Methodology for Determining Share Price Movement
Discuss about the Financial Accounting Theory for Share Price.
The methodology that will help me determine whether the movement of the share price is related to the new announcement is the event study. The treatment of the date of event is as day of declaration. The seven-day period is chosen because of the need for exploring the investor's responses in the short run via the probability of the result misrepresentation triggered by the days without trading activities being incorporated into an event delay.
The disruption is eliminated by incorporating announcement into the investigation is set whereby each even interval of negative six; positive six days is mandated to cover solely a single declaration which might be linked to the equivalent classification. For changes in the price of stock evaluation dictated by the announcement, the abnormal returns, and absolute returns are estimated (Basu 2007).
The Average Absolute Return (AAR) is computed as arithmetic mean, but they does not eliminate the market’s impact. Therefore, abnormal returns (AR) are also calculated as ARi=Ri-E (Ri). In this equation, ARi is the abnormal return linked to a given company (i) on day seven. The Ri is the real return for firm (i) on day seven while E (Ri) is the anticipated return for the firm (i) on day seven. The modest form is employed in this study to remove the projected return whereby it is the real return of the pertinent index of the market.
The eventual computation of abnormal returns (AAR) will be done as the arithmetic mean. Further, dissimilar computation of average abnormal as well as absolute returns for the individual groups of announcement alongside sentiment in the two price of stock variations done. The ranges of stock price are distinct as follows, the lowest being from 0.01 to 1,00litas, median being from 1.01 to 10.00 litas while the uppermost is ranges between 10.00 and 100.00 litas.
The findings would be relevant to newspaper editors during their determination of the particular stories to publish. This is because the editors are very key in the capital market or stock exchange market. They are the people who spread the announcement in share prices changes which trigger various reactions of the investors. The editors, therefore, must scrutinize the reported findings and only publish those that are facts so not to destabilize the market and make investors lose their money (Bies 2005).
The editors will, in this case, show the correlation between announcing and share price changes and relate it to the emotional intelligence. They need to explain the need for high scores of emotional intelligence among the investors since it is related to behaviors that correlate with good investment performance. However, they will need to stress the need to help the investors who find it increasingly hard to overcome the fear when the share prices are declining. In so doing, they well restore confidence among such investors making them escape the irrational buying of too little shares which make them subject to greed where the price rises by selling too little and holding too long.
Investor Behavior and Emotional Intelligence
The findings reported in this article will be increasingly relevant both securities exchanges and corporate regulators. The securities exchanges will get to understand the various emotionally laden decisions and their impacts on investing. They will be able to make rational decisions when it comes to the level of active management required, the frequency of trade, and the degree of concentration of a given portfolio, the extent to utilize risky or novel strategies as well as the much to save and invest against consumption.
The regulators will also benefit from the information presented in the extract to undertake their regulatory duties. The information relating to the decision by John Neal to cut about 700 jobs in Australia to save $US200 million by 2014 would be the point of interest for the regulators. Cutting jobs is not good for the economy and, therefore, the regulators will come in to understand the rationale behind this unfortunate decision.
The regulators will help explain that this is just a knee-jerk investing at its worst as Chanticleer reckons and explain that it is just due to lack of proper understanding of the major profit drivers of both companies. The regulators will, therefore, warn the buyers against the proven dangers attached to impulsive buying of shares.
I think that the market inefficiency was the main reason that Dr. Chu and Mr. Lama managed to avoid losses by trading on insider information. There was an information asymmetry in the market as only the two people knew the information. If this information was present in the market, many people could have avoided their shares and hence made the two to lose their investments. The market was not semi-strong-form market efficient since the information they reflected in the security prices was not all publicly available. The capital markets research assumes that the markets are always semi-strong-form efficient and this was not the case here.
The semi-strong-form efficiency suggests that security price will alter when unexpected earnings results, cash flows result, and earning results are announced. Semi-strong-form efficiency means that all the public information is computed into the current share price of the stock. This means that neither fundamental nor technical analysis is usable to accomplish superior benefits. The hypothesis only suggest that information that is not publicly available can benefit the investors who seek to earn abnormal returns on investment. All the information is accounted for in the price of the stock and no amount of technical or fundamental analysis accomplishes superior benefits If assume a no share price movement when GTx publicly announced the blood clot worries, I think that such information would be irrelevant to the market. The capital market research assumes a correlation between the public announcement and the share price movement and hence a relevant announcement should follow the same pattern.
