Part3:Accounting And Information Theory

Question 1

What is prob(S|δ)?

Answer 1

prob(S|δ) denotes the conditional probability, I.e. the probabilities of the states after observing information signal

Question 2

Can we compare or rank information partitions?

Answer 2

We can rank partitions if they are subpartitions of each other or, equivalently, if they differ in their fineness.

• Thus, information partitions (or accounting systems) cannot necessarily be ranked.

Question 3

Would the partitions change our investor‘s decision?

Answer 3

with partitions, the investor can pick an action conditional on the signal he received.

Question 4

1. How do the authors apply the concepts of fineness and aggregation?

Answer 4

The authors use the notion that (dis)aggregation can result in a decrease (increase) in the degree of fineness: “Greater disaggregation leads to more, finer information available to investors”

Question 5

How are they related to the concept of disclosure quality?

Answer 5

They further assume that disaggregation in the financial statements is positively associated with disclosure quality: “We operate on the maintained assumption that more finely disaggregated data are of higher quality”

Question 6

What is ‘fineness’ of information (or accounting) systems?

Answer 6

• Idea of subpartitions and fineness: Some of the partitions provide more details than others.

For instance, ∆4
contains the same information as every other partition and
more. Everything we can learn from ∆0, ∆1, ∆3, we can learn from ∆4.

Hence, we can rank partitions if they are subpartitions of each other or,
equivalently, if they differ in their fineness.

Question 7

Model of expected and unexpected income changes ( Ball & Braun)

Answer 7

● Positive correlation: abnormal
income v/s stock prices

● Market anticipates results 12
months in advance

● (Over/Under) performing firms
are therefore identified in
advance

● >50% of the whole information
is captured by income numbers

● ~10-15% has not been anticipated by investors at the day in the month of the announcement

● Effect persistence > +2 months

Question 8

An Empirical Evaluation of Accounting Income Numbers: conclusion

Answer 8

● Income numbers are related to stock prices

● 85-90% of the price change has been anticipated by investors before the announcement

● Income numbers are useful by content but not by timeliness

● Investors take into consideration income numbers to adjust/confirm their rational expectations