GODFREY

HODGSON
HOLMES
TARCA

CHAPTER 1
INTRODUCTION
Overview of Accounting Theory
What is a theory?
Hendriksen’s definition:
…the coherent set of hypothetical, conceptual and
pragmatic principles forming the general
framework of reference for a field of inquiry.

2
Overview of Accounting Theory
What is an accounting theory?
Hendriksen’s definition:
Accounting begin from practice to theory
…logical reasoning in the form of a set of broad
principles that
• provide a general framework of reference by
which accounting practice can be evaluated and
• guide the development of new practices and
procedures.

3
Overview of Accounting Theory
• Whether a theory is accepted depends on
how:
– well it explains and predicts reality
– well it is constructed both theoretically and
empirically
– acceptable its implications are

4
Overview of Accounting Theory
• Accounting theory is a modern concept
compared to mathematics or physics
• Even Pacioli’s treatise on double-entry
accounting focused on documenting
practice and did not explain the underlying
theoretical basis for it

5
Overview of Accounting Theory
The development of accounting
theory has been mostly unstructured
babilonia is the nation who develop the accounting theory

Chambers:
Accounting has frequently been described as a
body of practices which have been developed in
response to practical needs rather than by
deliberate and systematic thinking.

6
Overview of Accounting Theory
• Was developed to resolve problems as they
arose – reactive
• Ad hoc approach
Ad hoc approach refer only to one thing or to this
• Led to inconsistencies in practice
– e.g. different depreciation methods
• Accounting standard setting
– Conceptual framework projects have not resolved
inconsistency in practice
1600 amsterdam market, VOC issue the share

7
Pre-theory (1400s – 1800)

Goldberg:
No theory of accounting was devised from the time
of Pacioli down to the opening of the nineteenth
century.

8
Pragmatic accounting (1800– 1955)
• The ‘general scientific period’
– based on empirical observation of practice
– provided an explanation of accounting practice
– focused on the existing ‘viewpoint’ of accounting

9
Normative accounting (1956-1970)
great wall street crash: 1929-1933
• Sought to establish ‘norms’ for the best
accounting practice
• Focused on what should be (the ideal) v.
what is

10
Normative accounting (1956-1970)
• Degenerated into battles between competing
viewpoints
• Two groups dominated:
– conceptual framework proponents
– critics of historical cost
revaluation is fraud. Historical cost more logical

11
IFRS:Robert R Chamber
Normative accounting (1956-1970)
• Factors prompting the demise of the
normative period include:
– the unlikelihood of one particular normative
theory being generally accepted
– the application of financial economic principles
– the availability of empirical data and new testing
methods

12
Normative accounting (1956-1970)
• The major criticisms of normative theories
were:
– they do not necessarily involve empirical
hypothesis testing
– they are based on value judgements

13
Positive accounting (1950 to the
present day)
agency theory was born in this era
• A shift to a new form of empiricism called
‘positive theory’
data, hypothesis, hypothesis testing
• Had its origins in the ‘general scientific period’
• It seeks to explain the accounting practices
being observed

14
Positive accounting (1950 to the
present day)
• Its objective is to explain and predict
accounting practice
e.g. the bonus plan hypothesis

15
Positive accounting (1950 to the
present day)
• It helps predict the reactions of ‘players’, such
as shareholders, to the actions of managers
and to reported accounting information

16
Positive accounting (1950 to the
present day)
• Major deficiencies are:
– ‘wealth maximisation’ has become the answer to
explain all accounting practices and reported
information
– it relies excessively on agency theory and dubious
assumptions about the efficiency of markets

17
Positive accounting (1950 to the
present day)
• Behavioural research:
– concerned with the sociological implications of
accounting numbers and the associated actions of
‘key players’
– emerged in the 1950s

– despite growing acceptance since the 1980s,

positive accounting theory still dominates

18
Recent developments
• Academic and professional developments in
accounting theory have tended to take
different approaches
• Academic research focuses on capital markets,
agency theory and behavioural aspects
• The profession has sought a more normative
approach – what accounting practices should
be adopted

19
Recent developments

20
Recent developments
• Conceptual framework – resurrected in 1980s
– states the nature and purpose of financial
reporting
– Establishes criteria for deciding between
alternative accounting practices
– SACs 1–4

21
Recent developments
• Conceptual framework – Recent Developments
– Joint project between IASB & FASB
– International harmonisation of accounting
practices through a single consistent set of
international financial reporting standards (IFRS)

22
Recent developments
• The conceptual framework underpinning the
IFRS favours a move toward
– accounting practices that provide information for
enhancing decision making by investors and
others
– recognising all gains and losses in the accounting
periods in which they occur
– measurement using exit values

23
Content outline
• Part 1: Accounting theory (chapters 1 – 3)
• Part 2: Theory contributing to practice
(chapters 4 – 10)
• Part 3: Accounting and research (chapters 11 –
14)

24
Summary
• Accounting theory
• Major periods of accounting theory
development
• Normative accounting
• Positive accounting
• Conceptual framework
• IFRS

25
Key terms and concepts
• Theory
• Accounting theory
• Normative theory
• Positive theory
• Behavioural theory
• Conceptual framework
• IFRS

26
 GODFREY
HODGSON
HOLMES
TARCA

CHAPTER 2
ACCOUNTING THEORY
CONSTRUCTION
Pragmatic theories
1800-1955
Descriptive pragmatic approach:
• based on observed behaviour of accountants
• theory developed from how accountants act in
certain situations
• tested by observing whether accountants do
act in the way the theory suggests
• is an inductive approach

cara akuntan mendapat teori akuntansi dengan melihat praktisi akuntan (senior) lalu
meniru
2
Pragmatic theories
• Criticisms of descriptive pragmatic approach:
– does not consider the quality of an accountant’s
action
– does not provide for accounting practices to be
challenged
– focuses on accountants’ behaviour not on
measuring the attributes of the firm
job order costing: ilmu baru akuntansi, didapat dengan descriptive pragmatic
job costing: 1800 US and UK invented by real-world companies

3
Pragmatic theories
Psychological
investors and creditors
pragmatic approach:
• theory depends on observations of the
reactions of users to the accountants’ outputs
• a reaction is taken as evidence that the outputs
are useful and contain relevant information
preconditioned response: monday effect, holiday effect regarding to buying shares

4
Pragmatic theories
• Criticisms of the psychological pragmatic
approach:
– some users may react in an illogical manner
– some users might have a preconditioned response
– some users may not react when they should

