Question 1-5

1. What is positive accounting theory? How does it differ from normative accounting
theory? What was/were the major dissatisfaction(s) with normative accounting theory
which led to the development of a positive theory of accounting?
2. Explain the meaning of an efficient market. What is meant by the following terms:
weak-form efficiency, semistrong-form efficiency and strong-form efficiency? Which
form is the most important to accounting research? Why?
3. Explain the importance of examining the impact of profits on share prices for
financial analysis. Can this analysis be used to make abnormal returns from share
markets?
4. Does a study of the information content of profits announcements explain why
firms use particular accounting practices? Does it help to predict which firms will use
particular accounting practices?
5. Give reasons that non-linear models relating unexpected returns to share prices
would provide a more precise estimate of the earnings response coefficient (ERC).

Case study 12.1

1. Why do you think David Jones’ shares have dropped in value when fourth-quarter
profits have increased?
2. What other economic information is the market using besides accounting reports?
3. One analyst suggests that there wasn’t enough in ‘upside surprise or news to really
keep the (share price) momentum going’. what does this comment suggest to you
about market efficiency?
4. Given the analyst’s comment in question 3 how would you classify the market
efficiency: weak-form; semistrong-form; strong-form? Explain you answer.