Term
| What is the information approach? |
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Definition
| Applying decision theory and efficient markets theory to better understand role of accounting |
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Term
| What is the role of accounting? |
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Definition
| To provide information to investors |
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Term
| Who makes sure the information is relevant, complete and accurate? |
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Definition
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Term
| What does the investor do with the information provided? |
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Definition
| They use the information to predict future firm performance |
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Term
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Definition
| No need for information, no need for accountants |
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Term
| What are the two types of theory? |
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Definition
1. Decision Theory
2. Market Theory |
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Term
| Capital Asset Pricing Model (CAPM) models the relationship between... |
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Definition
| expected return, market prices, and risk |
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Term
| CAPM is referred to as the __ model |
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Definition
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Term
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Definition
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Term
Under the CAPM model,
RETURN (R)= |
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Definition
| =(Change in pricing+ Dividend)/ Price |
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Term
Under the CAPM model,
Expected Return (ER)= |
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Definition
| =(1-B)* RiskFreeRate + Beta firm risk* E(Return on market portfolio) |
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Term
Under the CAPM model,
Beta Firm Risk provides what? |
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Definition
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Term
| What is an example of an investment that moves inversely with the market? |
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Definition
| Gold-- Gold is a risk free investment. When the market declines, people choose to investment in assets that are free from risk |
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Term
Under the CAPM model,
Abnormal Return= |
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Definition
| difference between the actual return and the expected return’s slope on the graph |
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Term
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Definition
| To estimate how the change in expectations affects the price of the stock. It is simple. It can be used to estimate beta |
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Term
| What is an example of something that provides information to market participants? |
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Definition
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Term
| What can happen as a result of an earnings release? |
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Definition
- Investors may revise beliefs
- Trading may occur because of the revision of beliefs
- Increase in trading volume and/or change in price |
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Term
| What is an "efficient market"? |
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Definition
| A market that impounds information quickly, which leads to price changes |
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Definition
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Term
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Definition
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Term
| What is the only return characteristic that can be attributed to released financial accounting information? |
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Definition
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Term
| How does the market determine its' "earnings expectations"? |
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Definition
- LY's/LQ's earnings
- Analysts forecasts |
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Term
| Generally there is a positive correlation between good news and ___ |
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Definition
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Term
| Generally there is a negative correlation between bad news and ___ |
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Definition
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Term
| The correlation between good news/ bad news and price is attributed to what 2 theories? |
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Definition
| decision theory and efficient market theory |
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Term
| Problems with news that may lead to an incorrect correlation: |
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Definition
- Incorrect Beta
- Incorrect window
- Incorrect earnings expectations
- Incorrect estimate of market wide effects |
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Term
| What two questions did the Ball and Brown Research answer (1905's -1960's)? |
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Definition
| Is accounting information useful? Why is it performed? |
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Term
| During the time of the Ball & Brown Research, how was accounting viewed? |
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Definition
| Accounting information was thought to be meaningless at this time (little value) Security price behavior was used to measure usefulness |
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Term
| How did Ball and Brown perform their research? |
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Definition
| They used CAPM to determine expected returns. They compared these expected to the actual returns |
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Term
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Definition
| is possible with shorter window if properly controlled (month 0) |
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Term
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Definition
| in the longer window (months -12 to -1) |
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Term
| Is a narrow or short window more consistent with decision usefulness? |
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Definition
| Narrow window more consistent with decision usefulness |
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Term
| Is the Ball and Brown study an association study or a causation study? |
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Definition
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Term
| What big issue did the Ball and Brown study shown within the marketplace? |
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Definition
| that information is not timely enough- Bad news is much more reactive than good news |
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Term
How does the stock market's flow of information occur?
What theories is this based on? |
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Definition
Stock market reacts to earnings information in month 0
But, anticipates GN or BN in earnings over the preceding 12 months. Anticipated based on other sources of information
Consistent with securities market efficiency and underlying rational decision theory |
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Term
| What did the Beaver Research (1968) investigate? |
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Definition
| Investigated trading volume for a firm’s shares around its earnings announcement. Compared actual trading volume to a normal expectation for the weeks surrounding the earnings announcement |
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Term
| Beaver Research used what type of window? |
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Definition
| Shorter window; therefore, causation related. |
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Term
| Earnings Response Coefficients: |
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Definition
| Extent of a security’s abnormal market return in response to the unexpected component of reported earnings |
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Term
Firms have differing ERC's depending on multiple factors
- Firms with higher risk have what kind of ERC's?
- Levered firms have what kind of ERC's?
- Firms with high growth have what kind of ERC's? |
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Definition
- High risk--> Low ERC
-Levered--> Low ERC (debt holders get benefit)
- High Growth --> High ERC (more earnings potential) |
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Term
| A firm's ERC is a good indicator of what? |
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Definition
| earnings quality – higher quality earnings have higher ERCs |
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Term
| Persistent earnings are tied to |
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Definition
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Term
| Transient earnings are tied to |
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Definition
| poor disclosure (hidden items) |
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Term
| What are some accounting indicators that lead to the market knowing before earnings are released? |
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Definition
- FV accounting
- Impairments
- R&D success |
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Term
| What are some limitations of deriving useful information? |
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Definition
- Should we base accounting requirements on market responses or associations?
-Wouldn’t we be able to reduce options or alternatives?
-What about private firms?
-Is this best from society’s perspective as opposed to the firm’s?
-Share price doesn’t consider all costs in producing information |
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Term
| What is a stock's "fundamental" value? |
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Definition
| The value of the stock if there is NO insider information and ALL information is publicly available |
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