• Theories are therefore tested using large

samples of people

5
Syntactic and semantic theories
syntactic: all about rules, grammar
• Semantic inputs are the transactions and
exchanges recorded in vouchers, journals and
ledgers

• The inputs are then manipulated on the basis

of the premises and assumptions of historical
cost accounting

6
Syntactic and semantic theories
• Criticised because there is no independent
empirical verification of the calculated outputs

• The outputs may be criticised for poor syntax

inaccurate e.g. different types of monetary
measures are added together

7
Syntactic and semantic theories
• The outputs may be syntactically accurate but
nevertheless be valueless due to a lack of
semantic accuracy (a lack of correspondence
with real-world events, transactions or
values)
US GAAP choices of retained earnings: retained earnings and reinvested capital

8
Syntactic and semantic theories
• Historic cost accounting may produce
‘accurate’ outputs but which nevertheless
have little or no utility
• That is, they are not useful for economic
decision making except to verify accounting
entries

9
Normative theories
• 1950s and 1960s ‘golden age’
derived through income or profit
– policy recommendations
– what should be
– concentrated on deriving:
• true income (profit)
• practices that enhance decision-usefulness
– based on analytic and empirical propositions

Financial statements should mean what

they say

10
Normative theories
• True income:
– a single measure for assets
– a unique and correct profit figure
FVA (exit price and current cost) and historical: the way to determine the income
physical capital maintenance and financial capital maintenance

11
Normative theories
• Decision usefulness:
– the basic objective of accounting is to aid the
decision-making process of certain ‘users’ of
accounting reports by providing useful accounting
data

12
Normative theories
The decision process

Accounting Prediction Decision

system of model of model of
company X user user

13
Positive theories
• Expanded during the 1970s
• Based on ‘experiences’ or ‘facts’ of the real
world
• Explain the reasons for current practice
• Predict the role of accounting information in
decision-making

14
Positive theories
• The main difference between normative and
positive theories is that
– normative theories are prescriptive
– positive theories are descriptive, explanatory or
predictive

15
Different perspectives
• Scientific approach:
– has an inherent assumption that the world to be
researched is an objective reality
– is carried out by incremental hypotheses
– has an implied assumption that a good theory
holds under circumstances that are constant
across firms, industries and time

inherent (sifat yang melekat) x exherent

cognitive dissonance theory: kekacauan 16
Different perspectives
• Criticism of the scientific method:
– large-scale statistical research tends to lump
everything together
– it is conducted in environments that are often
remote from the world of or the concerns of
accountants
qualitative approach (case study and interview)

17
Different perspectives
• Naturalistic approach:
– implies that there are no preconceived
assumptions or theories
– focuses on firm-specific real-world problems

18
Different perspectives
• Alternative ways of looking at the world:

CATEGORY ASSUMPTION
1. Reality as a concrete structure
2. Reality as a concrete process
3. Reality as a contextual field of information
4. Reality as a symbolic discourse
5. Reality as a social construction
6. Reality as projection of human imagination

19
Different perspectives
• For categories 1 – 3 it is more appropriate to
use the scientific approach

• For categories 4-6 the naturalistic approach is

more appropriate

20
Different perspectives

21
Scientific approach applied
to accounting
Misconceptions of purpose
• Make scientists out of accounting practitioners
• Researchers = practitioners
• The desire for ‘absolute truth’

22
Scientific approach applied
to accounting
• The scientific method does not claim to
provide ‘truth’
• It attempts to provide persuasive evidence
which may describe, explain or predict

23
Issues for auditing theory
construction
• Auditing is a verification process that is
applied to the accounting inputs and
processes
kingstone cotton's mills case (1896) perusahaan tekstil terjadi tuntutan hukum dari
pemegang saham kpd auditor. auditor gagal menangkap fraud, audit tidak bersalah
karena bukan tugas auditor buat menemukan fraud, auditor hanya menilai kewajaran
laporan keuangan
auditor is a watchdog not a bloodhound

24
Issues for auditing theory
construction
• Auditors provide an opinion on
– whether the financial statements accord with the
applicable reporting framework
– whether the statements give a true and fair view

25
Issues for auditing theory
construction
• The normative era of accounting coincided
with a normative approach to auditing theory
• The positive ere of accounting has led to a
positive approach to auditing theory

26
Summary
• Many different approaches to theory
formulation in accounting
• Evolution of accounting theory
– positive v. normative
– scientific v. naturalistic

27
Key terms and concepts
• Descriptive pragmatic approach
• Psychological pragmatic approach
• Syntactic and semantic theories
• Historical cost accounting
• Normative theories
• Positive theories
• Scientific approach to theory
• Naturalistic approach to theory
• Auditing theory

28
29
 GODFREY
HODGSON
HOLMES
TARCA

CHAPTER 5
MEASUREMENT THEORY
Importance of measurement
Campbell:
The assignment of numerals to represent
properties of material systems other than
numbers

Assignment of numerals to objects or events

according to rules. (Stevens)

2
Importance of measurement
• Involves linking the formal number system to
some property of objects or events by means
of semantic rules
– e.g. semantic rules in accounting are represented
by transactions
• In accounting we measure profit by:
– first assigning a value to capital
– then calculating profit as the change in capital
over the period
3
Scales
• Every measurement is made on a scale
• Created when a semantic rule is used to relate
the mathematical statement to objects or
events
• The scale shows what information the
numbers represent

4
Nominal scale
• In this scale, numbers used only as labels
• Numbers represent classification
• e.g. numbering footballers
• e.g. the classification of assets and liabilities
into different classes

5
Ordinal scale
• In this scale, rank orders objects with respect
to a given property
– e.g. tallest to shortest person
– e.g. investment alternatives that are ranked 1, 2, 3
according to the size of their net present values
• Intervals between the numbers are not
necessarily equal

6
Interval scale
• In this scale, rank orders objects with respect
to a given property
• The distance between each interval is equal
and known
• An arbitrarily selected zero point exists on the
scale
– e.g. celsius temperature scale
– e.g. standard cost accounting

7
Ratio scale
• In this scale, rank orders objects with respect
to a given property
• Intervals between objects are known and
equal
• A unique origin exists
– e.g. measurement of length
– e.g. use of dollars to measure assets and liabilities

8
Permissible operations of
scales
• Invariance of a scale means that the
measurement system will provide the same
general form of the variables, and the decision
maker will make the same decisions
• This is not the case in accounting – there is
more than one accounting system
• The information they provide will differ and
different decisions will be made

