Deck 10: Reactions of Capital Markets to Financial Reporting

Question 1

Recent capital markets studies have:

A) Suggested capital markets are less efficient than previously believed
B) Confirmed previous beliefs about the efficiency of capital markets
C) Suggested capital markets are more efficient than previously believed
D) Not considered the efficiency of capital markets

Answer 1

A

Question 2

Positive abnormal returns following an earnings announcement suggests the announcement contained:

A) Good news
B) Unexpected good news
C) Bad news
D) Unexpected bad news

Answer 2

B

Question 3

Semi-strong-form market efficiency means that the information reflected in security prices is:

A) All publicly available financial information
B) All public and private information
C) All publicly available information
D) All information about past prices and trading volumes

Answer 3

C

Question 4

Which of the following statements is true?

A) Capital markets research analyses individual responses to financial reporting, while behavioural research assesses the aggregate effect of financial reporting.
B) Capital markets research assesses the aggregate effect of financial reporting, while behavioural research analyses individual responses to financial reporting.
C) Both capital markets and behavioural research assess the aggregate effect of financial reporting.
D) Both capital markets and behavioural research analyse individual responses to financial reporting.

Question 5

According to the findings of capital markets research,the existence of post-announcement abnormal returns for a given firm suggests that for firms in the same industry:

A) Subsequent post-announcement abnormal returns will increase
B) Subsequent post-announcement abnormal returns will decrease
C) There will be no effect on subsequent post-announcement abnormal returns
D) It is impossible to predict the effect on subsequent post-announcement abnormal returns

Question 6

Earnings are relevant to investors because:

A) Investors want to maximise their profits
B) Past earnings predict future earnings
C) Past earnings predict future cash flows
D) Future cash flows are a function of future earnings

Question 7

An example of an event study is:

A) The comparison of an earnings announcement with changes in share price levels
B) The comparison of a dividend announcement with changes in share trading volume
C) The comparison of an earnings announcement with changes in share price volatility
D) All of the given options are correct.

Question 8

In addition to investigating the information content of earnings announcements,capital markets research has also considered whether:

A) Earnings announcements reflect information previously utilised by investors
B) Abnormal earnings announcements reflect information previously utilised by investors
C) Cash flow announcements reflect information previously utilised by investors
D) Abnormal cash flow announcements reflect information previously utilised by investors

Question 9

Capital markets research assumes that markets are:

A) Semi-strong-form efficient
B) Strong-form efficient
C) Weak-form efficient
D) Inefficient

Question 10

If markets are inefficient,the link between share price changes and information disclosures:

A) Cannot be established
B) Cannot be explained
C) Does not exist
D) All of the given options are correct.

Question 11

Semi-strong-form market efficiency suggests security prices will change when:

A) Unexpected earnings results are announced
B) Earnings results are announced
C) Cash flow results are announced
D) All of the given options are correct.

Question 12

The book value is generally less than the market value of a firm because:

A) Capital markets are not strong-form efficient
B) Certain intangibles may not meet the asset recognition criteria
C) Assets may be overvalued by unethical managers
D) The market values of assets are difficult to measure

Question 13

The 'earnings/returns relation' refers to the relationship between returns and:

A) Changes in expected future earnings
B) Expected future earnings
C) Changes in current earnings
D) Current earnings

Question 14

According to the findings of capital markets research,historic cost earnings information is:

A) Useful to investors
B) Useful to investors when it differs from expectations
C) Largely unknown by investors prior to announcement date
D) Manipulated by managers

Question 15

Capital markets research suggests that:

A) Cash flows are a more useful measure of firm performance than earnings
B) Earnings are a more useful measure of firm performance than cash flows
C) Cash flows and earnings are equally useful measures of firm performance
D) None of the given options are correct.

Question 16

Which of the following is not a reason so many studies have focused on market responses to earnings announcements?

A) Earnings data is unbiased.
B) Earnings data is readily available.
C) Earnings data is important to shareholders.
D) Earnings data is the primary purpose of financial reporting.

Question 17

A 'systematic change' in share prices will not be caused by the disclosure of new information about:

A) Inflation
B) Dividends
C) Business confidence
D) Unemployment

Question 18

Given efficient markets,the disclosure of favourable new information about a firm would be evidenced by:

A) A share price decrease
B) No change in the share price
C) A share price increase
D) None of the given options are correct.

