Market Based Research Assignment due on Feb 24, Thursday Midnight Read all the material posted in this week and pp219 - pp223. 1.Discuss and explain a) the weak and b) semi-strong forms of the EMH. 2. State whether each of the following scenarios is true or false under the two forms ( (a) weak and (b) semi-strong) of market efficiency. Explain your arguments. i) Technical analysis is deemed meaningless and unprofitable. ii) No trading advantages accrue to users of financial statements. iii) Insider information can lead to abnormal return 222 MARIT-BASED MARCH 223 EMPRICAL MARCH WACATIONS FOR RACIALTAMENT ANALYS tiny faced by a firm that is due to common factors facing all fra the bene gde, mention and is merele CAPM is the the firm, Uneyini nisk is the certainty i oven tre The wystemat return is the return serving to the former counting for the systemen The material can be diversited www by investon holding will diversified portfolio Thus, this can be diversified way, the lato reward to into her return) for bearing this make the expected emal eum is e) - The mari, co the other hand, which can be deedway, bewed y dering the investor a Nigher expected return MPT and the CAPM impacted counting theory developed in a number of way. Tini, provided a model to remarket rolure and the reaction to caring Deviation from expected caming how to in the realitede um montifically, the expected portion (the whole Second, il implied that in the spected return for approfonde tot depend seriks that can be divenited way, information regarding the word time was largely relevant. The only thing that mattered the sale of the form and its relationship to the total portfolio , is attentiation in a nimidalama wie hy Where 4 The empirical test refewed due to meet or either the market inden is impecified or the power of beu se sot pood predicto of the cente beta that should be used a portfolio formation We return to the we of market lefficiency later in the chapter. A detailed review of the read that relates ning vahes to make a prin apter 18 where werall risk and credit analysis in discussed In addition to the prediction of riskeres, market-based research studies can te wed into the following 1. Tests of the IM the dialapproach 2. Tests of the informationalen of wing what Tests of the earninretur relationship Tests of the MH versus the Mechanike Hypothesis The mechanie hypothesis content with the clinical proach to counting the wy, hold that we of Ancial statemente copt the entien pewided face value implicat in this hypothesis is the unition that were financial statements do not other source of information de la mer for the effects of slimative conting med at me lyph Manche in appen to the EMII, which both the current perfekt forma the walki The mechanie hypothesis was nied by amining the vid market action to change in ting methods that increase reported income to me toch weet Specially Armat changed their precio modo financial reporting (but not for inn) purposes from scrated right linee Chapter lowed of the method) were examined by both Anh (1977) Kaplan and Roll (1972). Since the changer le reported income, the mechanik hypothesis Inde a petreces. The EMH www what w market showed the change and to mock print reaction should result The time of the caring cement for sample offres de made the casting The arch methodology isted of mewuring the boormal retum around change. Under the mechanik approach, we expecte under the expect Figure 52 press themsel Kaplan and Red, who excited the price ration in the week period wing the coming home Around the line of the earning nomerem, which occur in both the cumulative somal return (CAR) and the boormal tum tell we imignificantly different The ability of conting data to predict and providers of them an of contingenthe evidentiating that what www teethalet de films arbete Whar var is that the of earth, whough promising Marginally play a role Het pranding. Neve me point on to the of ik ere. Contrary to the relationship predicted by the CAPM. Famad French (2) conclude that during the period of was so Tore on Mocht On the other tech company in the marit to book ratio, devers and price Garning ratio were found y Pumad French will then) to be related to The Andings have tried considerable chale in Madenie.pl www of relationship include the following 1. Se are mariee that is the market is not fit them strong fin. LMH 2. The CAPM model is feladition of internationis There weather resting presies fotik The achieve in einer rede wa "The whole wenye CAP TW CAPM shayari were lucre There were ng w where the phone Will Therapie deshwa Mirpur Sophie We teper te pa ......... | I alwww ws of MI EM there are CAPM the 22 MARKET BAD SEARCH 221 The iron part of the indicated by the precedingun) is that the very analysis pingin fundamental analysis looking for the rainware that there are to wait to be found. The research results in prices that fully reflect all alle informatie This makes the limiting with so volt. The cel mai wwe vachili mag very well that publekinged financial statements data de preciwy what we are eficient The Male had implications for the setting of counting standards, no longer i such standarde Neve to specifically protect the nivelever, Sephined alysis and investor, who neure that prices correctly and souly reflect available information protect the naive me. Any trades by ichimes are made "airie 220 PRAISARCH WAKATIONS TOR FINANCIAL STATEMENT ANALYSIS The two major es in finance rate that informed in research in this period were the market hypothesis and modern portfolio theory Efficient Market Theory Underlying the new approach to using theory and search was the widespread interest in (and increasing ceptance of the efficient