Importance of IFRS Adoption in India
I agree with the statement that India needs to adopt the new accounting standards based on IFRS which suits the legal environment and context of India. The theory of public interest can support the adoption of the IFRS in India. I choose this theory to explain how the public interest will be guaranteed in India by adopting the IFRS. IFRS has been created by the IASB to make sure that stricter control as well as regulation alongside control are in place so that organizations and are unable to mislead their respective stakeholders. This is in line with the theory of public interest which require firms to consider public interest in their operations. IFRS, therefore, ensure a greater level of responsibility introduced in both disclosure and reporting system.
Both real world application and empirical studies have proven that IFRS system guarantees a greater degree of financial system transparency which tends to meet the requirement of the public interest theory. It has been discovered that adopters of the IFRS have witnessed impacts on the cost of capital as well as liquidity alongside the label adopters. It has been proven statistically and researcher by analysts that financial disclosure quality has improved following IFRS’ adoption. The system has warranted an increased in the value of relevance as well as earnings of the entities hence the need for India to adopt the system.
Since India is based on principles and not rules, it is appropriate that the IFRS is adopted to suit this context for maximum benefits. Blind replication of the West may not optimize the benefits due to a different context and environments in India. The new IFRS adoption will help India companies have wider sources of raising capital cheaply than before in the long run.
Even though some barricades will exist during the transition phase, the initiative will be beneficial eventually in the long run for all the stakeholders since IFRS brings with it increased judgment. The companies will also have sufficient time benchmark thereby planning effectively to minimize the effect of the key financial ratios as well as operating parameters. India will benefit more by adopting the IFRS to the local contexts and environmental since it is more of principles than rules which may create conflict if they are adopted without amendments.
By harmonizing Indian accounting standards with IFRSs, Indian companies would raise capital from more sources and at a lower cost than before. Many Indian companies are currently adopting IFRS to expand their businesses globally as well as seek for unique and standardized reporting system helpful in the provision of true as a fair financial image of their organization. The Indian companies will have better access to foreign capital markets as well as investment hence increased sources of capital. The IFRS in India will also assist the companies to understand effectively the financial statements which would benefit the investors who will be willing to invest their funds across the world. The international companies will raise more capital from different markets at a reduced cost provided they create confidence in the minds of the investors that their financial statements adhere to the globally conventional IFRS accounting standards in India.
The stakeholders will face a challenge of increased initial cost of implementation as a result of a dual reporting requirement that the company may have to meet till complete convergence is realized. Another current accounting framework in India will deeply affect the laws as well as regulations. For the IFRS implementation, it will need changes in a range of laws and regulatory. The stakeholders, employees, regulators, and auditors will need to be aware of the IFRS as they need to train. The organizations will also be required to incur extra cost for the modification of their current accounting as well as procedures for accomplishing the new requirement for disclosures as well as reporting.
The differences between the Indian GAAP as well as IFRS could impact the decision and financial performances of the entities. There will be drastic changes among the entities that adopt the IFRS in their entire set of financial statements. Because of the various differences between Indian GAAP and IFRS would pose a big challenge to promote awareness regarding the IFRS alongside its effects on the users. Since IFRS is using the fair value as a measurement base for the valuation of most of their items of financial statements the challenge will be due to the a lot of hard work involved in calculating fair value which require valuation experts. The Indian stakeholders will also have to change the terms and condition linked to management compensation plans since the reporting of financial results under the IFRS is probably to be different from those under the Indian GAAP. The disclosure and reporting systems under the IFRS are different completely from the Indian reporting requirement hence a challenge.
The stakeholder theory is chosen to support T-Mobile’s decision to give non-financial information to the shareholders. This theory is useful in expanding why entities should give the non-financial information. This is because it holds that managers have a fiduciary duty to all groups with a stake in or claim on the firm including suppliers, employees and customer in addition to shareholders. This theory holds that this duty emerge from a legal, moral as well as economic arguments since firms have connection with a range of constituent cohorts which affect or impacted firms. The theory posit that despite a legally anchored fiduciary duty of managers towards shareholder, entities remain limited legally as well as economically where they act in accordance with this narrow perspective of shareholder value optimization. It requires firms to purse shareholders’ interest whereby it protects particular rights as well as interest of stakeholders thus avoiding moral hazards and monopoly powers. Stakeholder theory was, therefore, appropriate to explain the T-Mobile since it supports corporate social responsibility. Therefore, the companies must give the non-financial information to the shareholders including social and environment issues which have a great impact on the company’s bottom line which is essential to investors. The sustainability reporting thus benefit the shareholders whereby the non-financial information is disclosed in financial reports. The non-financial reports have ensured that shareholders get to know about bribery issues and diversity on boards of directors. The interest of the shareholder was, therefore, guaranteed in the T-Mobile organization since issuance of non-GAAP standard information was critical to justify their organization’s transparency.
