Definition of Cumulative-Effect Adjustment

Cumulative-Effect Adjustment

The cumulative, after-tax, prior-year effect of a change in accounting
principle. It is reported as a single line item on the income statement in the year of the
change in accounting principle. The cumulative-effect-type adjustment is the most common accounting
treatment afforded changes in accounting principle.

CARs (cumulative abnormal returns)

a measure used in academic finance articles to measure the excess returns an investor would have received over a particular time period if he or she were invested in a particular stock.
This is typically used in control and takeover studies, where stockholders are paid a premium for being taken over. Starting some time period before the takeover (often five days before the first announced bid, but sometimes a longer period), the researchers calculate the actual daily stock returns for the target firm and subtract out the expected market returns (usually calculated using the firm’s beta and applying it to overall market movements during the time period under observation).
The excess actual return over the capital asset pricing model-determined expected return market is called an ‘‘abnormal return.’’ The cumulation of the daily abnormal returns over the time period under observation is the CAR. The term CAR(-5, 0) means the CAR calculated from five days before the
announcement to the day of announcement. The CAR(-1, 0) is a control premium, although Mergerstat generally uses the stock price five days before announcement rather than one day before announcement as the denominator in its control premium calculation. However, the CAR for any period other than (-1, 0) is not mathematically equivalent to a control premium.

Antidilutive effect

Result of a transaction that increases earnings per common share (e.g. by decreasing the
number of shares outstanding).

Calendar effect

The tendency of stocks to perform differently at different times, including such anomalies as
the January effect, month-of-the-year effect, day-of-the-week effect, and holiday effect.

Clientele effect

The grouping of investors who have a preference that the firm follow a particular financing
policy, such as the amount of leverage it uses.

Coinsurance effect

Refers to the fact that the merger of two firms decreases the probability of default on
either firm's debt.

Cumulative abnormal return (CAR)

Sum of the differences between the expected return on a stock and the
actual return that comes from the release of news to the market.

Cumulative dividend feature

A requirement that any missed preferred or preference stock dividends be paid
in full before any common dividend payment is made.

Cumulative preferred stock

Preferred stock whose dividends accrue, should the issuer not make timely
dividend payments. Related: non-cumulative preferred stock.

Cumulative probability distribution

A function that shows the probability that the random variable will
attain a value less than or equal to each value that the random variable can take on.

Cumulative Translation Adjustment (CTA) account

An entry in a translated balance sheet in which gains
and/or losses from translation have been accumulated over a period of years. The CTA account is required
under the FASB No. 52 rule.

Cumulative voting

A system of voting for directors of a corporation in which shareholder's total number of
votes is equal to his number of shares held times the number of candidates.

Dilutive effect

Result of a transaction that decreases earnings per common share.

Effective annual interest rate

An annual measure of the time value of money that fully reflects the effects of
compounding.

Effective annual yield

Annualized interest rate on a security computed using compound interest techniques.

Effective call price

The strike price in an optional redemption provision plus the accrued interest to the
redemption date.

Effective convexity

The convexity of a bond calculated with cash flows that change with yields.

Effective date

In an interest rate swap, the date the swap begins accruing interest.

Effective duration

The duration calculated using the approximate duration formula for a bond with an
embedded option, reflecting the expected change in the cash flow caused by the option. Measures the
responsiveness of a bond's price taking into account the expected cash flows will change as interest rates
change due to the embedded option.

Effective margin (EM)

Used with SAT performance measures, the amount equaling the net earned spread, or
margin, of income on the assets in excess of financing costs for a given interest rate and prepayment rate
scenario.

Effective rate

A measure of the time value of money that fully reflects the effects of compounding.

Effective spread

The gross underwriting spread adjusted for the impact of the announcement of the common
stock offering on the firm's share price.

Fisher effect

A theory that nominal interest rates in two or more countries should be equal to the required real
rate of return to investors plus compensation for the expected amount of inflation in each country.

