Accounting Case Study

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Question One:
Finding One: Earnings have information content
This finding is about how earnings figures provide information for investors, to assist them in decision making. For example, earnings about a firm, provides investors information about things such as future cash flows. If the accounting information (here specifically earnings information) is useful then there would be share price reactions for example, when earnings announcements are made, that is when the biggest abnormal returns can be observed. This is shows us that Investors use earnings information to assist them in investment decisions.
Finding Two: Accounting numbers are not a monopoly supplier of information This finding highlights the idea that, accounting information
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This finding is also referred to as ‘the efficient market hypothesis. We find out that there is a relationship between the cumulative abnormal return and the time before/after new information is released by a firm. For example, the greatest abnormal returns was recorded when information such as earnings announcements were made. Depending on whether the information was good news, in which case meant that there were positive earnings changes and if there was negative news then there would be negative earnings changes at this time. After 6 months, since announcements have already been made, abnormal returns would flatten to around 0%. This is because, immediately after announcements are made the market absorbs the new information and reacts quickly to the information, this is what caused the greatest change in abnormal returns at time of the announcement. So at this point (after 6 months), the new information has already been used by investors and the changes in abnormal returns flattens out to around 0% …show more content…
Here, for the managers there are two incentives to choose from. The first is to choose accounting policies that increase earnings. This enables earnings to reach an amount between the lower and upper bounds, meaning that the manager gets a bonus. The second incentive for managers is to choose income decreasing accounting policies, to reduce income as low as possible. This incentive is generally chosen when there is no hope of the earnings figure to be increased by the incentive mentioned above. When earnings are below the lower bound it means that manager will not receive a bonus. In that case, managers choose income decreasing techniques to reduce earnings as low as possible so that they are able to defer earnings to a future period, where they can use it to increase earnings to ultimately get a

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