Question 19

Post-earnings announcement 'drift' is:

A) Consistent with the strong-form efficient markets hypothesis
B) Consistent with the semi-strong-form efficient markets hypothesis
C) The predictability of returns following earnings announcements
D) The predictability of abnormal returns following earnings announcements

Question 20

Which of the following is not a finding of capital markets research?

A) Earnings forecasts contain useful information.
B) Voluntary disclosures benefit capital markets.
C) The strength of the relationship between earnings announcements and share price movements is positively related to the size of an entity.
D) Financial statement disclosures are perceived differently to footnote disclosures.

Question 21

Which of the following statements is true,regarding the Ball and Brown (1968)study?

A) It is the first major capital markets research publication in accounting.
B) It investigated the usefulness of accounting earnings under an historical cost model.
C) It found evidence to suggest that the information contained in the annual report is used in investment decision-making.
D) All of the given options are correct.

Question 22

Which of the following is true about the semi-strong form of efficiency?

A) All publicly available information is rapidly and fully impounded into share prices in a biased manner when released.
B) All publicly available information is rapidly and partially impounded into share prices in an unbiased manner when released.
C) Selected publicly available information is rapidly and fully impounded into share prices in an unbiased manner when released.
D) All publicly available information is rapidly and fully impounded into share prices in an unbiased manner when released.

Question 23

Which of the following statements is true in regard to the results obtained by capital market research?

A) The relationship between earnings announcements and share price movements is inversely related to the size of the entity.
B) Earnings announcements have a greater impact on the share prices of larger firms than on smaller firms.
C) Compared to US markets, the Australian market has larger adjustments during the year with slower adjustments at earnings announcement.
D) Share prices remain the same if investors 'fixate' on reported earnings without considering the relative magnitudes of cash and accrual components.

Question 24

Which of the following statements is not true regarding capital markets research?

A) It explores the role of accounting and other financial information in equity markets.
B) It involves examining statistical relations between financial information and share prices or returns.
C) It analyses individual responses to financial reporting.
D) It assesses the aggregate effect of financial reporting on investors.

Question 25

Which of the following is a finding of Beaver,Lambert and Morse (1980)?

A) Share prices and related returns are related to accounting earnings.
B) Over short intervals, earnings are more strongly associated with returns than are realised cash flows.
C) Fair value estimates of bank's financial instruments seem to provide a better explanation of bank share prices than historical cost.
D) Revaluation of assets results in better alignment of market and book values.

Question 26

If market value is related to book value:

A) Returns should not be related to accounting earnings per share, divided by price at the beginning of the accounting period
B) Returns should be related to accounting earnings per share, divided by price at the beginning of the accounting period
C) Returns should be related to accounting earnings per share, multiplied by price at the beginning of the accounting period
D) Returns should be related to accounting earnings per share, divided by price at the end of the accounting period

Question 27

Capital markets research is used to:

A) Investigate share price reaction to the disclosure of financial information
B) Investigate how share prices react to particular government announcements
C) Investigate how share prices react to companies winning particular awards
D) All of the given options are correct.

Question 28

Which of the following statements is correct,regarding the voluntary disclosure of information provided by a firm?

A) Firms with more informative disclosure policies have a larger number of analysts following them, and more accurate analyst earnings forecasts.
B) Firms with more informative disclosure policies have a lower number of analysts following them, and less accurate analyst earnings forecasts.
C) Increased voluntary disclosure within the annual report is associated with higher costs of equity capital.
D) There is no relationship between increased voluntary disclosures within the annual report and costs of equity capital.

Question 29

Which of the following statements regarding capital markets research is true?

A) Capital markets research relies on the underlying assumption that equity markets are efficient.
B) Capital markets research typically assumes that equity markets are semi-strong-form efficient.
C) A large fraction of published research in leading academic accounting journals examines the relation between financial statement information and capital markets.
D) All of the given options are correct.

Question 30

According to Zhang (2007),which of the following is not a negative effect of introducing the Sarbanes-Oxley Act (2002)in the US?

A) The out-of-pocket compliance costs are significant.
B) Executives complain that complying with the rules diverts their attention from doing business.
C) The Act exposes managers and directors to lower litigation risks and penalties.
D) CEOs take less risky actions, consequently changing their business strategies and potentially reducing firm value.