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Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by !!ga" #0.#
Financial Accounting TheoryFinancial Accounting TheoryCraig DeeganCraig Deegan
Chapt!r #0Chapt!r #0
$!actio"s o% capital &ark!ts to %i"a"cial$!actio"s o% capital &ark!ts to %i"a"cial
r!porti"gr!porti"g'li(!s writt!" by Micha!la $a"ki"'li(!s writt!" by Micha!la $a"ki"
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.2
Learning ObjectivesLearning Objectives
* +" this chapt!r you will b! i"tro(uc!( to+" this chapt!r you will b! i"tro(uc!( to
, th! rol! o% capital &ark!t r!s!arch i" ass!ssi"gth! rol! o% capital &ark!t r!s!arch i" ass!ssi"g
th! i"%or&atio" co"t!"t o% accou"ti"gth! i"%or&atio" co"t!"t o% accou"ti"g(isclosur!s(isclosur!s
, th! assu&ptio"s o% &ark!t !%%ici!"cy a(opt!(th! assu&ptio"s o% &ark!t !%%ici!"cy a(opt!(i" capital &ark!t r!s!archi" capital &ark!t r!s!arch
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.
Learning ObjectivesLearning Objectives
, th! (i%%!r!"c! b!tw!!" capital &ark!t r!s!arch thatth! (i%%!r!"c! b!tw!!" capital &ark!t r!s!arch thatlooks at th! i"%or&atio" co"t!"t o% accou"ti"glooks at th! i"%or&atio" co"t!"t o% accou"ti"g(isclosur!s a"( capital &ark!t r!s!arch that us!s(isclosur!s a"( capital &ark!t r!s!arch that us!sshar! pric! (ata as a b!"ch&ark %or !aluati"gshar! pric! (ata as a b!"ch&ark %or !aluati"gaccou"ti"g (isclosur!saccou"ti"g (isclosur!s
,why u"!p!ct!( accou"ti"g !ar"i"gs a"( ab"or&alwhy u"!p!ct!( accou"ti"g !ar"i"gs a"( ab"or&al
shar! pric! r!tur"s ar! !p!ct!( to b! r!lat!(shar! pric! r!tur"s ar! !p!ct!( to b! r!lat!(,th! &a1or r!sults o% capital &ark!t r!s!arch i"toth! &a1or r!sults o% capital &ark!t r!s!arch i"to
%i"a"cial accou"ti"g a"( (isclosur!%i"a"cial accou"ti"g a"( (isclosur!
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.
Capital market researchCapital market research
introductionintroduction* 3plor!s th! rol! o% accou"ti"g a"( oth!r3plor!s th! rol! o% accou"ti"g a"( oth!r
%i"a"cial i"%or&atio" i" !4uity &ark!ts%i"a"cial i"%or&atio" i" !4uity &ark!ts
* i"ol!s !a&i"i"g statistical r!latio"si"ol!s !a&i"i"g statistical r!latio"s
b!tw!!" %i"a"cial i"%or&atio" a"( shar!b!tw!!" %i"a"cial i"%or&atio" a"( shar!
pric!spric!s
* r!actio"s o% i"!stors !i(!"t %ro& capitalr!actio"s o% i"!stors !i(!"t %ro& capital&ark!t tra"sactio"s&ark!t tra"sactio"s
* "o shar! pric! cha"g! i&pli!s "o r!actio""o shar! pric! cha"g! i&pli!s "o r!actio"
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.5
Capital market versusCapital market versus
behavioural researchbehavioural research* capital &ark!t r!s!arch6capital &ark!t r!s!arch6
,ass!ss!s th!ass!ss!s th! aggregateaggregate!%%!ct o% %i"a"cial!%%!ct o% %i"a"cial
r!porti"g o" i"!storsr!porti"g o" i"!stors,co"si(!rs o"ly i"!storsco"si(!rs o"ly i"!stors
* B!haioural r!s!arch6B!haioural r!s!arch6,
a"alys!sa"alys!s
individualindividual
r!spo"s!s to %i"a"cialr!spo"s!s to %i"a"cial
r!porti"gr!porti"g
,!a&i"!s (!cisio"-&aki"g by &a"y groups!a&i"!s (!cisio"-&aki"g by &a"y groups* !g. ba"k &a"ag!rs loa" o%%ic!rs au(itors!g. ba"k &a"ag!rs loa" o%%ic!rs au(itors
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.7
Reasons or capital marketReasons or capital market
researchresearch* +"%or&atio" about !ar"i"gs a"( its+"%or&atio" about !ar"i"gs a"( its
co&po"!"ts is th! pri&ary purpos! o%co&po"!"ts is th! pri&ary purpos! o%
%i"a"cial r!porti"g%i"a"cial r!porti"g* !ar"i"gs ar! ori!"t!( towar(s th! i"t!r!sts o%!ar"i"gs ar! ori!"t!( towar(s th! i"t!r!sts o%
shar!hol(!rsshar!hol(!rs
* !ar"i"gs is th! "u&b!r &ost a"alys!( a"(!ar"i"gs is th! "u&b!r &ost a"alys!( a"(%or!cast by s!curity a"alysts%or!cast by s!curity a"alysts
* r!liabl! (ata o" !ar"i"gs is r!a(ily aailabl!r!liabl! (ata o" !ar"i"gs is r!a(ily aailabl!
