Scribd
Upload
5 views3 pages

Capital Market Reactions to Accounting Data

The document discusses the relationship between capital markets and accounting information, emphasizing the role of accounting disclosures in influencing share prices. It covers market efficiency, the information content of earnings, and key findings from capital market research, including the impact of earnings announcements on stock returns. Additionally, it addresses factors affecting market reactions and critiques of the Efficient Market Hypothesis.

Uploaded by

ravindumaleesha566
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
5 views3 pages

Capital Market Reactions to Accounting Data

The document discusses the relationship between capital markets and accounting information, emphasizing the role of accounting disclosures in influencing share prices. It covers market efficiency, the information content of earnings, and key findings from capital market research, including the impact of earnings announcements on stock returns. Additionally, it addresses factors affecting market reactions and critiques of the Efficient Market Hypothesis.

Uploaded by

ravindumaleesha566
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Main Topic: Capital Market Reactions to Accounting

Information

1. Introduction to Capital Market Research (CMR)


 Definition and scope of CMR
 Role of accounting disclosures in capital markets
 Focus: Aggregate effects of financial reporting on share prices

2. Market Efficiency and CMR


 Efficient Market Hypothesis (EMH)
o Definition of market efficiency

 Forms of Market Efficiency


o Weak form

o Semi-strong form

o Strong form

 Implications for Accounting


o How markets use accounting info to predict future earnings

o Value relevance of accounting disclosures

3. The Information Content of Earnings


 Concept of unexpected earnings
 Relation to abnormal share price movements
 Earnings announcement example

4. Earnings/Return Relationship
 Total vs. normal vs. abnormal returns
 Use of CAPM for expected returns
 Calculating abnormal return
5. Results of Capital Market Research (CMR)
 Ball and Brown (1968) Study
o Empirical evidence on usefulness of earnings information

o Investors anticipate most of the earnings information

 Other Foundational Studies


o Kothari (2001) – Broad review of CMR

o Holthausen & Watts (2001) – Value relevance and standard setting

o Healy & Palepu (2001) – Corporate disclosure and info asymmetry

6. Extensions and Key Findings of CMR


 Permanent vs. Temporary Earnings Changes
o Effect on dividend expectations and share price

 Cash vs. Accrual Components of Earnings


o Earnings persistence and investor "fixation"

 Information Transfer
o Earnings announcements of one firm impacting peer firms

 Voluntary Disclosure
o Benefits: analyst following, accuracy, reduced capital cost

 Recognition vs. Disclosure in Footnotes


o Market places higher value on recognized items

7. Additional Factors Affecting Market Reactions


 Firm Size
o Greater price response for smaller firms

 Timing of Price Movements


o Do prices anticipate or react to earnings announcements?
8. Revisiting Market Efficiency Assumptions
 Behavioral criticisms of EMH
 Evidence of underreaction and overreaction
 Earnings drift and emerging research areas

9. Summary and Implications


 Interaction of corporate disclosures and share prices
 Capital market efficiency as a foundational assumption
 Use of accounting information in investment decisions

You might also like