Financial Accounting Information Disclosure And Accounting Policy Choices
Earnings announcements are one of many information events that has received immense attention and interest from market participants. Such interest, is well-founded as it is attributable to the usefulness of the particular accounting information (earnings) that they contain and communicate to their users (Investopedia, LLC, 2016).
In market-based economies, accounting information are useful in a sense that they enable market participants to determine future returns of investment opportunities and also keep tabs on managers’ usage of the investments they have made (Beyer, et al., 2010). It is accounting’s duty to deliver a level playing field among investors through timely and full relevant, reliable and cost effective financial accounting information disclosure and accounting policy choices (beaver). Thus, it should be expected that efficient market are able to reflect investor’s decision using these accounting information.
Despite that, Ball and Shivakumar (2008) results showed that ‘average quarterly earnings announcement is associated with abnormal price volatility of only 1% to 2%, approximately, of total annual volatility’. This raises suspicion that earnings lack relevance to capital market and implied that there is no need for investors to gather information when market already reflects prices –are efficient. The validity of these statements will be discussed as follows. How earnings are relevant
Earnings are relevant because they represent a direct…