9
Permissible operations of
scales
• Nominal and ordinal scales
– no arithmetic operations
• Interval scale
– addition and subtraction
• Ratio scale
– all arithmetic operations

10
Types of measurement
• There must be a rule to assign numbers before
there can be measurement
• The formulation of the rules gives rise to a
scale
• Measurement can be made only on a scale

11
Fundamental measurements
• Numbers are assigned by reference to natural
laws
• Fundamental properties are additive
– e.g. length, number and volume

• In accounting there is considerable debate

over the nature of fundamental value

12
Derived measurements
• Is one that depends on the measurement of
two or more other quantities
• Depends on known relationships to
fundamental properties
– e.g. the measurement of density depends on the
measurement of both mass and volume
– e.g. the measurement of profit depends on the
measurement of both income and expenses

13
Fiat measurements
• Typical in social sciences including accounting
• Based on arbitrary definitions - e.g. of profit
• Numerous ways in which scales can be
constructed
• May lead to poor levels of confidence in the
scale – e.g. there are hundreds of ways to
measure profit

14
Reliability and accuracy
• No measurement is free of error except
counting
– e.g. we can count the chairs in a room and be
exactly correct

15
Sources of error
The sources of error include the following:
• Measurement operations stated imprecisely
• Measurer
• Instrument
• Environment
• Attribute unclear
• Risk and uncertainty
We need to establish limits of acceptable error

16
Reliable measurement
• What is reliable measurement?
– proven consistency
– repeatable or reproducible
– precision

• Reliability incorporates two aspects

– accuracy and certainty of measurement
– representative faithfulness

17
Accurate measurement
• Consistency of results, precision and reliability
do not necessarily lead to accuracy
• Accuracy has to do with how close the
measurement is to the ‘true value’ of the
attribute measure - representation
• ‘True value’ may not be known
– e.g. in accounting accuracy relates to the
pragmatic notion of usefulness

18
Accurate measurement
• Many accounting measurements are on a ratio
scale
• This is the most informative scale
• Weakest theoretical foundation as they are
fiat measurements

19
Measurement in accounting
• Two fundamental measures
– capital & profit
• Capital and profit can be defined & derived in
various ways
• Concepts of capital & profit have changed
over time
– number of concepts of fundamental measurement

20
Measurement in accounting
• Two notable developments in international
standards (2005, IASB)
– profit measurement and revenue recognition
should be linked to timely recognition
– the fair value approach should be adopted as the
working measurement principle

At no stage has the principle of capital maintenance

been explicitly discussed

21
Measurement issues for
auditors
• The focus of profit measurement has shifted
from matching revenues and expenses to
assessing the changes in the fair value of net
assets
– e.g. immediate recognition of impairment losses

22
Measurement issues for
auditors
• Auditors must determine whether
management has made appropriate and
reasonable valuations
– e.g. at least 12 methods of valuing intangibles

23
Measurement issues for
auditors
• It is possible for several different but
reasonable measurements and impairment
losses to be recognised by management
• These would all be acceptable to an auditor if
management have
– applied the valuation models correctly
– used appropriate data
– made appropriate assumptions
– acted in a consistent manner
24
Summary
• Measurement involves the formal linking of numbers to some property or
event via semantic rules
• Rules used to assign numbers are determined according to four scales
• Invariance of a scale means the measurement system will provide the
same general form of the variables and the decision maker will make the
same decisions
• There are three different types of measurement
• Reliability refers to consistency, and accuracy refers to the representation
of a fundamental value
• The two fundamental measures in accounting are capital and profit and
they are both derived measures
• The existence of alternative valuation methods creates auditing issues

25
Key terms and concepts
• Measurement
• Nominal scale
• Ordinal scale
• Interval scale
• Ratio scale
• Invariance of a scale
• Fundamental measurements
• Derived measurements
• Fiat measurements
• Reliability in measurement
• Accuracy in measurement
• Capital and profit as derived measurements
• Appropriate measurement in an auditing context

26
27
 GODFREY
HODGSON
HOLMES
TARCA

CHAPTER 6
ACCOUNTING MEASUREMENT
SYSTEMS
Three main income and capital
measurement systems
US adopting
• The Historical cost accounting system emerged after
the 1929 Wall Street collapse
before 1929: some kind fair value accounting
• In the 1960s several alternatives were developed
develop by paton and littleton who are lecturer and his student
– current cost accounting
• financial capital maintenance (the purchasing power of
the financial capital)
• physical capital maintenance (the physical ability to
produce goods and services)
– exit price accounting

2
Historical cost accounting
• Separation of ownership and control
– information asymmetry
• Most critical objective of accounting
responsibility
is opposite
decision usefulness

accountability - stewardship (conservatism)

record the changes of asset an report it to the owner

• The income statement is paramount

– transaction based
– revenue recognition
– matching
expired = expense
determine value of revenue and expense not expired = asset
asset x expense
– profit measurement
laporan utama di amerika laporan L/R
laporan utama di eropa laporan neraca 3
Arguments for Historical cost
accounting
• Relevant in making economic decisions
• Based on actual, not merely possible, transactions
• Data have been found to be useful
• The best understood concept of profit
• Must guard data against internal modifications
revaluation is fraud of stewardship
• Profit based on alternatives may not be useful
• Market prices can be supplementary data
• Insufficient evidence to reject it
amerika do not agree with goodwill impairment at the beginning
goodwill amortization = 40 years
goodwill can be impaired

4
 Criticisms: Objective of
accounting
instrumental: helpful

• Stewardship is only a secondary objective

• Providing the decision making needs of users
is the primary objective and Historical cost
data is a failure
responsibility relate to past value
in this regard
• Historical cost information is
– not objective
– can be easily manipulated
– does not maintain the entity’s capital

5
Criticisms: Information for
decision making
• Is irrelevant when evaluating past decisions
• After acquisition, Historical cost data is
fictional
• Connected to inconsequential measures of
capital
• Produces only flawed measures of profit

6
 Criticisms: Basis of Historical
cost
not worth to used in acctg standard
• The going concern assumption
propose by HCA supporter to reject revaluation
does not justify
the use of Historical cost accounting
– many businesses fail
– no businesses continue indefinitely doing only or
at all what they are presently doing
– all businesses, except those presently existing,
cease operations
• All businesses have alternatives and choices
going forward
if FVA still consistent, going concern should not be exist

