Advertisement

Accounting and Efficient Markets

  • Michael Firth
Chapter
Part of the Studies in Finance and Accounting book series (SFA)

Abstract

The efficient-markets theory says that share prices always fully reflect publicly available information and that any new items of information are instantaneously reflected in those prices. Thus any ‘new’ information of ‘economic’ value contained in annual or interim accounts should cause an immediate reaction in share prices as they adjust to reflect this information. ‘New’ information and ‘economic’ value are stressed as many data contained in accounting reports have already been reflected in share prices (i.e. anticipated by investors) and some data have no impact or no obvious impact on the economic value of the firm (for example directors’ shareholdings). If one assumes that the market is efficient or ‘reasonably’ efficient, then this has certain implications for accounting.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Notes and References

  1. 2.
    P. Brown, ‘The Impact of the Annual Net Profit Report on the Stock Market’, Australian Accountant, vol. 40 (1970).Google Scholar
  2. 4.
    B. Lev and B. Yahalomi, ‘The Effects of Corporate Financial Statements on the Israeli Stock Exchange’, Management International Review, vol. 12, nos. 2–3 (1972).Google Scholar
  3. 7.
    J. Kiger, ‘An Empirical Investigation of NYSE Volume and Price Reactions to the Announcement of Quarterly Earnings’, Journal of Accounting Research (Spring 1972).Google Scholar
  4. 8.
    A Martin, ‘An Empirical Test of the Relevance of Accounting Information for Investment Decisions’, Empirical Research in Accounting: Selected Studies, 1971, Journal of Accounting Research supplement, vol. 9 (1971).Google Scholar
  5. 10.
    T. R. Dyckman, ‘On the Investment Decision’, Accounting Review, vol. 39 (April 1964).Google Scholar
  6. 11.
    R. E. Jensen, ‘An Experimental Design for Study of Effects of Accounting Variations in Decision Making’, Journal of Accounting Research, vol. 4 (Autumn 1966).Google Scholar
  7. 12.
    W. J. Bruns, Jr, ‘Inventory Valuation and Management Decisions’, Accounting Review, vol. 40 (April 1965).Google Scholar
  8. 13.
    M. E. Barrett, ‘Accounting for Intercorporate Investments: A Behavioral Field Experiment’, Empirical Research in Accounting: Selected Studies, 1971, Journal of Accounting Research, supplement, vol. 9 (1971).Google Scholar
  9. 14.
    C. P. Bonini, Simulation of Information and Decision Systems in the Firm ( Englewood Cliffs, N.J.: Prentice-Hall, 1969 );Google Scholar
  10. E. F. Brigham, ‘The Effects of Alternative Depreciation Policies on Reported Profits’, Accounting Review, vol. 43 (January 1968);Google Scholar
  11. E. E. Comiskey and F. A. Mlynarczyk, ‘Recognition of Income by Finance Companies’, Accounting Review, vol. 43 (1968);Google Scholar
  12. M. N. Greenball, ‘Evaluation of the Usefulness to Investors of Different Accounting Estimators of Earnings’, Empirical Research in Accounting: Selected Studies, 1968, Journal of Accounting Research, supplement, vol. 6 (1968).Google Scholar
  13. 15.
    John L. O’Donnell, ‘Relationships Between Reported Earnings and Stock Prices in the Electric Utility Industry’, Accounting Review (January 1965).Google Scholar
  14. 16.
    John L. O’Donnell, ‘Further Observations on Reported Earnings and Stock Prices’, Accounting Review (July 1968).Google Scholar
  15. 17.
    E. L. Summers, ‘Observation of Effects of Using Alternative Reporting Practices’, Accounting Review, vol. 43 (April 1968).Google Scholar
  16. 18.
    F. A. Mlynarczyk, ‘An Empirical Study of Accounting Methods and Stock Prices’, Empirical Research in Accounting: Selected Studies, 1969, Journal of Accounting Research, supplement, vol. 7 (1969).Google Scholar
  17. 20.
    N. Gonedes, ‘The Significance of Selected Accounting Procedures: A Statistical Test’, Empirical Research in Accounting’, Selected Studies, 1969, Journal of Accounting Research, supplement (1969).Google Scholar
  18. 26.
    R. C. Morris, ‘Evidence of the Impact of Inflation Accounting on Share Prices’, Accounting and Business Research (Spring 1975).Google Scholar
  19. 27.
    See W. Frank, ‘A Study of the Predictive Significance of Two Income Measures’, Journal of Accounting Research (1969);Google Scholar
  20. R. A. Samuelson, ‘Prediction and Price-Level Adjustment’, Journal of Accounting Research (1972).Google Scholar
  21. J. K. Simmons and J. Gray, ‘An Investigation of the Effect of Differing Accounting Frameworks on the Prediction of Net Income’, Accounting Review, vol. 44 (October 1969);Google Scholar
  22. E. V. McIntyre, ‘Current Cost Financial Statements and Common Stock Investment Decisions’, Accounting Review(1973).Google Scholar
  23. 28.
    N. Gonedes, ‘Efficient Capital Markets and External Accounting’, Accounting Review (January 1972);Google Scholar
  24. R. May and G. Sundem, ‘Cost of Information and Security Prices: Market Association Tests for Accounting Policy Decisions’, Accounting Review (January 1973);Google Scholar
  25. H. Bierman, ‘The Implications of Efficient Markets and the Capital Asset Pricing Model to Accounting’, Accounting Review (July 1974);Google Scholar
  26. M. N. Greenball, ‘The Predictive-Ability Criterion: Its Relevance in Evaluating Accounting Data’, Abacus, vol. 7 (June 1971);Google Scholar
  27. W. Beaver, ‘The Behavior of Security Prices and Its Implication for Accounting Research (Methods)’, Accounting Review, supplement (1972);Google Scholar
  28. W. Beaver, ‘Implications of Security Price Research for Accounting: A Reply to Bierman’, Accounting Review (July 1974);Google Scholar
  29. B. Carsberg, A. Hope and R. W. Scapens, ‘The Objectives of Published Accounting Reports’, Accounting and Business Research (Summer 1974)Google Scholar
  30. B. Carsberg, ‘The Objectives of Published Accounting Reports: Reply to a Comment’, Accounting and Business Research (Spring 1975 );Google Scholar
  31. K. V. Peasnell, The Usefulness of Accounting Information to Investors Occasional Paper No. 1 (I.C.R.A., 1973)Google Scholar
  32. K. V. Peasnell, ‘Objectives of Published Accounting Reports: A Comment’, Accounting and Business Research (Winter 1974 );Google Scholar
  33. W. J. Kenley and G. T. Staubus, Objectives and Concepts of Financial Statements (Accounting Research Foundation, 1972 ).Google Scholar

Copyright information

© Michael Firth 1977

Authors and Affiliations

  • Michael Firth
    • 1
  1. 1.Department of Accountancy and Business LawUniversity of StirlingUK

Personalised recommendations