Abstract This article presents a reply from the authors to the criticism of their article underlying a set of market-clearing security prices by Robert P. Magee, published in a recent issue of the journal "The Accounting Review." In their earlier work, the authors showed that there is a potential bias against non-extant accounting alternatives built into association tests based on extant security prices. Magee shows that under certain conditions the bias may be sufficiently reduced such that a nonextant alternative which actually contains more information will indeed be judged so on the basis of its association with market prices. He concludes that the conditions that they specified under which association tests will be valid for nonextant alternatives are too restrictive. There is no nontrivial accounting disclosure change that will not potentially cause a redistribution of wealth; consequently, there is no change for which social welfare impacts can be accurately surrogated by results of market association tests for differential information content. The authors concluded that market association tests may provide data that policy makers can use to revise their prior beliefs about the relative desirability of alternative accounting disclosure requirements.
May et al. (Tue,) studied this question.