Deegan Topic: Reactions of capital markets to financial reporting
QUESTION 1
If some research is undertaken that provides evidence that capital markets do not always behave in accordance with the Efficient Market Hypothesis, does this invalidate research that adopts an assumption that capital markets are efficient?
QUESTION 2
Evidence shows that share prices might not fully react to financial accounting information immediately and that abnormal returns might persist for a period of time following the release of information (a case of ‘post-announcement drift'). Does this indicate that securities markets are not efficient and that assumptions about market efficiency should be rejected?
QUESTION 3
If an organisation's operations rely heavily on the specialised expertise of its management team, would you expect there to be a higher or a lower correspondence between the net assets recognised in the statement of financial position (balance sheet), and the total market value of the organisation's securities, relative to an organisation that relies more on tangible assets (for example, commonly used plant and machinery) to generate its income?
QUESTION 4
Would you expect an earning announcement by one firm within an industry to impact on the share prices of other firms in the industry? Why or why not?
QUESTION 5
Researchers such as Chambers and Sterling have made numerous claims that historical cost information is meaningless and useless. Are the results of capital markets research consistent with this perspective?
QUESTION 6
Some recent capital markets research investigates whether accounting information reflects the valuations that have already been made by the market (as reflected in share prices). In a sense, it assumes that the market has it ‘right' and that a ‘good' accounting approach is one that provides accounting numbers that relate to, or confirm, the market prices/returns. If we assume that the market has it ‘right', what exactly is the role of financial accounting?