Mechanistic hypothesis and efficient market hypothesis LO5 Douglas Ltd had always classified interest paid as

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Mechanistic hypothesis and efficient market hypothesis   LO5 Douglas Ltd had always classified interest paid as an operating cash flow. In 2019 Douglas Ltd changed its accounting policy and classified interest paid of $100 000 as a financing cash flow in its statement of cash flows. The reported amounts are summarised below. 2018 2019 $’000 $’000 Net cash inflows from operating activities 800 900 Net cash outflows for investing activities (600) (600) Net cash outflows from financing activities (100) (200) Net movement in cash 100 100 Required 1. Describe the mechanistic hypothesis. What does the mechanistic hypothesis predict about how investors and, therefore, share prices will respond to the increase in operating cash flows reported in Douglas Ltd’s 2019 financial statements? 2. Describe the semi-strong form of market efficiency. What does the efficient market hypothesis predict about how investors and, therefore, share prices will respond to the increase in operating cash flows reported in Douglas Ltd’s 2019 financial statements?

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Financial Reporting

ISBN: 978-0730363361

2nd Edition

Authors: Janice Loftus ,Ken Leo ,Sorin Daniliuc ,Belinda Luke ,Hong Nee Ang ,Karyn Byrnes

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