Value relevence

Question 1

Do security market prices respond to accounting information?

Answer 1

Yes - value relevance of accounting information

Question 2

Value relevance

Answer 2

implies that empirical research can assist accountants to further increase decision usefulness by letting market reactions guide as to which information is valued by investors or not

Question 3

How is the degree of usefulness for investors measured

Answer 3

by the extent of volume or price change following the release of the information

Question 4

Finish this sentence: “Good or bad news is evaluated relative to investors ___”

Answer 4

expectations

Question 5

Under the empirical investigations approach, is there an increase or decrease in trading volume following the week of earnings announcement?

Answer 5

Increase

Question 6

What does an Earnings Response Coefficient (ERC) measure?

Answer 6

the extent of a security’s abnormal market return in response to the expected component of reported earnings of the firm issuing that security

Question 7

ERC =

Answer 7

abnormal share returns / expected earnings

Question 8

Reasons for differential market responses (7)

Answer 8

1) beta. - risk evokes weaker response
2) Capital structure - higher leverage weaker response
3) Persistence - permanent vs transitory vs price irrelevant
4) Earnings quality - predictive (accruals quality)
5) growth opportunities - higher growth stronger response
6) Similarity of investors’ expectations
7) Informativeness of price - price leads earnings