The attachments are article and lecture slide. The questions are:

1. Summarize the main points of the article (3 marks)

2. Critically discuss the article with specific references to one(1) of the theories in the lecture slide.

Thank you.

4/13/2016 Print Article: Blackmores faces big test in cracking infant formula market Print this article | Close this window Blackmores faces big test in cracking infant formula market Jared Lynch and Mark Hawthorne Published: April 11, 2016 5:53PM Investors have dumped shares in Blackmores amid a Chinese crackdown on foreign foods, just as the market darling faces one of its biggest tests with a major assault on the Australian infant formula market. Confidential market data obtained by Fairfax Media reveals that Blackmores' much anticipated range of infant formula - which has so far only been available online and via pharmacies - has failed to win over Australian mums and dads. Blackmores has managed to win just 0.1 per cent of the $173 million formula market in Australian pharmacies. The company's shares dived as low as 13 per cent to $179.42 after Chinese authorities reined in what foreign products could be bought and sold through its official cross border channels. Under the changes, health foods require regulatory approval, which Fairfax Media understands can cost up to $200,000 per item and can take up to four years. The further tightening of regulations came after Beijing last Friday slapped a 11.9 per cent tax on goods bought through foreign websites. Abject failure with consumers According to a key supply manager with one of Australia's biggest pharmacy chains, the release of Blackmores infant formula has been an "abject failure" with consumers. "There are basically three brands dominating the market, and they are Aptamil, A2 and Bellamy's," said the source. IRIAztec compiles pointofsale scan data from the majority of major supermarkets and pharmacies across the country. That data reveals that Blackmores has won just 0.1 per cent market share of the total amount of infant formula sold by Australian pharmacies, the equivalent to just $1.7 million of annual sales. But company chief executive Christine Holgate defended the figures, saying they had engaged in a "soft launch" of the product in late January. That launch was backed by a television advertising campaign. Ms Holgate said the company waited to launch its infant formula range across supermarkets, which account for 90 per cent of the Australian market, to ensure it had enough supply for Australian mums and dads. "With our infant formula, if we had launched across grocery up front, we wouldn't be able to support the supply and we would have been criticised for it," she said. "Do you prioritise sales or the right thing by the customers? We believe we have taken the right approach." From this month, Blackmores formula will be available in more than 200 supermarkets across Australia. Coles and Woolworths account for almost 90 per cent of all Australian infant formula sales. Blackmores' foray into supermarkets will compete headon with the major brands of the industry in Aptamil, A2 Platinum, and Bellamy's. Infant formula has been dubbed "white gold" due to unprecedented demand from China for the product, but data shows that Blackmores is not the only company to fail to cash in on the boom. Natures Way has only managed to win 0.4 per cent of the Australian pharmacy market for infant formula. Coles, which has launched its Nutriforme Gold homebrand formula, has also failed to win over consumers. Just 0.8 per cent of the formula sold by Coles is its homebrand product. http://www.theage.com.au/action/printArticle?id=1007931864 1/2 4/13/2016 Print Article: Blackmores faces big test in cracking infant formula market Market share of infant formula sales Australian pharmacy sales 20/12/2015 Natures Way 17/01/2016 14/02/2016 13/03/2016 0.7% Blackmores 0.0% Danone (estimated) 42% 0 10 20 30 40 50 60 70 80 90 100 80 90 100 Coles Group sales 20/12/15 Nutriforme Gold 14/02/16 13/03/16 0.9% 0 17/01/16 10 20 30 40 50 60 70 Source : Aztec Scan Data Share But still early days But Morgans analyst Belinda Moore said it was still early days for the Blackmores, which launched its brand of infant formula in a partnership with Bega Cheese last October and began selling on its websites and pharmacies in January. "And you have to remember that it's conventional infant formula, which is highly competitive," Ms Moore said, adding that only companies with a point of difference like Bellamy's and a2 Milk have seen big gains in market share. A2 Milk chief executive Peter Nathan said his company was still enjoying a boom in sales to Chinese nationals, and his company had worked hard to overcome supply issues at major supermarkets. He likened Chinese tourists buying tins of Australian formula to take home to Australians going on shopping sprees while overseas. "The phenomenon of Chinese tourists buying infant formula from Australian retailers is similar to the recent experience of Australian consumers buying Levi Jeans in large