Topic 8 - CAPITAL MARKETS RESEARCH Flashcards
describe Normative theories
- “should be” theories
what were 3 major contribution of normative accounting theories?
- valuation models
- critical thinking
- highlighted numerous deficiencies in conventional accounting practice
describe Positive theories
- fact and research based theories
if markets are efficient what two assumptions can be made about prices?
- prices fully reflect all available information
- price movement is swift, random and unbiased
what are the three levels of market efficiency?
- weak form
- semi-strong form
- strong form
what level of information is available in the three different levels of market efficiency?
- weak form: historical data known
- semi-strong form: publicly available data known
- strong form: all information including insider knowledge known
at what level is our market considered to be efficient?
- Markets efficient in weak form
- Markets efficient, but not completely, in semi-strong form e.g. post earnings announcement drift
- Market inefficiency in strong form
what does it mean for an investor if market is semi strong form efficient?
An investor cannot, on average, earn a return greater than the expected return for the level of risk.
• Investors face a ‘fair game’, can’t be fooled into paying too much
what does Prices follow a ‘random walk’ mean? 3
- no pattern exists
- not influenced by past prices
- influenced by new information
What is charting? when does it help investors make a gain? what is the weakness of this technique?
using past data to predict future share prices by observing patterns in the data
when an analyst can obtain advantage with these insights over other market participants.
All forms of market efficiency imply that prices already reflect all information from past prices, so no advantage would be obtained by charting
What is market timing? what is the weakness of this technique?
Buy when the price is low (underpriced) and sell when the price is high (overpriced)
price of a security reflects all publicly available information, we would not be able to identify when it is underpriced or overpriced given publicly available information or when it has reached it’s limits
What is fundamental analysis? what is the weakness of this technique? when does this analysis work?
Fundamental analysis is looking for ‘mispriced’ securities, i.e., the market price ≠ ‘intrinsic value’
Futile search in a market with semi-strong form of efficiency ‘Intrinsic value’ → “value justified by the facts”
weak form market - prices don’t reflect public info
what does semi-strong form of EMH mean for financial reporting? 5 !!!!!!
- implies that the substance, rather than the form, of disclosure may be the more important
- just because an item does not appear in the financial statements it is not reflected in prices.
- role of accrual accounting is unclear, do they trick the market into believing the firm has performed better or does the markets see through it?
- issue of disclosure may have to be reconsidered – e.g., the information set available to the “average” investor versus the “professional”?
- consider uninformed investors in policy decisions
What things does efficient market hypothesis not imply? 7
- doesn’t imply that a random selection of securities investment is good strategy (must consider risk)
- doesn’t imply that a buy-and-hold policy is good as any other investment policy
- does not explain social desirability or any other normative connotation (i.e. chemical factory popular investment)
- does not imply that false info is not included
- does not mean investors believe in efficient market
- does not mean analysts are useless
- does not mean that governments don’t need to Protect investors, maintain market confidence
list two types of evidence
what are some of their benefits/limitations?
- Anecdotal – specific cases
- Systematic empirical research – statistical, large-scale investigations
- A - highlight potential problems or issues/ limited to specific cases
- S - More generalisable results, minimises biases