7
Criticisms: Matching
• Is a practical impossibility
• Is totally arbitrary
• The balance sheet is important
• Resulted in non-assets being classified as
assets
• Leads to volatility and smoothing

8
 Criticisms: Notions of investor
needs
bias should avoid, neutrality needed
• Distorts and conceals
• Its goals are ill-conceived
• Creative accounting is commonplace
• Incentives to produce misleading data
• Today, investors pay little attention to
Historical cost accounting data about a firm
– Main characteristic of Historical cost (revenue-
stand with traditional theory/principle
expense view) is conservatism
kalau pada pengadilan
seseorang boleh menentukan loss jika merasa akan kalah meski hakim belum memutuskan
seseorang tidak boleh menentukan gain jika merasa akan menang jika hakim belum memutuskan
9
Objective of current cost
accounting
design by edward and bell on 1961
• CCA values assets at their current standard
market buying price and
of FV
profit is determined using matching expense allocations based
on the current cost to buy
• Profit is more precisely defined as the change in capital over
the accounting period
• Managers are better able to evaluate their past decisions and
better use the firm’s resources to maximise future profits
• Shareholders, investors and others are able to make better
allocations of their resources

10
Objective of current cost
accounting
• Managers will examine
– the current operating profit
sales of inventory
• the excess of the current value of the output sold over
the current cost of the related inputs
– realisable cost savings revsine
increase of market price
• increases in the current cost of assets held
– holding gains/losses
– realised/unrealised
company
have enough
money to
buy an asset
when the
market price
is high
11
Financial capital versus physical
capital
• Profit is the change in capital
• Holding gains are included in profit under
financial capital recognize in net Income
• Holding gains are excluded from profit under
physical capital similar to IFRS
recognized in current cost reserved

12
Arguments for and against
current cost
• Recognition principle
– violates the conservatism principle - but actual
phenomena
– are holding gains profits or revaluation adjustments?
• Objectivity of current cost
– lacks objectivity
• Technological change
– appears to ignore technological advances

13
More specific criticisms
• Advocates of Historical cost accounting
– violates the realisation principle; subjectivity of increase
• Comparisons of the results with Historical cost
CCA considers the possibility the existence of specialized asset
– industry variations which asset not available in current market

• Advocates of exit price

– the logical expression of opportunity cost is the current selling price
– the arbitrary allocation of expenses is still a problem issue
– additivity problem exists there is no available current market buying price which is AR and
goodwill, they have the other technique (adding different unit)
– number of reasons for an asset having value to a business
– irrelevant to most business decisions
– physical capital concept fraught with weaknesses
unavailable asset
exist in historical cost accounting reproduction method (assume that if we want construct the
CCA: precious metal asset, how much money should be prepared) and index 14
method (inflation)
Exit price accounting
• Exit price = selling price = fair market value
other fair value accounting (CCA)

• Has two major departures penyimpangan

from Historical cost
accounting:
– the values of non-monetary assets are selling
prices and any changes are included in profit as
unrealised gains
– changes in the general purchasing power of
money affect both financial capital and profits

15
Exit price accounting
• Represents clean surplus accounting
income statement links
opening B/S and closing
B/S, no need adjustment

• The income statement explains all of the

differences existing between the opening and
closing balance sheets

16
Objective of accounting
• Objective = data for adaptive decision making
• The assumption is that the business world is dynamic and
business must adapt to survive
darwin theory
• Firms and those associated with them go into markets to take
advantage of opportunities as they arise
• The ability to engage
ikut serta
in market transactions is revealed by net
financial position (net current market value)
• Ultimately
pada akhirnya
all accounting information users are interested in
cash and cash equivalent values
• In the final analysis, the economic survival and performance
of a firm depends on theseberapa amount of cash it can command
banyak uang yang dihasilkan
chambers

asset should be revalued under current market price 17

Objective of accounting
Chambers:
exit price accounting

…the single financial property which is uniformly

relevant at a point of time for all possible future
actions in markets is the market selling price or
realisable price of any or all goods held.

18
Arguments for exit price
accounting
• Provides useful information
• Provides relevant and reliable information
– there is one way to determine profit that is superior to all
opposite: inferior
others
• profit is the difference between capital at two points in time
exclusive of additional investments by and distributions to owners
– to be relevant, information must be useful in the decision
models of accounting data users
– the present selling price is the only item of information
that is relevant to all decisions

19
Arguments for exit price
accounting
• Additivity
– if we use different measurement systems then no
practical or commercial meaning can be deduced
disimpulkan
from the aggregate
– even if we use Historical cost accounting as the
sole measurement system, the jumble of Historical
satu-satunya campur aduk
costs on different dates means we cannot put any
meaning on the calculation of net assets or profit
– exit price accounting does not have this problem
active market: bank (purchaser) goodwill is not an asset in exit accounting
not recognized goodwill as an asset
included in asset since around 1964 20
goodwill = excess of buying asset
Arguments for exit price
accounting
• Allocation
– the nofinancial statements are allocation free
depreciation expense under exit price

• Reality
– references are to the real-world in that every
disclosed amount refers to a present, actual
market price
– exchangeability

21
Arguments for exit price
accounting
• Objectivity
– market prices are relatively more objective than
most believe
• A measure of risk
– can indicate the financial risk of purchasing an
asset

22
Arguments against exit price
accounting
• Profit concept Weston: exit price accounting provides relevant information only if the
company plans to liquidate the assets

– does not provide a meaningful concept of profit

– the critical event does not relate to the performance of the
firm
– does not produce realistic financial reports
• Additivity
– violates the principle of exclusion of anticipatory
calculation that it claims to reject

23
Arguments against exit price
accounting
• The valuation of liabilities
– valuing liabilities at face value and not market value is
internally inconsistent
• Current cost or exit price
– at what stage of the operating cycle should exit price
dominate asset valuation?

