162 RAY BALL AND PHILIP BROWN where the hats denote estimates.The expected income change for firm j in year t is then given by the regression prediction using the change in the average income for the market in year t: △Iit=djt+d2t△Mit. The unexpected income change,or forecast error ()is the actual income change minus expected: a6=△Ir-△1. (2) It is this forecast error which we assume to be the new information con- veyed by the present income number. THE MARKET'S REACTION It has also been demonstrated that stock prices,and therefore rates of return from holding stocks,tend to move together.In one study,it was estimated that about 30 to 40 per cent of the variability in a stock's monthly rate of return over the period March,1944 through December,1960 could be associated with market-wide effects.Market-wide variations in stock returns are triggered by the release of information which concerns all firms. Since we are evaluating the income report as it relates to the individual firm,its contents and timing should be assessed relative to changes in the rate of return on the firm's stocks net of market-wide effects. The impact of market-wide information on the monthly rate of return from investing one dollar in the stock of firm j may be estimated by its predicted value from the linear regression of the monthly price relatives of firm i's common stock1o on a market index of returns:1 9King(1966). 10 The monthly price relative of security j for month m is defined as dividends (dim)+closing price (pi),divided by opening price (pjm): PRm=(pi,m+1十dm)/pm, A monthly price relative is thus equal to the discrete monthly rate of return plus unity;its natural logarithm is the monthly rate of return compounded continuously. In this paper,we assume discrete compounding since the results are easier to inter- pret in that form. 11 Fama,et al.(1967)conclude that "regressions of security on market returns over time are a satisfactory method for abstracting from the effects of general market conditions on the monthly rates of return on individual securities."In arriving at their conclusion,they found that "scatter diagrams for the [returns on]individual securities [vis-a-vis the market return]support very well the regression assumptions of linearity,homoscedasticity,and serial independence."Fama,et al.studied the natural logarithmic transforms of the price relatives,as did King(1966).However, Blume (1968)worked with equation(3).We also performed tests on the alternative specification: ln。(PRm)=bi十b2n。(亿m)+im, (3a) where In.denotes the natural logarithmic function.The results correspond closely with those reported below