In Section 6.4, the concept of value relevance of net income is introduced. It appears that the

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In Section 6.4, the concept of value relevance of net income is introduced. It appears that the value relevance of reported earnings, as measured by R2 or ERC, is low, and falling over time. Use single-person decision theory to explain why value relevance of reported earnings can be measured by R2 or ERC. Is it possible for abnormal share return to increase but R2 and ERC to fall? Explain.

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