24
Value in use versus value in
exchange
• Similar when markets are liquid and efficient
• There are factors common to both
– market prices are more relevant for decision making
– additivity and reliability are prime requirements
– Historical cost accounting has too many defects
• They are complements not substitutes
• Value in use assesses long term survival (solvency),
value in exchange assesses the ability to adapt in the
short term (liquidity)
recoverable amount = higher from value in use and value in exchange
1723
25
A global perspective and international
financial reporting standards
• Current cost in the United States
– an experiment but abandoned
diabaikan
(1976 -1984)
• Current cost in the United Kingdom
– implemented but abandoned (1975 – 1985)
• Current cost in Australia
– recommended but abandoned (1976 – 1980’s)

26
International accounting
standards and current costs
• IASB/FASB have agreed that fair value is the
best measurement basis (2004)
– the amount for which an asset could be
exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length
transaction

27
International accounting
standards and current costs
• Historical cost accounting still generally applied
• Distinct movement toward current value systems
• IASB moving toward exit prices (2004)
• But still a mixed valuation approach
• Fair value means – current market entry price,
current market selling price, Historicalal cost and
discounted future cash flows
There is no mention
mentioning
in the standards of capital
maintenance concepts
28
How is Historical cost applied
• Subjectivity is involved in the determination of
the acquisition cost of an item
• Thereafter the measurements are even more
subjective

29
Historicalal cost under attack
• The era of Historical cost accounting has
‘ended’
– it produces irrelevant, unreliable, non-comparable
tidak dapat diandalkan
and non-understandable data

30
A mixed measurement system
and international standards
• Market values - exit prices - are implied in
the ‘fair value’ approach in international
financial reporting standards
• A lack of a theoretical concept of valuation,
capital maintenance and profit measure, has
resulted in a still mixed measurement system
and a lack of consistency

31
Issues for auditors
• The mixed measurement model creates
misstatement so that auditors struggle
berjuang
to
meet one of their primary objectives
– determining whether the financial statements
present a true and fair view
cotter and richardson
external appraisers are better at valuing plant and equipment than directors

32
Summary
• Overview of three main measurement systems
• The Historical cost system and arguments for and
against
• Current cost accounting
• Financial capital versus physical capital
• Exit price accounting
• Value in use and value in exchange
• Global initiatives and fair value accounting
• Issues for auditors
33
Key terms and concepts
• Historical cost valuation
• Current cost valuation
• Financial capital and physical capital
• Recognition principle
• Exit price valuation
• Adaptive behaviour
• Useful information
• Relevant and reliable information
• Additivity
• Allocation
• Reality
• Objectivity
• A measure of risk
• Value in use and value in exchange
34
35
 GODFREY
HODGSON
HOLMES
TARCA

CHAPTER 12
CAPITAL MARKET RESEARCH
Philosophy of positive
accounting theory
• Seeks to explain and predict accounting practice
• Seeks to explain how and why capital markets react
empirical:
to accounting reports - uses hypothesis
- uses sample

• Does so by observing practice – empirical evidence

- does hypothesis testing by statistical method

• Explanation means providing reasons for observed

practice
– e.g. why do firms continue to use historic cost
• Prediction means that the theory predicts
unobserved phenomena
proxy by new variables
• Has an economic focus

2
Philosophy of positive
accounting theory
• Positive theory is based on assumptions about
the behaviour of individuals
– assumes investors and financial accounting users
and preparers are rational utility maximisers
– rejects arguments based on anecdotal evidence
and naïve acceptance of political or academic
prescriptions self-interested
anecdotal evidence: don't satisfied requirement of research sample of research less than 30
samples in a year

3
Strengths of positive theory
• In order to prescribe an appropriate
accounting policy, it is necessary to know how
the world actually operates
• We can then normatively prescribe accounting
practice

4
Strengths of positive theory
• Positive hypotheses are capable of falsification by
empirical research
• Provides an understanding of how the world works
rather than prescribing how it should work
– obtain an understanding about how value-relevant
accounting numbers are for share prices
– attempt to understand the connection between
accounting information, managers, firms and markets, and
analyse those relationships

5
Dissatisfaction with prescriptive
standards
• Normative standards
based on argument about norms and best practice (asset measurement system
cannot determine which argument is the best, no standard to accept (subjective value judgement)
• Prescriptions not based upon identified,
empirical observations or methods
• Theories are not falsifiable
• Do not explain and predict accounting practice
• Do not assess existing accounting practices
devil's advocate:

6
Scope of positive accounting
theory
Two stages of development
1. Capital market research – into the impact of
accounting and the behaviour of capital
markets
– did not explain accounting practice
– investigated connection between the accounting
data and share prices/returns
– efficient markets hypothesis (EMH)
– capital asset pricing model
the influence profit number to the share price (sebanding (=))
7
Scope of positive accounting
theory
2. Sought to
mencoba untuk
explaining and predict accounting
practices across firms
– ex post opportunism agency theory: was born on
second stage of accounting
theory 1970; behavior to act
– ex ante efficient contracting opportunistics
statement proposed by agency
theory (principal and agent)
originally from agency theory
principal work on contract
principal will limit the contract of agent
agent will sign the contract
limit opportunistics act of agent
contract: right obligation
generating firm value rather than oppotunistics
earnings management (Patricia
de Co, Johns, Kotari, Slash Nick)

8
Capital market research and the
efficient markets hypothesis
Eugene F Fama: Journal of finance (1970)
• Two types of capital markets research
– the impact of the release of accounting
information on share returns
– the effects of changes in accounting policy on
share prices
the speed of adjustment of the market to the new information
• Most research in these areas relies upon the
bergantung pada
EMH

9
Capital market research and the
efficient markets hypothesis
Efficient market: one ‘in which prices fully
reflect available information’
3 Forms of Information Efficiency
1. Weak form investor only need past information to sell or buy the shares
(past price information)
2. Semi-strong form public information: financial statement
(publicly available information)
3. Strong form past, public and private are needed
information from insider
(all information – public and private)
10
Capital market research and the
efficient markets hypothesis
• Capital markets research in accounting
assumes semi-strong form efficiency
menerima/ menanggung strong: only on hypothetical condition

• Financial statements and other disclosures

form part of the information set that is
publicly available

11
Capital market research and the
efficient markets hypothesis
• Based on dubious
meragukan
assumptions
– there are no transaction costs in trading securities
– information is available cost-free to all market
participants
– there is agreement on the implications of current
information for the current price and distributions
of future prices

12
Capital market research and the
efficient markets hypothesis
Market efficiency does not assume, mean or
imply
– that every, or any, investor has knowledge of all
information
– that all financial information has been correctly
presented or interpreted by individual investors
– that managers make the best decisions
– that investors can predict the future precisely

13
Capital market research and the
efficient markets hypothesis
• Market efficiency simply means that share
prices reflect the aggregate impact of all
relevant information, and do so in an unbiased
and rapid manner

