CAPITAL MARKETS RESEARCH
Event Study - Conclusions
- Majority of price adjustment is due to continuous release of information
- This is made up of both accounting and non-accounting information
Argument
Event Study - Conclusions
Event Study - Ball & Brown (1968)
Investors do rely upon accounting earnings to revise their estimates around share prices.
- Remaining price adjustment is due to accounting information released during annual report
- The annual report's impact increases in an Australian context
Association Studies
Thomas Honeywill
- Recognises accounting reports not only source of information
- Tend to be done in periods longer than a year
- Tests whether and how quickly accounting measures capture changes in the information set that is reflected in share prices
Capital Markets Research
WEEK 10 - Case Study
Two main study methods:
- Event Study
- Association Study
Relevance
Student A:
'Standard setters have adopted the decision usefulness objective for financial reporting. Such an approach is based on the view that accounting information is actually used by investors in making resource allocation decisions and setting the price of shares.'
- Accounting figures are relevant if they are able to affect decisions made by market participants
General Assumption
Accounting information directly informs the capital market and share-market participants.
Association Study - Conclusions
Conclusion
Limitations of Capital Markets Research
Certain factors have a role in determining firm value.
Factors:
- Risk and uncertainty, firm size, industry, interest rates, financial leverage, potential growth, and permanent and temporary profits.
1. Profits may not accurately reflect accounting information
2. OLS Linear Regression may have incorrect underlying assumptions
3. Efficient Market Hypothesis limitations
Disclosures of accounting information leads to share price changes or increases in the volume of trading, providing evidence that capital-market participants do use accounting information.