Information-content effect

The rise in the stock price following the dividend signal.

International Fisher effect

States that the interest rate differential between two countries should be an
unbiased predictor of the future change in the spot rate.

Low price-earnings ratio effect

The tendency of portfolios of stocks with a low price-earnings ratio to
outperform portfolios consisting of stocks with a high price-earnings ratio.

Neglected firm effect

The tendency of firms that are neglected by security analysts to outperform firms that
are the subject of considerable attention.

Non-cumulative preferred stock

Preferred stock whose holders must forgo dividend payments when the
company misses a dividend payment.
Related: cumulative preferred stock

P/E effect

That portfolios with low P/E stocks have exhibited higher average risk-adjusted returns than high P/E stocks.

Small-firm effect

The tendency of small firms (in terms of total market capitalization) to outperform the
stock market (consisting of both large and small firms).

Synergistic effect

A violation of value-additivity whereby the value of the combination is greater than the
sum of the individual values.

Weekend effect

The common recurrent low or negative average return from Friday to Monday in the stock market.

Effective Annual Yield

Annualized rate of return on a security computed using compound
interest techniques

Effective Interest Rate

The rate of interest actually earned on an investment. It is
calculated as the ratio of the total amount of interest actually
earned for one year divided by the amount of the principal.

effectiveness

a measure of how well an organization’s goals
and objectives are achieved; compares actual output results
to desired results; determination of the successful accomplishment
of an objective

judgmental method (of risk adjustment)

an informal method of adjusting for risk that allows the decision maker
to use logic and reason to decide whether a project provides
an acceptable rate of return

cumulative voting

Voting system in which all the votes one shareholder is allowed to cast can be cast for one candidate for the board of directors.

effective annual interest rate

Interest rate that is annualized using compound interest.

international Fisher effect

Theory that real interest rates in all countries should be equal, with differences in nominal rates reflecting differences in expected inflation.

Effective Exchange Rate

The weighted average of several exchange rates, where the weights are determined by the extent of our trade done with each country.

Policy-Ineffectiveness Proposition

Theory that anticipated policy has no effect on output.

Seasonal Adjustment

adjustment to correct measures for changes that happen for seasonal reasons.

Wealth Effect

The effect on spending of a change in wealth caused by a change in the overall price level.

Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees

A committee formed in response to SEC chairman Arthur Levitt's initiative to improve the financial
reporting environment in the United States. In a report dated February 1999, the committee
made recommendations for new rules for regulation of financial reporting in the United States that
either duplicated or carried forward the recommendations of the Treadway Commission.

Cumulative Effect of Accounting Change

The change in earnings of previous years assuming
that the newly adopted accounting principle had previously been in use.

Cumulative Effect of a Change in Accounting Principle

The change in earnings of previous years
based on the assumption that a newly adopted accounting principle had previously been in use.

Effective Tax Rate

The total tax provision divided by pretax book income from continuing
operations.

Panel on Audit Effectiveness

A special committee of the Public Oversight Board that was created
to perform a comprehensive review and evaluation of the way independent audits of financial
statements of publicly traded companies are performed. The panel found generally that the
quality of audits is fundamentally sound. The panel did recommend the expansion of audit steps
designed to detect fraud.

Inventory adjustment

A transaction used to adjust the book balance of an inventory
record to the amount actually on hand.

Accumulated Other Comprehensive Income

cumulative gains or losses reported in shareholders'
equity that arise from changes in the fair value of available-for-sale securities, from the
effects of changes in foreign-currency exchange rates on consolidated foreign-currency financial
statements, certain gains and losses on financial derivatives, and from adjustments for underfunded
pension plans.

Change in Accounting Principle

A change from one generally accepted accounting principle to another generally accepted accounting principle—for example, a change from capitalizing expenditures
to expensing them. A change in accounting principle is accounted for in most instances
as a cumulative-effect–type adjustment.

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