财务会计理论—Chap4Efficient3acapitalmarket_edit

1、Understanding the Securities Market: Efficient Securities Markets and Accounting (Scott - Chapter 4) Major topics Efficient securities market theory and its implications on accounting policies & financial reporting Information asymmetry / The role of capital market Logical inconsistency of costl

2、y information and fully informative prices Financial reporting and information asymmetry Full disclosureMarket Efficiency OverviewEfficient market hypothesis (EMH): an early attempt by accountants to relate theories to realityPast PricesPublicInform.All informationEfficient Securities Market Market

3、efficiency: one where the prices of securities traded “properly reflect” the “specific” information about those securities Market price will quickly adjust to new information once information publicly available Rational investors revise beliefs about future returns as soon as new information becomes

4、 publicly known.Efficient Securities Market Weak Form Weak-form efficiency: market is efficient with respect to the information about the past price performance of the securities: Implications: Stock price is random walk. Cannot predict whether the stock price will rise or not in the next step. Fall

5、 or rise with equal chances. Random Walk Theory The movement of stock prices from day to day DO NOT reflect any pattern. Statistically speaking, the movement of stock prices is random.Random Walk Theory$102.50$100.00$105.00$100.00$97.50$100.00$95.00Coin Toss GameHeadsHeadsHeadsTailsTailsTailsEfficie

6、nt Securities Market: Semi strong efficiency Market prices efficient with respect to publicly known information, including financial statement information Semi-strong efficient market automatically implies weak form efficiency. EMH does not rule out possibility of inside informationImplications of E

7、fficient Securities Markets for Financial Reporting(Adapted from Beaver 1973: What should Be the FASBs Objectives, JOA) Accounting polices adopted does not affect security prices, as long as the policies have no differential cash flow effects, The particular policies used are disclosed, sufficient i

8、nfo is given so that reader can convert across different policies. Implications of Efficient Securities Markets for Financial Reporting Examples: differences in amortization period, deferred taxes, full-cost vs successful efforts are “tempests in a teapot” Choices between different policies involve

9、only “paper effects” Policy chosen will affect reported income but not future cash flows & dividends Implications of Efficient Securities Markets for Financial Reporting ECM = as long as firms disclose accounting policy & info, market can see through to cash flow and dividend implications. E

10、CM not “fooled” by differing accounting policies Management should not care about particular policies if they have no cash flow effects. ECM and nave investors Market efficiency = firms should not be overly concerned about nave investor financial info. need not be presented so simple that everyone c

11、an understand. Reasoning = if enough investors understand the disclosure = market price is same as if all investors understood it. ECM and nave investors Investors who understand info. will engage in buy-and-sell decisions = market price towards the efficient level. Nave investors can hire analysts,

12、 or mimic buy-sell decisions of knowledgeable investors. Any info disadvantage of knowledgeable investors may quickly dissipate. Informativeness of Share Price Grossman (1976): fully informative share prices and costly information gathering is a logical inconsistency Fully informative = all availabl

13、e information are already reflected in market price. If price fully reflects information, no one will gather information, since cant beat the market If no one gathers information, share prices will not reflect all publicly available information Hence the logical inconsistencyThe Informativeness of S

14、hare Price A way out of the logical inconsistency: noise trading Not based on rational evaluation of information Expected value of noise = 0 Share prices not fully informative since market price may be “wrong” in presence of noise Share prices now only partially reflect publicly available informatio

15、nthey also reflect noiseThe Informativeness of Share Price A way out of the logical inconsistency: noise trading Investors now have incentive to gather information: at a cost, they can sharpen beliefs by private information-gatheringShare Price on an Efficient Market CAPM E(Rjt) = Rf(1 - j) + jE(RMt

16、) Market sets share price so that expected return E(Rjt) (i.e., firms cost of capital) is given by right side of equation Note that only firm-specific component is j How is expected return defined? See Equation (4.2) in text:Information Asymmetry The fundamental value of a share The value of a firms

17、 share on an efficient market if all information about the firm is publicly available (i.e., no inside information) Inside information Information about the firm that is not publicly availableInformation Asymmetry (continued) The adverse selection problem Insiders may exploit their information advan

18、tage to earn profits at the expense of outside investors Inside information a source of estimation risk for investorsInformation Asymmetry (continued) Investor reaction to estimation risk The lemons problem (Akerlof, 1970) Would you buy a used car from someone you do not know? Would you buy a share

19、in the presence of inside information? No, withdraw from market, market collapses (e.g., post-Enron) Yes, but pay less, to protect against estimation riskInformation Asymmetry (continued) Effect of estimation risk on share prices Efficient market price includes a “discount” for estimation risk i.e.,

20、 investors demand a higher return CAPM understates cost of capital, since ignores estimation risk Information Asymmetry (continued) Controlling estimation risk Insider trading laws Financial reporting Role of financial reporting is to convert inside information into outside, thereby reducing estimat

21、ion risk Markets that “work well” Low estimation risk, share prices as close to fundamental value as is cost effectiveA Graphical Illustration of Estimation Risk4 - 24Information asymmetry and pecking order思捷環球控股有限公司思捷環球控股有限公司(0330.HK) Esprit HoldingsAn Example of Full Disclosure Management Discussi

22、on and Analysis Forward-looking orientation Concept of information system is implicit Forward orientation and risk information increase main diagonal probabilities More relevant than historical cost-based financial statements. Less reliable? Reasonably consistent with decision theorySegmental Disclo

23、sure Analysis of companies with more than one line of business has inherent difficulties Aggregation of financial data for businesses with differing financial structures, risk attributes, and indicators of performance obscures characteristics SFAS 131 requires segment reporting based on the way that

24、 management organizes the segments within the enterprise. Research suggests that estimation based on segmental information is more precise. Procter & Gamble Annual Report (2006)Revision ExercisesA strong-from efficient securities market is one where the prices of securities fully reflect information that is publicly known30Fully informative share price and information that requires gathering cost can logically co-exist. Summary Exercises31Exercise Identify the concepts associated