The ability of the capital market to value the TMobile’s shares will not be negatively affected by the inclusion of non-standard metrics by the firm. Even though the article highlights that such provisions had obscured the key messages, these messages were included, and this does not mean market inefficient. The voluntary information integrated into the earning releases was additional transparency. The market efficient hypothesis was never disrupted by giving additional information. The T-Mobile, therefore, did a good thing by giving the non-financial information to which are critical to investors even though they are no compelled to do so. Giving such information should help the users to understand the firm better. Therefore, the firm never violated any rule by giving the non-GAAP standard information. The claim that such information obscured the key message was, therefore, irrational.
To validate the claim made in the article that non-GAAP metrics confused the investors, I will design an approach for controls over the non-GAAP measures. The external reporting manager will calculate the non-GAAP measures before drafting the disclosure for the earnings release of the company. The controller will then review the draft disclosure by re-calculating individual non-GAAP measure as well as agree on the underlying GAAP measures to the general ledger.
The controller will consider whether the non-GAAP measures entail misleading adjustments as well as review a list of forbidden presentation of non-GAAP financial measure to make sure that they are consistent with the SEC guidance. The audit committee will thus confirm whether non-GAAP measures are disclosed appropriately according to the policy as well as consistent with SEC rules, guidance and regulation. If the study notes a misleading adjustment, inconsistencies, and wrong disclosure, then I will conclude the non-GAAP measures’ claim confused the investors.
Carried interest describes that a share of profits which the general partners of a private equity or hedge funds receives as compensation irrespective of their contribution to the original funds. It seeks to motivate the fund manager or general partner to work towards enhancing the performance of the fund. I have chosen the fair value accounting theory to help determine whether I would find fair value accounting more decision-useful than historical cost accounting for the Blackstone’s value of carried interest. The fair value accounting theory is appropriate for dealing with the carried interest. The fair value accounting would be able to address the issues as takes in consideration the facts of the market prices. According to fair value accounting theory, historical cost is irrelevant. The deterioration in quality of the debt of the company that lowers its value in the market is reported to the stakeholders as a rise in the capital and profit of the company. This is because this is rational and unbiased technique that provide an estimation of the potential market price of securities of the firm (Campbell and Owens-Jackson 2008). Moreover, it will consider objectives cost like distribution, acquisition, as well as the replacement cost. The information produced by the fair value accounting is more relevance, reliable than the historical cost accounting. Moreover, it discloses full information compared to the historical cost accounting.
The amplified volatility of earnings of Blackstone resulting from fair value accounting will impact the amount I would be willing to pay for these securities. This is because the fair value accounting treats the prevailing prices as reliable measures of value. Since it is evaluated per period, it gives relevant information that will influence my rational decision. Since Blackstone is willing to bear this volatility to secure the revenue recognition, I will only pay the amount once they have paid for this volatility.
As reflected in the Positive Accounting Theory, the decision by Blackstone to adopt fair value accounting for carried interest fees in 2007 can be explained effectively (Scott 2013). The positive accounting theory advocates for the issuance of information to the stakeholders, and by using the fair value, it was appropriate for the firm to deal with the unconsolidated investment through fair value option to value future carried interest fees alongside the offsetting credit to current earnings. Since the positive accounting addresses what is needed to be done, it is appropriate since it would have led to earnings as presented in the information. The equity method that was used previously for the unconsolidated investment thus proved inappropriate.
Basu, S., 2007. The conservatism principle and the asymmetric timeliness of earnings 1. Journal of accounting and economics, 24(1), pp.3-37.
Bies, S.S., 2005. Fair value accounting. Fed. Res. Bull., 91, p.26.
Campbell, R.L. and Owens-Jackson, L.A., 2008. FAIR VALUE ACCOUNTING.
Scott, W.R., 2013. Financial accounting theory (Vol. 2, No. 0, p. 0). Upper Saddle River, NJ: Prentice hall.
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