Chapter 4 - Solution Manual

Nevertheless insider information is still useful for

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Nevertheless, insider information is still useful for other purposes. It is used for planning and strategy for the corporation. It is used in labor negotiations. It is used for the preparation of income tax returns. Many users use the information According to the strong form of the EMH, all information is impounded into security prices. Under this theory, even insiders could not benefit from knowledge of nonpublic information. But accounting information would still be useful to lenders, and a host of other users. Team 2 Given the EMH, argue that accounting information is irrelevant The three forms of the efficient market hypothesis (EMH) are the weak form, the semi-strong form, and the strong form. According to the weak form, the historical price of a stock provides an unbiased estimate of the future price of the stock. Hence, an investor cannot make excess gains by knowledge of prior prices. Under this form of the EMH it is not possible to argue that accounting information is irrelevant. An investor could gain if he/she has other knowledge regarding expected future performance of a company, e.g., accounting information. Under this form of the EMH, accounting information is definitely relevant. According to the semi-strong form of the EMH, all publicly available information is instantaneously impounded into security prices. Hence, publicly available information, such as publicly released accounting information is already reflected in the price of a share of stock, and knowledge of this information would not provide an advantage to any potential investor. If this is so, investors would not have information that is not publicly available and accounting information would be irrelevant. They could do just as well picking stock randomly.
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72 According to the strong form of the EMH, all information is impounded into security prices. No information, even accounting information which is not available to the public, would provide an advantage to any investor over other investors. Hence, accounting information would not be relevant. Debate 4-2 Critical perspective versus mainstream accounting Team 1 Present arguments supporting critical perspectives research. Critical perspectives proponents argue that accounting is not objective. Rather, the accounting procedures and standards resulted from a complex web of economic, political, and accidental co- occurrences. For example, the recent pronouncements related to accounting for fair value and accounting for stock options created pressure on Congress to interfere in the standard setting process. Similarly the pronouncement on loan impairments created outside pressures for the FASB to promulgate accounting rules taking the present value of future cash flows into consideration. The result is that debtors and creditors of impaired loans, in particular troubled debt restructures, account for the same economic event in different ways. It is difficult to explain how this kind of accounting asymmetry provides information that is representationally faithful and therefore objective.
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