numbers from the US," he said. "This really is new and welcome territory for Australian brands, where aspirational Australian brands such as A2 Platinum have such significant traction with the largest consumer market on the planet, in China. "This has very positive commercial benefits for the Australian economy as selling highvalue brands is far preferable to just selling commodities." Since December 2014, Blackmores shares have surged from $33 to a high of $220.90 reached in January this year. CLSA analyst Naveen Patney the "key challenge" for Blackmores under China's new regulations would be to "educate the relevant regulatory authorities that a large number of their products should be considered normal foods rather than health foods". Approval can take four years Health foods, Mr Patney said, need regulatory approval to be placed on the "positive list" and sold through official channels - a process that can take two to four years. He said while official cross border ecommerce channels [CBEC] accounted for a small amount - about 5 to 10 per cent - of Blackmore's, a2's and Bellamy's sales into China, they were "key to longterm success". "We view the positive list as a potential negative for Blackmores, given nearterm uncertainties and the potential for some Blackmores products to not be permitted under CBEC," Mr Patney said. Blackmores chief executive Christine Holgate is in China this week in what the government has dubbed the "largest ever" trade mission to the Asian powerhouse. She said all that all of the companies main products, such as fish oil, were still allowed to be exported into China. "I haven't seen anything in the regulatory changes that gives me any concern," Ms Holgate said. "I continue to be excited by the prospects for not only Blackmores but Australia". Tom Parker, head of consultancy firm Bastion S&Go's China advisory, expected the grey market - or what he preferred as the overseas shopper market sending products back to China - to flourish in the short term because it was more nimble than the official channels and not subject to the taxes and fresh regulatory changes. "But the Chinese government, if anything, has a longterm vision and these regulatory changes are about getting the bigger players used to it, because once you have them on these crossborder channels, you can place taxes on them, regulation - you can control trade," Mr Parker said. "It's the castle and moat strategy - you can pull up the drawbridge whenever you like." This story was found at: http://www.theage.com.au/business/blackmoresfacesbigtestincrackinginfantformulamarket20160411go3h7c.html http://www.theage.com.au/action/printArticle?id=1007931864 2/2 Topic 7: Reactions of Capital Markets to Financial Reporting (Adapted from slides written by Craig Deegan to accompany Deegan, 2014, Financial Accounting Theory, 4th edition, McGraw-Hill, Sydney, Australia.) Understand the impact of financial reporting decisions on capital market participants, and on individual users Describe, explain and critically evaluate the role of both CMR and behavioural research in assessing accounting disclosures Explain the importance of the Efficient Markets Hypothesis as an underlying assumption of CMR Describe the different methods of undertaking CMR: Information Content research and Value Relevance research Describe the major results of CMR Financial Accounting Theory, 4th edition Required reading: Chapter 10 Discussion Questions: 10.1, 10.6, 10.7, 10.9, 10.20, 10.25, 10.28, 10.29 Deegan, Capital markets research in accounting: Explores the role of accounting information in capital markets (share markets) Reflects the aggregate effect of financial reporting on capital markets Uses evidence from a large number of firms over several years to come to conclusions Seeks to explain how and why capital markets react to or use accounting information Also seeks to identify the relevance of various financial reporting decisions to market decision making CMR focuses on the information role of accounting disclosures and financial reports Financial reporting Semi-strong form market efficiency assumed Share prices / returns Definition of Market Efficiency: \"a market that adjusts rapidly to fully impound information into share prices when it is released\" (Fama et al, 1969) Information is an input to investment decisions Therefore, our concern is only with \"information efficiency\" 3 Forms of Information Efficiency: 1. 2. 