Stream I - Lecture 4b

Question 1

What is Capital Markets Based Research?

Answer 1

The study of whether accounting information affects stock prices

Question 2

What is Positive Accounting Theory

Answer 2

The study of whether accounting numbers can have other economic effects

Question 3

When does a signal from an information system have value?

Answer 3

The signal must alter beliefs

Question 4

What does empirical evidence show about obvious changes in accounting method?

Answer 4

The market sees through it as it is clearly to report higher earnings

Question 5

What happens (in terms of market opinions) to firms who report small earnings surprises?

Answer 5

The market treats the earnings surprise sceptically but only in the post-scandals period

Question 6

What is the correlation between the P/E ration and the future EPS?

Answer 6

There is a positive correlation

Question 7

What can a B/M ratio inform the market about?

Answer 7

Future earnings expectations

Question 8

What can explain the differences between book and market values?

Answer 8

1) Intangible assets
2) Optimism/conservatism
3) Future earnings expectations

Example: Jeff Bezos buying the Washington Post for a price that was 17 times its EBITDA

Question 9

Is it only accountings earnings surprises that matter in information content studies?

Answer 9

No. We can also look at:

1) Footnote disclosures in annual reports
2) Forward-looking disclosures in annual reports
3) Voluntary changes in accounting methods as a ‘signal’