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.8
!nderlying assumption o!nderlying assumption o
C"R#"$C"R#"$* CM$ r!li!s o" th! assu&ptio" that !4uityCM$ r!li!s o" th! assu&ptio" that !4uity
&ark!ts ar! !%%ici!"t&ark!ts ar! !%%ici!"t
, i" accor(a"c! with 3%%ici!"t Mark!t Hypoth!sisi" accor(a"c! with 3%%ici!"t Mark!t Hypoth!sis
* !%%ici!"t &ark!t (!%i"!( as a &ark!t that!%%ici!"t &ark!t (!%i"!( as a &ark!t that
a(1usts rapi(ly to %ully i&pou"(a(1usts rapi(ly to %ully i&pou"(
i"%or&atio" i"to shar! pric!s wh!" th!i"%or&atio" i"to shar! pric!s wh!" th!i"%or&atio" is r!l!as!(i"%or&atio" is r!l!as!(
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.9
Three orms o "arketThree orms o "arket
#iciency#iciency* Weak formWeak form6 pric!s r!%l!ct i"%or&atio" about6 pric!s r!%l!ct i"%or&atio" about
past pric!s a"( tra(i"g olu&!spast pric!s a"( tra(i"g olu&!s
* Semi-strong form:Semi-strong form:all publicly aailabl!all publicly aailabl!i"%or&atio" is rapi(ly a"( %ully i&pou"(!(i"%or&atio" is rapi(ly a"( %ully i&pou"(!(i"to shar! pric!s i" a" u"bias!( &a""!r wh!"i"to shar! pric!s i" a" u"bias!( &a""!r wh!"r!l!as!(r!l!as!(
,&ost r!l!a"t %or accou"ti"g-bas!( capital &ark!t&ost r!l!a"t %or accou"ti"g-bas!( capital &ark!tr!s!archr!s!arch
* strong formstrong form6 s!curity pric!s r!%l!ct all6 s!curity pric!s r!%l!ct alli"%or&atio" :public a"( priat!;i"%or&atio" :public a"( priat!;
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.s!( to s!parat! out %ir&-sp!ci%ic shar! pric!>s!( to s!parat! out %ir&-sp!ci%ic shar! pric!
&o!&!"ts %ro& &ark!t-wi(! &o!&!"ts&o!&!"ts %ro& &ark!t-wi(! &o!&!"ts
,(!ri!( %ro& th! Capital Ass!t Prici"g Mo(!l(!ri!( %ro& th! Capital Ass!t Prici"g Mo(!l* assu&!s i"!stors ar! risk a!rs! a"( ha!assu&!s i"!stors ar! risk a!rs! a"( ha!
ho&og!"!ous !p!ctatio"sho&og!"!ous !p!ctatio"s
* its us! allows th! r!s!arch!r to %ocus o" shar!its us! allows th! r!s!arch!r to %ocus o" shar!pric! &o!&!"ts (u! to %ir&-sp!ci%ic "!wspric! &o!&!"ts (u! to %ir&-sp!ci%ic "!ws
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.#2
#arnings%return relation#arnings%return relation
continuedcontinued* Total or actual r!tur"s ca" b! (ii(!( i"to6Total or actual r!tur"s ca" b! (ii(!( i"to6
,"or&al :!p!ct!(; r!tur"s gi!" &ark!t-wi(!"or&al :!p!ct!(; r!tur"s gi!" &ark!t-wi(!
&o!&!"ts&o!&!"ts
,ab"or&al :u"!p!ct!(; r!tur"s (u! to %ir&-ab"or&al :u"!p!ct!(; r!tur"s (u! to %ir&-
sp!ci%ic shar! pric! &o!&!"tssp!ci%ic shar! pric! &o!&!"ts
* ab"or&al r!tur"s us!( as a" i"(icator o%ab"or&al r!tur"s us!( as a" i"(icator o%i"%or&atio" co"t!"t o% a""ou"c!&!"tsi"%or&atio" co"t!"t o% a""ou"c!&!"ts
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.#
Results o C"R&all andResults o C"R&all and
&ro'n ()*+,- study&ro'n ()*+,- study* !a&i"!( (ata %ro& 27# >' %ir&s!a&i"!( (ata %ro& 27# >' %ir&s
* t!st!( wh!th!r %ir&s with u"!p!ct!(t!st!( wh!th!r %ir&s with u"!p!ct!(
i"cr!as!s i" accou"ti"g !ar"i"gs ha(i"cr!as!s i" accou"ti"g !ar"i"gs ha(
positi! ab"or&al r!tur"s a"( %ir&s withpositi! ab"or&al r!tur"s a"( %ir&s with
u"!p!ct!( (!cr!as!s ha( "!gati!u"!p!ct!( (!cr!as!s ha( "!gati!