14
Market model
Market Model:
• Derives fromcalculate
CAPM abnormal return

• Used to estimate abnormal returns on shares

when profits announced
• Share prices and returns are affected by both
market-wide and firm-specific events
• Market-wide events must first be controlled
for

15
Market model

16
Market model
• Based on dubious assumptions
– investors are risk averse
– returns are normally distributed and investors
select their portfolios on this basis
– investors have homogeneous expectations
– markets are complete
• all participants are price takers
• there are no transaction costs
• there are no taxes
• there are rational expectations by investors
17
Impact of accounting profits
announcements on share prices
Ball & Brown (1968):
influence profit to the share price
Journal of Accounting research (1968)

• Seminal work in positive accounting and

finance literature
• Tested the usefulness of historical cost profit
figure to investment decisions
• If the historical cost profit figure is useful the
share price will react

18
 Impact of accounting profits
announcements on share prices
favourable
announcements
were cases in
which reported
profits were
greater than
predicted by a announces net income of gain or loss (positive influence)
naive mechanical investor could anticipate income number of company,
forecasing model therefore share price of company will reacting 12 months the
(greater than last statement of income
year's profit)
. about how investor can anticipate the earnings
unfavourable announcement or release income number to the public
announcement *before 12 months
were cases in
which reported
profits were less
than last year

19
Impact of accounting profits
announcements on share prices
Ball & Brown (1968) Results:
• Most of the information contained in the
earnings announcement (85-90%) was
anticipated by investors
• Evidence of information content at time of
historical cost earnings announcement

20
Impact of accounting profits
announcements on share prices
• Magnitude bigger net income bigger share price
• Information asymmetry and firm size
competitors
• Magnitude of profit releases from other firms
•Beaver,
Volatility fluctuation, more volatile net income more volatile share price
Wright, Clark (1979)
lower income lower share price
Brown (1970) conducted australian as a sample
the most drastic changes of share price happened in a month of earnings announcement
Freeman (1987) announcement of small company, large company arise the earnings
large company, there are many sources beside F/S like TV, website, magazine
whether small company only have the source of F/S
increase share price followed by earnings management but not rapidly changes
Foster (1981) when competitors announce they net income then the share price of the company will
affected, share price will increase, this happen because of investor do not only see company as a
single unit but also look at company in same industry as a whole 21
 Impact of accounting profits
announcements on share prices
• Profit release event studies showed that accounting
profit does capture a portion of the information set
that is reflected in security returns
• The evidence also shows that competing sources of
information pre-empted the information in annual
cost by profits by about 70-85 per cent

• Annual accounting figures are not timely

• Led to an another approach – association studies
focus on relationship between accounting measures and share price

22
Association studies and earnings
response coefficients
• The objective is to test the impact of
accounting variables and a wider information
set that is reflected in securities returns over a
longer period
– earnings response coefficient (ERC)
Modigliani-Miller (1963)
developed after balls and brown
strength correlation with profits and share price

23
Association studies and earnings
response coefficients
Factors which can affect the association
between profits and share prices:
– risk and uncertainty
– audit quality Dopuch and Simunic (1982), act as moderating variable, company who audited
by non big 6 , relationship between profit and share price will decreased
– firm size
– industry
– interest rates Jeter and Cheney (1992), act as moderating variable between profit and
– financial leverage share price, increase of financial leverage, profit influence the share price
will be more less, large income large leverage means lower increase in
– firm growth share price, higher leverage higher burden of company
– permanent and temporary profits
– non-linear modeling
– disaggregating profits
– cash flows
– balance sheet and balance sheet components
24
Methodological issues
• To argue that the results of the research are
supportive of EMH and that the form of
accounting is not that important for valuation
purposes derives, in part, from the fact that
the EMH is assumed to be descriptively valid
• This assumption may not be warranted
• There is increasing evidence that markets can
be fooled by accounting numbers
the more reason research more than profit and share price it can be earnings management

25
Methodological issues
• No attempt to discriminate EMH from
competing hypothesis
– mechanistic hypothesis naive investors
Sloan (1996) income react increasing accruals

• managers use accounting to deliberately mislead the

share market
• market participants can be fooled by accounting number
– no-effects hypothesis
• the market ignores accounting changes that have no
cash flow consequences
investors cannot fooled by accounting number, because they have reasonable knowledge
of accounting and finance (sophisticated investors)

26
Trading strategies
Ou and Penman (1981/1982), the information
• Post-announcement drift have range in 12 months decision make, it is
have a good insight for investors

• Winners/losers and over-confidence

Debondt and Thaler, todays winner in 3 years time will become a winner and vice versa

• Mechanistic or behavioural effect

– no-effects hypothesis
– cosmetic accounting

27
Trading strategies
Two viewpoints ofbigaccounting manipulation
caused of earnings management and industry regulations (by
bobtain government subsidies
equity offerings management compensation:
Marquadt and Wledman (2004) get higher bonus, or get
increasing the sales increasing the AR promotion

debt covenants: avoid breaching debt

covenant and being considered default fraud is the most extreme
positive: should be done by company, variant of earnings management
as long paid the payable in not in full,
the sales should be above 500m
negative: should not be done by
company, as loan to bank, ROA of
company cannot below 2%

signaling: attract the interest of 28

investors
Trading strategies
Detecting the quality and probability of
accounting management

29
Issues for auditors
• There is some evidence of an association
between auditing and the cost of capital
Miller and Maxwell (2004), company audited by big 4 will charged interest by bank
• Lower cost when firms voluntarily purchase an
audit or purchase a high quality audit
– investors value the deep resources of a large
auditor
– investors value the quality assurance regarding
accounting data provided by the auditor

30
Summary
• Philosophical objective of positive accounting
theory is to explain and predict current
accounting practice

• Positive theory developed in two stages

– capital market research
– contracting theory
• Significant issues relating to the validity of
capital market research
31
Key terms and concepts
• Prescriptive standards
• Positive accounting theory
• Capital market research
• EMH
• CAPM
• CAR
• ERC
• Information asymmetry
• Market efficiency
• Impact of behaviour
• Mechanistic hypothesis
• No-effects hypothesis

