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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,25/11/2013,#,How do users of financial statements react to accounting information?,Learning objectives,Compare and contrast capital markets research with behavioural research,Describe the role of capital markets research in assessing the information content of earnings announcements and accounting disclosures,Give an overview of what capital markets and behavioural research tell us about the extent to which financial accounting information and particular disclosures are useful to users,How this fits,We have examined positive theories of accounting and predicted what will happen under particular circumstances,for example Positive Accounting Theory might lead us to predict that earnings management will take place,We have examined some of the research evidence to examine,whether,it happens,for example what evidence is there to suggest that earnings management takes place and is influenced by management incentives,We are now going to examine the research evidence which considers whether it matters,for example do accounting numbers or disclosures have an impact on stock prices,How do individuals or user groups react to accounting information,Can use capital market research to:,assesses the,aggregate,effect of financial reporting on investors,considers only investors,Can use behavioural research to:,analyses,individual,responses to financial reporting,examines decision-making by many groups,e.g.bank managers,loan officers,auditors,Capital market research,3 things to understand,What can capital markets research tell us about financial statements i.e.what questions have researchers tried to answer?,In what ways have researchers examined these questions?,What were the findings?,What can capital markets research tell us about financial statements?,Question:Is accounting information useful to investors?,Measure the extent to which share prices react to accounting information -earnings announcements i.e.the release of financial statements.,Measure the extent to which variability of returns(risk)is affected by financial information,Can also measure reaction to other“events”but this doesnt tell us anything directly about financial statements,Earnings forecasts,Mergers and acquisitions,Audit reports,Legislation e.g.Sarbanes-Oxley,Research around earnings announcements,Do investors react to information around earnings?,Ball and Brown(1968),tested whether firms with unexpected increases in accounting earnings had positive abnormal returns,and firms with unexpected decreases had negative abnormal returns,found:,information contained in the annual report,prepared using historical cost was useful to investors,85-90%of earnings announcement is anticipated by investors the share price moves gradually in the run up to the announcement and continues its movement after the announcement,much of information is obtained from other sources,Further work around earnings announcements,Information content varies between countries and companies the more information in the public domain the less pronounced the reaction to an earnings announcement US vs.Australia(Brown 1970),Share price reaction varies depending on whether the change is expected to be permanent or temporary do investors disregard one-offs(Elliott&Hanna 1996),Earnings management?,Share price reaction is to,earnings,and does not consider whether the earnings figure is due to discretionary accruals or the reversal of discretionary accruals i.e.investors dont take into account cash flow component of earnings(Sloan 1996),There is competing evidence that the market does react to earnings management(Wahlen 1994),What can capital markets research tell us about financial statements?,Question:Are there benefits,associated with voluntary disclosure of,information i.e.is disclosure useful?,Botosan(1997)measures costs of equity capital.,Increased disclosure reduces cost of equity capital particularly for firms with low analyst following.,What can capital markets research tell us about financial statements?,Question:Is recognition in the financial statements more important than disclosure?,Compare the share price reaction of firms who disclose with those who recognise.,The market reacts to recognition more than it reacts to disclosure(Cotter&Zimmer 2023,Aboody 1996),What about Social&Environmental Reporting?,Question:Are there benefits associated with voluntary disclosure of information i.e.is disclosure useful?,Ability to raise capital,cost of equity capital,Benefits associated with the voluntary disclosure of corporate social responsibility activities Dhaliwal,Li&Yang(2023),Criticisms of CMR,Is the market semi-strong efficient?,Sub-prime crisis uncertainty,irrationality,over-reliance on past experience,Internet Discussion Sites pump and dump,spreading rumours,Market doesnt react instantaneously to new information evidence of“drift”,Is this the right focus for researchers,Ma
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