private firms, consistent with the results in Ball and Shivakumar (2005). We hypothesize that IPO firms supply the higher quality financial reports demanded by public investors, who face higher information asymmetry than private investors. The market mechanisms for enforcing this demand include monitoring by internal and external auditors, boards, analysts, rating agencies

REVISION: Is Financial Reporting Shaped by Equity Markets or by Debt Markets? An International Study of Timeli
Date Posted: Oct  02, 2007
We hypothesize debt markets - not equity markets - are the primary influence on "association" metrics studied since Ball and Brown (1968). Debt markets demand high scores on timeliness, conservatism and Lev's (1989) R2, because debt covenants utilize reported numbers. Equity markets do not rate financial reporting consistently with these metrics, because (among other things) they control for the total information incorporated in equity prices. Single-country studies shed little light on the rela

New: International Financial Reporting Standards (IFRS): Pros and Cons for Investors
Date Posted: Sep  13, 2006
Accounting in shaped by economic and political forces. It follows that increased worldwide integration of both markets and politics (driven by reductions in communications and information processing costs) makes increased integration of financial reporting standards and practice almost inevitable. But most market and political forces will remain local for the foreseeable future, so it is unclear how much convergence in actual financial reporting practice will (or should) occur. Furthermore, ther

New: Earnings Quality at Initial Public Offerings
Date Posted: Jul  25, 2006
Financial reporting around the time of IPOs is consistent with listed firms reporting more conservatively than previously as private firms, consistent with the results in Ball and Shivakumar (2005). We hypothesize that IPO firms supply the higher quality financial reports demanded by public investors, who face higher information asymmetry than private investors. The market mechanisms for enforcing this demand include monitoring by internal and external auditors, boards, analysts, rating agencies

The Role of Accruals in Asymmetrically Timely Gain and Loss Recognition
Date Posted: Jan  17, 2005
We investigate the role of accrual accounting in the asymmetrically timely recognition of unrealized gains and losses (i.e., prior to the actual realization of those losses in cash). This role of accrual accounting has not been directly recognized in the literature. We show that non-linear accruals models are a substantial specification improvement, explaining up to three times the amount of variation in accruals as conventional linear specifications such as Jones (1991). Conversely, we conclude