market lopoteit (EMI) the scademic and professional finance community. The EMB, defined by Pame (1970)prices walle. Fully reflecting need the knowledge of car information does not allow anyone to profit from it, because price ready incorporate the information. Further the information is impounded the prices correctly and they themen Information is fed into the resulting in three forms of the MH 1. The wife. The information set includes information about past securit prices only 1. The more form. The informatii utile all policy when The inform The informatie wchodes all information, including wately held (inde) information Empirical evidence in the counting and finance literature during this period op porind the weak and form. The weak for implies that we of past wurdy prions can be succesfully wed to predict future price Hrade, charting technique Chead and shoulder parte de ope) and other types of technical waly we deemed meaning and produkte The Wornational mundo se med by financial make under the Indudel publicly wade inte lucht francial statement Be reports, tryport and may Two key cution for policy, and analysis for the mistrong for of the Financial are not the only source of information for making iment decisions tended more important to trading advantages were to wwer of financial anal because the information contained in the name usly impounded in press on the information becomes public. This letter pont ww direct lackin undamental analysis the mainstay of fancial anal whe warched for a thul were ordened relative to their intervalul Benjamin Graham wada 19 Modern Portfolio Theory The second trendinse theory impacting ting theory and research was modern portfolio theory (MIT), died in the capital pricing model (CAPM) The CAPM arteries the relihip we come socks pected and risk KER) - R + ALIR.) - where ME MNR Rhetofon R- the risk free rate of return the return on the market whole the offirm that measures the comment of the firm's return with those of the overall market A") the symbol representing the expected value Therested return on this therefore removing the expectation wynbod R-RAM.-) where the wind or almal w Inter words, a portion Morture that in allerent from a spected return (penting market.com U MPT, Nigers are cred with higher expected, amplonly for that particoli hanno divente www. Hih de her der Semak in the part of That, sayyan in the producine e in the dann wird www.coloring wheel mainwindow merchant - Teymd heeft When he FASCIA A 22 219 MARKET-BASED RESEARCH value; thus, great importance is attached to ensuring that statements reflect the firm's true financial status. Moreover, as the nature of users' reactions to financial informa- tion is deemed predictable, no explicit effort is made to examine, empirically or otherwise, the interrelationship between financial statements and users' motivations and/or reaction to the information contained in those statements. Concurrent with the carly development of this approach to accounting theory, the teachings of Graham and Dodd reigned supreme in the academic and professional finance communities. In their world, stocks have intrinsic" value and inves- tors could use ratios and other financial analysis techniques based on financial state- ment data to develop filter rules that identify stocks as over- or undervalued. Simultaneously (and perhaps, paradoxically), it was argued that, although de- termining a company's true financial picture was a worthwhile objective, accounting rules did not actually mirror the underlying reality. Thus, financial statements were often seen as meaningless and of little use to investors. Canning (1929) was often quoted in support of this viewpoint: What is set out as a measure of net income can never be supposed to be a fact in any sense at all except that it is the figure that results when the accountant has finished applying the procedures which he adopts." The classical approach fell out of favor in academic circles due to its lack of testability. It was argued that the usefulness of accounting information could be evaluated only by observing its effects on financial statement users. The research emphasis turned to empirical investigations of the decision relevance of the information contained in accounting reports. Accounting regulators never fully embraced this new (empirical approach to accounting theory." Whether this was because they did not agree with it philosophically or because they felt that its results had no practical implications is a matter of debate. It is important to note that existing accounting rules, which make up GAAP, are greatly influenced by and are still a product of the classical approach in the concluding section of this chapter, we return to this point. MARKET-BASED RESEARCH Advances in finance theory in the mid- and late 1960s were the primary catalyst for the shift in accounting research described in this section. Academic accounting research moved from the classical deductive approach to a more empirical approach that focused primarily on three issues 1. What are users' reactions to financial statements? 2. Do alternative accounting methods affect users' reactions? 3. Given users' needs, could accounting methods be set to maximize the utility of financial statements to various user-groups? "This is equivalent to the concept of representational faithfulness discussed in Chapter 1 John B. Canning. The Economics of Accountancy (New York: Ronald Press Co, 1929). . 98 "There are some exceptions. For example, the change is the current cost disclosures from mandatory to voluntary required by Financial Accounting Standard Bard No. 13 was partially a result of empirical evidence indicating that the market ignored the information