Capsules and Comments:
Briloff and the Capital Markets
Elizabeth Edward
Hassan Raza
Rony Suthermaraj
Geoffrey Smith
• Abraham Briloff is a well-known accountant that
is noted for being critical of the accounting
methods of companies
• Economist, George Foster , analyzed the effects
that Abraham Briloff’s articles had on the capital
• An average drop of 8% was noted in the stocks of
the companies he researched when his info was
released to the public
• George Foster examines 5 reasons for why this
Capital Market Model
• Two criteria used for George Foster’s
examination of Briloff’s work:
-The day the article became “Publicly
Available” is obtainable
-The accounting practices of specific
companies must be criticized
• Fifteen articles selected that included security
returns on 28 companies
Capital Market Model
• The article mentions that announcements
appear to have an effect on the capital market.
• This effect is concentrated within two day period
around the announcements.
• Because of this Foster uses daily security returns
in his analysis
• He examines the security returns thirty days
prior to and after the publication of Briloff’s
Capital Market Model
• The capital market equilibrium model used to
describe the pricing of capital assets in the study
• (1) E(Rit) = E (Rat) + β i[E(Rmt) – E(Rat)]
• Rit = return on asset i in period t
• Rat = return on an asset whose returns are
uncorrelated with Rmt in period t
• Rmt = return on the market portfolio in period t
• β i = relative risk of asset i
Capital Market Model
• Using the previous model the effect of any new
information on asset i becoming available in
period t can be determined as:
• (2) Uit = Rit – E(Rit│Rat, Rmt, βi) where
• Uit = abnormal return
• Abnormal Return calculated based on the
“companion portfolio” of Black and Scholes
• Stocks are ranked on an estimate of beta in
period t-1 and placed into twenty portfolios
Capital Market Model
• The abnormal return on stock i in period t is
estimated using:
• (3) Uit = Rit - Rpt where
• Rpt = return on “companion portfolio” p in
period t
Cumulative Abnormal Return (C.A.R)
What is it?
-Sum of all the differences between the expected
returns and the actual returns up to a given point
in time
Cumulative Abnormal Return (C.A.R)
Figure 1, shows the average cumulative abnormal return
(CAR) of the 28 stocks
Cumulative Abnormal Return (C.A.R)
Figure 2, shows The average cumulative abnormal return (CAR) of
the 15 articles.
Cumulative Abnormal Return (C.A.R)
Figure 3, is an overlap off the first two graphs to better display the
affect Briloff’s articles had on the market. The blue line represents
the CAR of Briloff's articles, and the red line depicts the CAR of the 28
Kolmogorov–Smirnov Test
5 Explanations
The Capital Market is Inefficient
Briloff Brings New Ideas to the Market
Briloff’s Use of Non-public Info Sources
Increased Government Regulation
Uncontrollable Factors
The Capital Market is Inefficient
• If we assume that Briloff used information that
was “costless” and available to the public, then
by definition of market efficiency there should
be no price reaction to Briloff’s article
• Because the market was inefficient there was a
price reaction to the article
Briloff Brings New Ideas to the Market
• Individuals can create their own analysis
• This affects the ability to test the capital market
• When articles such as Briloff’s are released one
should predict the “appropriate” price reaction
to such info releases
• Compare the predicted and actual results
• Timing and magnitude of the info release can
play a large part in the “appropriate” price
Briloff’s Use of Non-public Info Sources
• The data sources used by Briloff extend beyond
the information set “publicly available”
• Unfortunately there is no clear-cut distinction
between “publicly available” and “non-publicly
available” information sets
Increased Government Regulation
• Due to the effective way Briloff writes, he acts as
a catalyst to parties who can affect the future
cash flows of firms
• Information on how the criticisms of a single
individual influence the decisions of
congressmen and bureaucrats are not easily
Uncontrollable Factors
• There is always the possibility in any experiment
that uncontrolled factors may cause the results
• If the publication of each Briloff article coincides
with the release of other information about the
cited companies then ambiguity would exist over
the cause of the results
• What were some of the financial analyses that
George Foster used to understand Briloff’s
• Explain market inefficiency?
• Which of the 5 explanations do you think was
the most influential to the changes in stock
5 Explanations
The Capital Market is Inefficient
Briloff Brings New Ideas to the Market
Briloff’s Use of Non-public Info Sources
Increased Government Regulation
Uncontrollable Factors
• Timing of the price reaction is consistent with an
efficient market
• When research goes beyond publically available
information it affects the tests of market
• Results are subject to varying interpretations

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