Essay: Market Based Accounting Research

Essay: Market Based Accounting Research
April 12, 2011 Comments Off on Essay: Market Based Accounting Research Academic Papers on Business Studies,Sample Academic Papers admin

Sample Essay

The major thrust in the field of MBAR came from the research efforts and advancements in the finance theory during the period of 1950 and 1960 (Cauwenberge & Beelde, 2007). After the research of many years, researchers have found some other parameters in their studies which are of immense importance like level of rationality of investors, the timing at which information arrived, efficiency of the market, the impact of other non-financial information provided by the annual reports and selection of a particular accounting standard selected by the managers (Lev & Ohlson, 1982).

All these issues have serious implications on stock prices. Lev & Ohlson (1982) also suggest that market forces predict the upcoming net income of a particular company before its final announcement and adjusted the stock prices accordingly. However, there is some time lag to incorporate the full information even after the final release of accounting reports. Sometimes, investor shows inefficiency with respect to the arrival of new information and takes much time to analyze and incorporate the full impact of this news in the stock prices (Lev & Ohlson, 1982). These results are slightly inconsistent with the research of Ball & Brown.

Bernard and Thomas (1989) also studied the relationship between accounting income and stock prices. They found that investor takes around two to six months to fully analyze and reflect the positive or negative information in the stock prices. Bernard and Thomas relate this behavior of investor to their risk/return profile (Bernard & Thomas, 1989). It means that the investors who have high-risk appetite and are time efficient respond immediately to the new information as compared to those who are less risky and inefficient. The ultimate result is that those who respond early earn the above normal returns till the information is widely spread in the market and there left no abnormal returns. The results of Ball & Brown (1968) seems contrasting because they said that market already captured the 85 to 90 percent of the information before the final announcement of earnings while Abarbanell & Bernard, and Bernard & Thomas proposed that market took a long time to reflect the whole effect. One relational of this disagreement may be the relative prices of a stock move upward because of the accounting information received during the year but the absolute price effect may not be visible until the whole industry stock price level raised after six months. In other words, we can say that relative stock price is efficient to earning’s information whereas absolute price changes are not so much informational efficient. The absolute price increase may also be attributed to some macroeconomic changes.

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