3. Weak form (past share price and trading volume information) Semi-strong form (publicly available information) Strong form (all information - publicly available and private) Capital markets research in accounting assumes semi-strong form efficiency Financial statements and other disclosures form part of the information set that is publicly available 1. Information Content Research Is historical cost based accounting information USED by the market to revise expectations about the value of the firm? 2. Value Relevance Research Does financial reporting REFLECT the information already used by the market to set share prices (is the information already impounded into the share price prior to its release)? What is the impact of the release of accounting information on share returns? Which accounting information is relevant for valuing shares in a company? Starts by looking at company announcements and then examines capital market reactions to it Looks at changes in share price/return at the time of the announcement Assesses whether the information is used by the market to revise their expectations of firm value A reaction (change in share price/returns) indicates the company announcement is new information to the market or has 'information content' No reaction indicates the company announcement has no 'information content' Either the information is irrelevant, or the information was previously known/confirms market expectations Information Content Research: If there is a price reaction associated with the release of financial information, it is deemed to be useful to the capital market: Assumed that all publicly known 'old' information has been fully impounded into share price (i.e. the share market is semi-strong form efficient) This enables 'new' information to be assessed If the share market reacts, the reaction can be attributed to the 'new information' Value Relevance Research: Share prices/returns are used as a benchmark against which the usefulness of financial information is assessed: Share price assumed to reflect the market's assessment of all publicly available information If information efficiency cannot be assumed, then we cannot evaluate the relevance to the market of alternative accounting methods and disclosures Relationship between share price and expected earnings Total earnings verses unexpected earnings Relationship between changes in share price and returns to investors The Market Model (CAPM) Share price = PV of expected future cash flows (i.e. dividends) A relationship exists between share price and expected future earnings Predictions of future earnings are based on historical earnings and all currently available information, from various sources E.g. company production volumes; announcement of CEO resignation; China's coal imports statistics; Reserve Bank interest rate change Unexpected changes in earnings will result in: revisions of expectations about future earnings, which will result in: revisions of expectations about future cash flows (dividends), which will result in: changes to share prices Only NEW information will cause expectations about future earnings to be revised: Since the share price already reflects all publicly available information (semi-strong form efficiency assumed) Only the unexpected component of an earnings announcement represents 'new' information Therefore, changes in share price will be associated with unexpected earnings rather than total earnings for the period If current earnings are exactly as expected, there is no new information, and therefore no change in share price!! Returns (to shareholders) are a function of share price: Return = End Price + Dividends - Beginning Price Beginning price Since share price is related to expected future earnings, returns are related to changes in expected future earnings Returns are generally calculated over periods of between one day and one year: If no dividend is paid, returns are simply equal to percentage change in price E.g. if a company's share price increased from $5.42 to $5.56 during the day when earnings were announced, the daily return is: R = (5.56 - 5.42) / 5.42 = 2.6% Returns, rather than share prices, are generally used to assess whether company disclosures (including historical earnings) have 'information content': A positive return indicates 'good news' Upward revision of share price A negative return indicates 'bad news' Downward revision of share price Not all returns are due to company announcements Market-wide factors cause systematic changes in share prices (returns) of all companies, e.g. unemployment statistics, interest rate changes Used to separate out firm-specific share price movements from market-wide movements: That is, it is used to control for share price movements due to marketwide (economy-wide) events This allows the impacts of earnings announcements on returns to be viewed in isolation Abnormal returns (i.e. returns not explained by market-wide factors) are evaluated at the time of announcements to gauge how much (if any) new information has been released Abnormal returns indicate whether the announcements have 'information content' Removing Confounding Effects: Confounding events are other firm-specific events that occur at the same time as the event being studied (e.g. announcement of CEO resignation) Large sample sizes are used to remove (average out) confounding effects Rit = i + Constant average daily return Raw return on day t = Actual returns = bi(Rmt) + Return due to firm moves (Firm-specific news) Return due to market moves + Normal returns it + + Abnormal returns bi is a measure of firm specific risk. Where bi > 1, the firm is more risky than the market average; where bi