Pgs 224-228

Following in Treynor's footsteps, Fischer had a deep interest in solving the problems of accounting. He found that an accountant and a financial analyst are essentially trying to achieve the same goal. That goal is to come up with some realistic measurement of firm value. The other discovery he made was that of all the accounting measures accountants use, aggregate earnings was the most highly correlated with market value. This showed Fischer that analysts and accountants were basically doing the same thing, just in two different ways. He published a paper titled "The Magic in Earnings" and began teaching accounting classes to further learn and investigate accounting's problems. The problem Fischer found with aggregate earnings as a measure of value was that some quarters could show negative earnings and it was not possible for a firm to have negative value. He solved this problem by simply viewing earnings as an option. By treating the firm's fixed costs as the strike price he could use option pricing to value earnings. This solved the negative earnings problem because options are always positively valued and this measure was even more correlated to market value than aggregate earnings.