Exam 8: Usefulness of Accounting Information to Investors and Creditors

The study by Ou and Penman, which used traditional accounting measures to predict whether a company's income would increase or decrease, indicated that markets are not as efficient as previously thought, and that fundamental analysis is important for investment purposes.

The study by Lev that examined earnings numbers and stock returns found a high explanatory relationship between earnings and stock returns.

Which of the following are possible sources of abnormal earnings?

Residual income refers to income in excess of a charge for the capital that is employed to generate that income.

Which of the following is a finding of previous capital market research studies?

Which of the following statements is not supported by empirical evidence from capital market research?

When accounting numbers are used to monitor agency contracts, there can be indirect consequences from changes in accounting policies.

Which of the following is true regarding the term residual income?

Surveys of individual investors have generally indicated a high readership of accounting information.

In portfolio theory, systematic risk is defined as the variance of expected investment returns.

Economic profit is equal to net operating profit less taxes paid minus a charge on invested capital.

The relationship between risk and return for diversified portfolios is modeled by the Security Market Line (SML).

The research approach that examines the association between accounting data reported in annual financial statements and the levels of stock prices is called:

The strongest evidence from capital market research concerns the information content of annual accounting earnings numbers.

What are the weaknesses of capital market research?

What is post-earnings-announcement drift, and what are possible causes for this phenomenon?

Respond to the following: a. What is meant by market efficiency? b. What does the efficient-markets hypothesis imply about the value of accounting information? c. Describe the three forms of the efficient-markets hypothesis.

Which of the following is not true regarding earnings and dividends?

Which of the following statements is true regarding post-earnings-announcement drift?

Research studies have predominantly supported the naive-investor hypothesis.