32
33
1. Accounting's contribution to Great Wall Street Crash came in the form of: capitalization
2. The effect of capitalization is as follows: current year revenue will increase; future
revenue will decrease
3. The following theory came from positive accounting era, except: stewardship theory
4. Deductive logic means: the thinking process to find the alternative for the current
accounting practice
5. The following gave the definition of theory and accounting theory: hendriksen
6. The keyword of accounting theory definition is: logical reasoning
7. Below is a characteristic of a good theory: it explains why the present accounting
practice is just like now
8. Accounting is more (modern) than politics
9. Economics is more (traditional) than engineering
10. The following statement is true regarding Luca Paccioli's treatise: it describes the
accounting practices in his era
11. The following statement is not discussed in Luca Paccioli's treatise: goodwill accounting
12. The sentence below which means that accounting development happens whenever
there is a problem to solve: accounting is developed in response to practical needs
13. Luca Paccioli's treatise is titled "Summa" because: it can be equated to an encyclopedia
14. The following concept means the accounting development did not happen in a
systematic manner. Rather, it progressed whenever a problem existed: ad hoc approach
15. The following is expected to solve inconsistencies issues in accounting: conceptual
framework
16. Accounting to Goldberg: no accounting theory exists from 14-19th century
17. Pragmatic period is also called general scientific period, because: it was based on real
world phenomena
18. The focus of pragmatic period is: to explain the accounting practice conducted by
accountants
19. The focus of normative period is: to search for alternatives of accounting practice
20. The focus of positive period is: to explain and predict accounting practice
21. The main criticism against normative accounting period is: it does not use hypothesis
testing method in accounting research
22. The following had a significant role in normative accounting period: value judgment
23. If a manager's bonus depends on the income he produces, then: he will use accounting
method that increase net income
24. According to positive accounting theory, the main human's trait is: wealth maximizers
25. In the case of enron (2001) and financial and banking crisis (2008): auditor colluded with
the companies to present misleading financial statements
26. The following name is often associated with Luca Paccioli: Leonardo Da Vinci
27. The prepare of US GAAP is: FASB
28. The prepare of IFRS is: IASB
29. Two groups that dominated normative period were: conceptual framework proponents
and critics of historical cost accounting
30. The weakness of positive accounting theory is: relies heavily on agency theory
31. Which one is correct according to steven (1951): when a model represent a reality pretty
well, we can discover the truth by investigating the numbers in the model
32. When a semantic rule is applied to link a mathematical statement to an object: scale will
be created
33. Torgerson (1958) refused nominal scale in a research because: measurement refers to
the properties of objects, but nominal scale refers to the object itself
34. Scale that uses numbers as rankings: ordinal scale
35. According to Mattesich (1964), variance in budgeting belongs to: interval scale
36. In the scale below, we can not know how far is the distance between each number:
ordinal scale
37. According to researchers, the scale below cannot have 0 as a natural point, but
torgerson (1958) stated it could: ordinal scale
38. The scale below indicates ranking and information about the distance between each
number: interval scale
39. Temperature is the example of: interval scale
40. Firm size is proxied by natural logarithm of total assets. what scale is being used: ratio
scale
41. Net income measurement belongs to: fiat and derived measurement
42. Accounts receivable measurement belongs to: fiat and fundamental measurement
43. Gross profit margin measurement belongs to: fiat and derived measurement
44. IQ (intelligence quotient) measurement belongs to: fiat and fundamental measurement
45. TOEFL score belongs to: fiat and derived measurement
46. Torgerson (1958)'s criticism against that measurement: there are many ways to measure
a specific things
47. A researcher makes a mistake in measuring firm value variable. She defines it as market
price of shares times book value of shares (it should be market price of shares divided
by book value of shares). In this case, the source of the error is: measurement
operations stated imprecisely
48. A researcher makes a mistake in calculating the present value of an asset. The possible
source of error is: measurement operations and imprecisely
49. An accountant conducts earnings management. The possible source of measurement
error is: risk and uncertainty
50. An auditor conducts a mistake when doing cross-footing due to fatigue. The possible
source of measurement error is: environment nonrandom
51. A researcher uses TOEFL, as the proxy for student's intelligence. The source of
measurement error is: attribute unclear
52. Reliability in accounting means: consistency and precision in measurement
53. The term "accuracy" has a tight connection to the following concept: true value
54. Economic structure that dominated the first 1000 years AD: fiefdom
55. Measurement method applied during the first 1000 years: calculating
56. Who acted as principal during the first 1000 years: landed gentry
57. Who acted as agent during the first 1000 years: steward
58. The term below was born during first 1000 years: accounting
59. The first focus in accounting measurement history: assets measurement
60. The first principle in accounting related to measurement: decision usefulness
61. The word "audit" originates from the verb: to listen
62. During the crusade, profit was measured as: the change in capital
63. Historical cost accounting is called juga revenue-expense view because: assets and
liabilities values are changed according to market price so Statement of Financial
Position is more important
64. One of the activities in conservatism principle: Determine which assets that has expired
and should be exchanged
65. Current cost accounting will be divided into 2 versions: financial capital maintenance and
physical capital maintenance
66. What is the effect of Fair Value Accounting (hal 148)?
67. Companies sell their assets
68. Profit in historical cost accounting shows: the past performance for a company
69. One of the difficulties in auditing intangible assets: Auditors still have disagreements
about how to audit intangible assets
70. Fair value accounting approach is also called: capital-profit view
71. The main failure of historical cost accounting according to the critics: It fails to help users
of financial statements in the decision making process
72. The profit measurement and revenue recognition must be timely, it means: Measurement
of assets and liabilities focus on the change in value of assets and liabilities over time
73. If recoverable amount is less than the carrying value of the asset: Impairment should be
recognized
74. The bigger the company's assets,...: The better the manager is
75. Below is the correct statement regarding fair value accounting: financial assets are
always valued according to market price
76. The correct statement about how IFRS views conservatism: IFRS supports conservatism
but also recommends neutrality
77. According to Sprouse (1973): Statement of Income is the most important financial
statement and transactions should be analyzed according to their effects on Statement
of Income's components
78. Which is true regarding IAS 41 Agriculture: There is no impairment for agricultural
product
79. Conservatism principle means the following: acceleration of assets recognition
80. The following account is the example of historical cost accounting inconsistency:
ordinary shares
81. How historical cost accounting views fixed assets: Fixed assets should be checked for
impairment
82. Primary financial statement in historical cost accounting: Statement of Income
83. Which is true about accounting measurement after 2005: Net income is the main
account in financial statement
84. What caused the decrease in the popularity of historical cost accounting: Research that
proved that Statement of Financial Position is more important than Statement of Income
85. The objective of Accounting according to historical cost accounting is: The stewardship