ab"or&al r!tur"sab"or&al r!tur"s
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.#
Results o C"R&all andResults o C"R&all and
&ro'n ()*+,- studycontinued&ro'n ()*+,- studycontinued* )ou"(6)ou"(6
, i"%or&atio" co"tai"!( i" th! a""ual r!porti"%or&atio" co"tai"!( i" th! a""ual r!port
pr!par!( usi"g historical cost was us!%ul topr!par!( usi"g historical cost was us!%ul toi"!storsi"!stors
,95-
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.#5
Results o C"Re.tent oResults o C"Re.tent o
alternative inormation sourcesalternative inormation sources* +"%or&atio" co"t!"t ari!s b!tw!!" cou"tri!s+"%or&atio" co"t!"t ari!s b!tw!!" cou"tri!s
a"( co&pa"i!sa"( co&pa"i!s
* co&par!( to >' &ark!ts Australia" &ark!tco&par!( to >' &ark!ts Australia" &ark!tha( slow!r a(1ust&!"ts (uri"g th! y!ar withha( slow!r a(1ust&!"ts (uri"g th! y!ar withlarg!r a(1ust&!"ts at !ar"i"gs a""ou"c!&!"tlarg!r a(1ust&!"ts at !ar"i"gs a""ou"c!&!"t
, l!ss alt!r"ati! sourc!s o% i"%or&atio" %orl!ss alt!r"ati! sourc!s o% i"%or&atio" %or
Australia" &ark!tAustralia" &ark!t
* l!ss alt!r"ati! sourc!s o% i"%or&atio" %orl!ss alt!r"ati! sourc!s o% i"%or&atio" %ors&all!r %ir&s tha" larg!r %ir&ss&all!r %ir&s tha" larg!r %ir&s
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.#7
Results o C"RpermanentResults o C"Rpermanent
and temporary changesand temporary changes* $!s!arch !a&i"!( r!latio" b!tw!!" th!$!s!arch !a&i"!( r!latio" b!tw!!" th!
&ag"itu(! o% u"!p!ct!( cha"g!s i" !ar"i"gs&ag"itu(! o% u"!p!ct!( cha"g!s i" !ar"i"gs
:3P'; a"( &ag"itu(! o% ab"or&al r!tur"s:3P'; a"( &ag"itu(! o% ab"or&al r!tur"s,k"ow" as th! !ar"i"gs r!spo"s! co!%%ici!"tk"ow" as th! !ar"i"gs r!spo"s! co!%%ici!"t
,a #? u"!p!ct!( cha"g! i" !ar"i"gs associat!(a #? u"!p!ct!( cha"g! i" !ar"i"gs associat!(
with 0.# to 0.#5? ab"or&al r!tur"with 0.# to 0.#5? ab"or&al r!tur"
,(!p!"(s o" wh!th!r !ar"i"gs i"cr!as!s !p!ct!((!p!"(s o" wh!th!r !ar"i"gs i"cr!as!s !p!ct!(
to b! p!r&a"!"t or t!&poraryto b! p!r&a"!"t or t!&porary
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.#8
Results o C"RrelativeResults o C"Rrelative
magnitudes o cash and accrualsmagnitudes o cash and accruals* 3ar"i"gs p!rsist!"c! (!p!"(s o" proportio"3ar"i"gs p!rsist!"c! (!p!"(s o" proportio"
o% accruals r!lati! to cash %lowso% accruals r!lati! to cash %lows
,%ir&s with larg! accruals r!lati! to actual cash%ir&s with larg! accruals r!lati! to actual cash%lows u"lik!ly to ha! p!rsist!"tly high%lows u"lik!ly to ha! p!rsist!"tly high!ar"i"gs!ar"i"gs
* shar! pric!s %ou"( to act as i% i"!storsshar! pric!s %ou"( to act as i% i"!stors
@%iat!= o" r!port!( !ar"i"gs without@%iat!= o" r!port!( !ar"i"gs withoutco"si(!ri"g r!lati! &ag"itu(!s o% cash a"(co"si(!ri"g r!lati! &ag"itu(!s o% cash a"(accrual co&po"!"tsaccrual co&po"!"ts
Ch 10 C i l k i
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.#9
Results o C"RinormationResults o C"Rinormation
announcements o other irmsannouncements o other irms* 3ar"i"gs a""ou"c!&!"ts by o"! %ir& also3ar"i"gs a""ou"c!&!"ts by o"! %ir& also
r!sults i" ab"or&al r!tur"s to oth!r %ir&s i"r!sults i" ab"or&al r!tur"s to oth!r %ir&s i"
th! sa&! i"(ustryth! sa&! i"(ustry* r!lat!( to wh!th!r th! "!ws r!%l!cts ar!lat!( to wh!th!r th! "!ws r!%l!cts a
cha"g! i" co"(itio"s %or th! !"tir! i"(ustrycha"g! i" co"(itio"s %or th! !"tir! i"(ustry
or cha"g!s i" r!lati! &ark!t shar! withi"or cha"g!s i" r!lati! &ark!t shar! withi"th! i"(ustryth! i"(ustry
Ch 10 C i l k i
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Chapter 10: Capital markets reactions
Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a#0.#