Deck 12: Capital Market Research

Question 1

Jensen argues that positive accounting theory precedes normative accounting theory.

Answer 1

False

Question 2

Which of these is true with respect to the efficient market hypothesis?

A)The semi-strong form of market efficiency is the most directly related to the accounting profession
B)Market efficiency means that all information has been correctly presented by a firm and properly interpreted by decision makers
C)Market efficiency implies that investors can predict future events with absolute precision
D)All of the above are true

Answer 2

A

Question 3

When the market is described,in the context of the EMH,as being efficient this means:

A)Every investor has knowledge of all information
B)All financial information has been 'correctly' presented by a firm
C)Security prices reflect the aggregate impact of all relevant information in an unbiased and rapid manner
D)All of the above

Answer 3

C

Question 4

Which research questions would you not expect to be addressed using a positive accounting theory philosophy?

A)What costs and benefits will the adoption of IASs have for Australian companies?
B)Should the adoption of IASs be compulsory for listed Australian companies?
C)What will be the effect of IAS adoption on share prices?
D)Why are firms continuing to use historical cost accounting?

Question 5

Which of these would not be considered to be a criticism of normative accounting theories?

A)They are not based on identified,empirical observations or methods
B)Normative theories do not specify an objective nor an objective function independently of subjective preferences
C)The prescriptions made by normative theories are falsifiable
D)Normative theories cannot be ranked objectively because it is impossible to prove or refute claims that one objective is more important than another

Question 6

DeBondt and Thaler found that the winner/loser effect is attributable to investor overconfidence and biased self-attribution.

Question 7

One focus of the second stage of positive accounting theory development is known as ex-ante,that is,trying to explain whether managers choose certain accounting methods for opportunistic reasons.

Question 8

A conclusion drawn from Ball and Brown's information content studies is:

A)85-90% of the price adjustments to the change in profit of firms occur before the announcement month
B)There is significant information content in the profit figure,however accounting is not the only source of information about firms
C)Quarterly accounting profits are a timely source of information for the capital market
D)A and B

Question 9

Blackwell,Noland and Winters found for small private companies that are not required to be audited,it was those that purchased audits who were charged lower interest rates.

Question 10

If the 'sufficient conditions' outlined by Fama are met for an efficient market then it is impossible,on average,to earn economic profits by trading on security information.

Question 11

The 'mechanistic' hypothesis states that the market will ignore accounting changes which have no cash flow consequences.

Question 12

The factor that has not been found to affect the earnings response coefficient is:

A)Risk and uncertainty
B)Industry
C)Firm growth
D)None of the above,i.e.all of the factors have been found to affect the earnings response coefficient

Question 13

The form of market efficiency in which the security's price at any particular time fully reflects the information contained in its sequence of past prices,is called:

A)Weak form
B)Semi-weak form
C)Semi-strong form
D)Strong form

Question 14

The development of positive accounting theory can be broken down into two stages,the first stage being literature that sought to explain and predict accounting behaviour.

Question 15

One explanation for differences in the earnings response coefficient across firms is that earnings announcements by large firms have more information content than earnings announcements by small firms.

Question 16

Positive accounting theory is aimed at prescribing how the world should work rather than providing an understanding of how the world does work.

Question 17

The studies that followed Ball and Brown's 1968 foundation study:

A)Mostly supported their conclusions
B)Mostly did not support their conclusions
C)About half the studies supported their conclusions and half did not
D)There have been no follow-up studies

Question 18

The first published study to investigate the magnitude of unexpected profits and abnormal returns was conducted by Beaver,Clarke and Wright,who found a positive correlation between the mean percentage of unexpected profits and the mean annual abnormal rate of return.

Question 19

You have been given the following one period market model for Acme Ltd for the calendar quarter ending June 2010:
Α_Acme = 3.0% R_Acme = 10 %
Β_Acme = 0.6 R_m = 7%
What is the error during this period of time?

A)3%
B)2.8%
C)0%
D)1.8%

Question 20

The maximum debt theorem of financial leverage suggests that as financial leverage steadily increases,the value of firms fall in response.

