Essay on Accounting Theory

1251 Words Mar 12th, 2013 6 Pages
10.3 If some research is undertaken that provides evidence that capital markets do not always behave in accordance with the Efficient Market Hypothesis, does this invalidate research that adopts an assumption that capital markets are efficient?

As Chapter 10 questions, if further evidence continues to surface that capital markets do not always behave in accordance with the efficient market hypothesis, then should we reject the research that has embraced the EMH as a fundamental assumption? In this regard we can return to earlier chapters of this book in which we emphasised that theories are abstractions of reality. Capital markets are made of individuals and as such it would not (or perhaps, should not) be surprising to find that the
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However, there could be various reasons why the share price did not change. Perhaps there was other information released on the day that offset the effects of the specific information, or perhaps the assumptions of market efficiency do not hold.

The other point that must be made is that share price studies only consider the reactions of one group of stakeholders—investors. Particular information might be relevant to other parties who do not directly participate in the capital market, but nevertheless have a right to know about particular information. Hence, failure to find a share price reaction does not mean that information is necessarily irrelevant to all stakeholders.

10.10 Would you expect an earning announcement by one firm within an industry to impact on the share prices of other firms in the industry? Why?

The research shows that the earnings announcements of firms within an industry can impact the share prices of other firms in the same industry. This effect has been labelled as the ‘information transfer effect’. The ‘information transfer effect’ highlights the belief that share prices react to public information emanating from various sources—including

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