QUESTION 1:

What assumptions about market efficiency are typically adopted in capital markets research? What do we mean by 'market efficiency'?

QUESTION 2:

Evidence shows that share prices might not fully react to financial accounting information immediately and that abnormal returns might persist for a period of time following the release of information (a case of 'post-announcement drift'). Does this indicate that securities markets are not efficient and that assumptions about market efficiency should be rejected?

QUESTION 3:

What, if any, effect would the size of an entity have on the likelihood that the capital market will react to the disclosure of accounting information?

QUESTION 4:

The following is an extract from a newspaper article entitled 'Westpac chief in $3bn parting shot' (by George Lekakis in the Advertiser, 2 November 2007, p. 72):

OUTGOING Westpac chief David Morgan yesterday delivered his final annual result for the groupa bumper bottom line harvest of $3.45 billion. Net profit was up 12.4 per cent for the year following spectacular growth in fee income businesses, particularly funds management and institutional banking. Dr Morgan, who makes way for incoming managing director Gail Kelly in February, described the 2007 earnings performance as 'one of the best" in his nine years at the group's helm. 'I think we've got enormous growth ahead of us,' he said. 'I've never seen momentum in the company as we have now.' Investors responded positively to the profit announcement, driving up the share price by 52c to a record close of $31.06.

Using the material provided in this chapter, provide an explanation of why the capital market responded as positively as it did to Westpac's profit announcement.

QUESTION 5:

Refer to Accounting Headline 10.3 and explain why investors might have reacted to the false rumour. Is the reaction of investors to this false rumour consistent with the view that the capital market is efficient or inefficient?