valuation

Question 1

what is the efficient market hypothesis

Answer 1

market price incorporates all currently available information
- incorporates: quickly and without bias
- currently available information: past prices, public domain, both private and public

Question 2

what is an implication of the EMH

Answer 2

market efficiency suggests that prices are unbiased relative to publicly available information and will react quickly to new or revised information

Question 3

how does value relevance work

Answer 3

1. investors have prior beliefs about future performance
2. release of accounting income number is a potential information source, causing belief revision
3. resulting investment decisions -> increased trading volume, share price movement

Question 4

what are the 2 assumptions of the value relevance approach

Answer 4

1. stock market efficiency in the semi-strong form
2. if acct info does not have info content, no revision of beliefs on receipt, no triggering of buy/sell decisions

Question 5

how to test value relevance

Answer 5

empirically model the r/s between unexpected (abnormal) earnings and abnormal share returns in relation a certain event

Question 6

how ball and brown supports value relevance

Answer 6

the narrow window results remain -> support value relevance of accounting information

Question 7

how ball and brown does not support value relevance

Answer 7

most information in net income was anticipated prior to month 0 -> around 85%-90% of information already built into share price by the time actual earnings were announced