Question 21

The item that is not a variant of earnings management under the opportunistic perspective is:

A)Debt covenant
B)Equity offerings
C)Fraud
D)Signalling

Question 22

Who first used the variance of abnormal return as an index of information content of profit announcements?

A)Ball
B)Brown
C)Beaver
D)Fama

Question 23

'There is increasing evidence that markets can be fooled by accounting numbers'.' J.Godfrey,et el,'Accounting Theory',7^th Ed.p.442.Discuss.

Question 24

Which of these describes the principle based on the optimal leverage approach of financial leverage?

A)There is an ideal financial leverage position for each firm
B)As financial leverage steadily increases,the value of firms falls in response
C)When financial leverage increases,share price concurrently increases
D)The ERC is positively related to profit persistence factor

Question 25

'The empirical research provides evidence of benefits to companies through lower cost of equity and debt capital when they voluntarily purchase an audit or purchase a high quality audit.' J.Godfrey,et el,'Accounting Theory',7^th Ed.p.442.
Outline the details of a study undertaken on the above question and explain reasons that have put forward for the finding.What do researchers see as a 'high quality audit'?

Question 26

Ball and Brown's study 'An empirical evaluation of accounting income numbers',found that competing information pre-empted the information in annual reports by about:

A)35%
B)65%
C)85%
D)90%

Question 27

Explain what accounting researchers mean by the market 'being efficient'.

Question 28

The factor that has an incorrect association or relation with the earning response coefficients (ERC)is:

A)There is a negative association between financial leverage and the ERC
B)Industries with the greatest perceived outcome uncertainty would have the smallest ERCs
C)High-growth firms will have higher ERCs compared to low-growth firms
D)Risk negatively affects the ERC

Question 29

Which of these is true with respect to information transfer research?

A)The research is based on the premise that positive profits for one firm in an industry reflects improved conditions in that industry
B)The variance of abnormal returns for competing firms decreases when another firm in the same industry makes a profit announcement
C)There are significant price reactions by non-announcing firms to early announcers sales and profit changes
D)B and C only

Question 30

The research finding that does not undermine the assumption of capital markets efficiency is:

A)Abnormal returns can be earned by trading on accounting information that is private
B)Financial analysts are fooled by profit figures and are optimistic in their forecasts
C)The presence of post-announcement drift
D)Failure of the market to recognise profit manipulation

Question 31

The hypothesis that assumes that the capital market only reacts to accounting changes that have cash-flow consequences is the:

A)Differential information hypothesis
B)No-effects hypothesis
C)Mechanistic hypothesis
D)Efficient market hypothesis

Question 32

It is true of the Australian study by Brown which replicated Ball and Brown's original 1968 study that:
I)There was more of a price adjustment in the announcement month than in the original study
Ii)There was less of a price adjustment in the announcement month than in the original study
Iii)In Australia annual reports are a more important source of information about companies than they are in the United States
Iv)In Australia annual reports are a less important source of information about companies than they are in the United States

A)ii,iii
B)ii,iv
C)i,iii
D)i,iv

Question 33

Outline the research that has been undertaken on post-announcement drift and the implications of this research.

Question 34

Which of these does not describe the differential information hypothesis?

A)Amount of information available from sources other than accounting reports is an increasing function of firm size
B)The larger the firm,the more information is contained in profits
C)The differential information hypothesis is developed from the theory of transaction costs and different incentives for information search
D)Incentive to undertake research for mispricing is greater for larger firms,given the costs of information search are fixed and constant across firms

Question 35

Which of these is not the theoretical argument set out by Bowen,Burgstahler and Daley with respect to profits and cash flow as explanatory variables for price?

A)Both profits and cash flow are individually and incrementally important
B)Both profits and cash flow are individually important,but profits are more incrementally important
C)Both profits and cash flow are individually important,but cash flow is more incrementally important
D)Both profits and cash flow are individually important,but neither is incrementally important

Question 36

Outline the arguments that have been raised to explain why a firm's size is a factor in the responsiveness of share price and the volume of trade to profit announcements.