pdf-tiedosto: stock hinnat ja earnings (Dechow)

Question 1

As articulated by Ohlson (1995), earnings are tied to the long-run cash distributions paid on securities, and so they are clearly value relevant. On the issue of usefulness, the answer is more complex. Stock prices clearly respond to information in earnings announcements. Yet earnings are also a relatively untimely source of information, particularly for early-stage firms engaging in innovative activities. This should not necessarily be viewed as a shortcoming of earnings in particular or the accounting process in general.

Answer 1

Tsemii :D

Question 2

Earnings are primarily designed to provide relatively reliable information about firm value that is based on past transactions. Subjective information about expected future transactions can be communicated through alternative mechanisms.

Answer 2

Jaksaa jaksaa! xD

Question 3

Research on the characteristics that make earnings useful highlights the trade-off between timeliness and reliability. Incorporating basic accrual transactions, such as accruing revenue on accounts receivable and capitalizing inventory, clearly adds to the usefulness and timeliness of earnings. There is also evidence suggesting that incorporating the fair values of assets and liabilities enhances the usefulness of earnings, although evidence is more mixed. The estimation of fair value is subject to managerial discretion and often there is no active market quotation for similar assets.

Answer 3

Finally, although there has been a trend toward incorporating more market prices into the measurement of assets and liabilities, evidence suggests that market prices can measure underlying intrinsic value with error. Consideration should therefore be given to basing accounting mea- surements on transactions relating to the underlying cash flows of the firm rather than to market prices.