ACCO 340 Lecture Notes - Lecture 4: Efficient-Market Hypothesis, Rational Expectations, Time Series
2 Feb 2017
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Document Summary
Accounting can be viewed as a mechanism to enable communication of useful information from inside the firm to the outside world. Accounting will survive only if it is relevant, reliable, timely and cost effective relative to other sources (analysts, media, share price etc). We can say therefore that accounting is in competition with other sources of information. Investors have to decide how much accounting expertise and information to acquire, and then to form their own subjective estimates of firms" future performance. These estimates will need revision as new information comes along. Each investor then faces a cost-benefit tradeoff with respect to how much information to gather. A major source of cost-effective information is careful analysis of quarterly/annual reports. Where the prices of securities traded on the market at all times fully reflect all information that is publicly known about those securities. Once new or corrected information becomes publicly available, the market price will quickly adjust to it.
