Seminar 02_Information Perspective (I)_students

Prices and dividends requires prediction of future

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Unformatted text preview: E(R jt ) ) 18 Some Early Thoughts on how Efficient Markets should affect Accounting: ¢༊  Accounting policies do not matter to anyone unless there are cash flow effects – assumes that there are some users of accounting information who can see through accounting policies to derive the actual underlying cash flows ¢༊  Full disclosure of relevant and reliable information by managers is desirable because ultimately the efficient markets will obtain the necessary information ¢༊  Accountants in competition with other information sources (e.g., analysts, media, management disclosures) in affecting share prices. Accountants must provide relevant and reliable information to investors to stay relevant themselves ¢༊  Price-protection of naive investors if enough sophisticated investors exist to process information on the firms which are then reflected in share prices. ¢༊  All these points contribute to the Information Perspective of financial reporting… 19 THE INFORMATION PERSPECTIVE OF FINANCIAL REPORTING ¢༊  It is the Investor’s Responsibility to Predict Future Firm Performance and Make Investment Decisions ¢༊  Accountant’s Role is to Supply Useful Financial Statement Information, to Assist Investors Full disclosure ¢༊  Assumes Market Efficiency and that the Market Can Interpret Information From Any Source —༉  OK to use historical cost accounting in financial statements proper (low relevance but high reliability), supplemented by lots of information in notes to financial statements (more relevance) ¢༊  Do investors actually react to accounting information, especially reported earnings? – Capital Markets Research 20 A GRAPHICAL ILLUSTRATION OF THE ROLE OF FINANCIAL REPORTING IN AN EFFICIENT MARKET Publicly Available Information About Firm 21 AN EXAMPLE OF FULL DISCLOSURE ¢༊  Management Discussion and Analysis —༉  Accounting Standard Council (Singapore) issues Practice Statement on Management Commentary (or MD&A) —༉  Latitude in in the extent to which companies meet the spirit of the disclosure requirements in the MD&A —༉  MD&A provides a narrative explanation of the firm’s performance, financial condition, and future prospects —༉  Information in MD&A has forward-looking orientation ¢༊  ¢༊  —༉  Is it more relevant than historical cost-based financial statements? Is it less reliable than historical cost-based financial statements? Because the information in the MD&A has forward-looking orientation, the information is useful for prospective analysis (to be covered in Seminars 22 16-18) VOLUNTARY DISCLOSURE —༉  —༉  2 3 Non-mandatory disclosures of firm’s information made by firms, through the annual reports, business publications, the press, etc. What conveys information? The content of disclosure, the act of voluntary disclosure or both?...
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