function of managers who are entrusted to manage the assets
86. The following event marked the raise of historical cost accounting: Great Wall Street
Collapse
87. Conservatism principle means the following: acceleration of assets recognition
88. deceleration of liabilities recognition
89. In auditing fixed assets impairment: Auditor must determine whether management has
chosen the appropriate method of valuation for impairment
90. The statement below indicates that revaluation is forbidden under historical cost
accounting: Current price is the working principle in accounting
91. Who first wrote about the concept of capital and profit: Paton and Littleton (1940)
92. According to critics, profit number in historical cost accounting is not: prospective
93. The reason US GAAP adopts historical cost accounting: The rise of stock exchange
94. Why IASB thinks the world needs an international accounting standard? Because
business has become global
95. Two kinds of profit in Current Cost Accounting: Realisable cost savings and Current
Operating Profit
96. In Current Cost Accounting, profit that is expected from the major activities of the
company is: Current Operating Profit
97. Why is it called "Realisable Cost Savings": Because the company purchased the asset
when it was more expensive
98. In physical capital maintenance: Holding gains are not included in net income
99. In financial capital maintenance: Holding gains are included in net income
100. Which statement is correct: IFRS is pretty similar to physical capital maintenance
101. Additivity problem means: Assets with different valuations are not separated into
different groups
102. When a company owns a machine that is no longer exists in the market: The
revaluation value for the machine will decrease due to older machine being inefficient
103. Why did current cost accounting use buying price: Because historical cost
accounting ignores technological change
104. Current cost accounting is said to have violated conservatism principle because:
Gain is recognized although the asset is not yet sold
105. Which one is correct: In physical capital maintenance, there is a Current Cost Reserve
Account in the equity section at Statement of Financial Position
106. The recognition of gain for precious metal in Current Cost Accounting: Gain is
recognized if there is an increase in value of precious metal above inflation rate
107. According to the advocates of exit price accounting: Current cost accounting's
weakness is that there is still expense that is based on matching concept
108. Researcher that explains the concept of realizable cost savings: Revsine (1973)
109. In current cost accounting, revaluation against fixed assets that have no market
value is conducted through: reproduction and the use of index number
110. Clean surplus accounting means: Changes in balance sheet are linked to profit
without direct recognition in equity
111. The philosophy behind exit price accounting is: collaboration and fairness
112. Chambers (1966) stated that: the economic survival and performance of a firm
depends on the amount of cash it can command
113. The most compelling argument for exit price accounting is: decision usefulness for
decision making
114. The differences between exit price accounting and historical cost accounting:
adaptability objective; additivity; neutrality principle
115. Additivity shows: uniformity in valuation of all elements in Balance Sheet and Income
Statement
116. Profit in exit price accounting shows: the amount of change in real purchasing power
117. The following is true about Goodwill in Exit Price Accounting: Goodwill is not an
asset because it cannot be exchanged or traded
118. According to Weston (1973): Exit price accounting provides relevant information only
if the company plans to liquidate the assets
119. Gross profit number in exit price accounting: is included in equity section of Balance
Sheet
120. Chambers (1970) was criticized for his inconsistency because: he stated that
liabilities should not be valued according to selling price, but valued at face value
121. According to Chambers (1966), a company should sell asset if: its exit price is less
than its value in use
122. The following practice violates acquisition cost principle: exclusion of utilities
expense in the inventory cost
123. Historical cost is criticized for inconsistency because: It states that market price is
equal in quality to historical cost
124. According to Cotter and Richardson (2002): External appraisers are better at valuing
plant and equipment than directors of the company
125. An investor gains return after conducting fundamental analysis against some shares.
an event like this happens in capital market with: semi-strongly efficient
126. The market price formed in a capital market is considered as a result of a "fair
game". This means: capital market reaction against new information reflects the
economic condition of the country
127. The first stage of positive accounting theory development is: research were based on
capital market data such as the relation between the income and stock price
128. Which research topic is not in line with positive accounting: the disadvantage of
using Last-In First Out method for inventory
129. Accounting that has prescriptive property means: it explains the working reality of the
world
130. According to Popper, falsifiable means: hypothesis testing should be prescriptive
131. The implication of Ball and Brown’s research for accounting is: statement of income
is inferior to earnings announcement
132. Ex ante means: contract is set before opportunistic behavior exists
133. Which research topic is in line with positive accounting: financial distress among
manufacturing companies in Indonesian Stock Exchange
134. Article written by Fama was published in: Journal of finance, 1970
135. An investor received a rumor that United States is going to attack Iran, therefore he
sells shares of Middle East Companies. An event like this happens in capital market
with: weakly efficient
136. The proponent of positive accounting theory are considered: “devil’s advocate”
because: they criticized heavily historical cost and current cost accounting
137. According to Fama, market efficiency denotes: the speed of adjustment of the market
to the new information
138. The objective of positive accounting theory is; explain and predict accounting
practice
139. Which statement best describes Jensen’s view on positive accounting theory: it can
describe how the world actually operates and function
140. researcher(s) that comprehensively wrote about positive accounting theory: Watts
and Zimmerman
141. The main assumption behind positive accounting theory is: every individual is
rational and self-interested
142. Ball and brown were researching about: the relationship between
favorable/unfavorable announcement and earnings announcement
143. One of the conclusions drawn from Ball and brown’s research is: investors can
predict the results of companies’ operations twelve months before earnings
announcement
144. Ex post means: opportunistic behavior exists after contract is set
145. The following research topic was developed during the second stage of positive
accounting development phase: the owner (principle) set the contract ex ante to prevent
opportunistic behavior
146. Positive accounting theory deals with “unobserved phenomena” which one suits best
unobserved phenomena: new variables that are different from previous research
147. A type of capital market research that contributed positively to the positive
accounting theory development is: influence of accounting policy on stock price
148. Devil’s advocate means: provoking thought
149. A capital market that solely requires excellence in analysing charts and graphics is a
capital market with: semi-strongly efficient
150. The ultimate purpose of normative accounting theory is: predict the accounting
practice in the future
151. One of the most fundamental work that contributed to positive accounting theory is
the work by ball and brown published in: journal of accounting research, 1968
152. A capital market in which investors can gain return by analyzing politic, financial,
economic, and legal data is said to be: semi-strongly efficient
153. According to ball and brown, how does stock return relate to favorable
announcement: volatility stock return will rise during favorable announcement
154. A good contract usually brings up the rear after dysfunctional behavior has emerged.
This means: opportunism is always one step ahead of a contract before the contract is
improved