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6 Desember

Kuliah Umum Program Pascasarjana Doktor Ilmu

The Efficient Markets

Jensen (1978) defines an efficient market
as follows:

A market is efficient with respect to
information set  t if it is impossible to make
economics profits by trading on the basis of
information set  t.
 Risk-adjusted
 On

rate of return.

 Economic profits are net of all costs.

Market efficiency

Much of the regulation of financial
reporting is premised on the notion that
once firms make accounting data
publicly available, the implications will
be widely appreciated and reflected in
security prices

Market efficiency

If the market is inefficient, then financial
reporting and disclosure are not as
effective, at least with respect to prices
fully reflecting that information.
Also have implications for resource
allocation and production efficiency
Is also of interest to researchers 
assumption about market efficiency in
the research design

so that additional information will not be wasted The more information a firm discloses about itself. the greater is investors’ confidence in the working of securities market (less inside information to worry about) The fact of disclosure and not the form it takes is what is important .Implications of Efficient Securities Markets for Financial Reporting  Full disclosure  Management should develop and report information about the firm as long as the benefits to investors exceed the costs    Investors will use all available information about the firm.

Market efficiency  Post-earnings announcement drift (Bernard & Thomas. 1996):   Firms that report good news (bad news) in quarterly earnings. 2001):  The overpricing of total accruals that Sloan (1996) documents is due largely to abnormal accruals. failing to reflect fully information contained in the accrual and cash flow components of current earnings until that information impacts future earnings. . their abnormal returns tend to drift upwards (downwards) for some time following their announcement Stock prices are found to act as if investors "fixate" on earnings. 1989 & 1990):   Accrual anomaly (Sloan. Abnormal accrual (Xie.

Information Asymmetry    Security prices do not fully reflect fundamental value in the presence of inside information. Information asymmetry: some parties to business transactions may have an information advantage over others Two major types of information asymmetry   Adverse selection Moral hazard .

The Lemons Problem .

The Lemons Problem  Akerlof (1970)  used car market .

Information Asymmetry     Securities markets are subject to information asymmetry problems Can lead to the breakdown in the functioning of the capital market Investors can’t differentiate between good firms and bad firms. thereby improving the working of securities markets . High quality reporting will reduce this problem.

Full Disclosure  2 main benefits:    To enable investors to make better decisions To improve the ability of securities markets to direct investment to its most productive uses Example: voluntary disclosure. MD&A .

Voluntary Disclosure  Medium:    Annual report Website Type:    General Sustanability reporting / Corporate Social Responsibility Intellectual capital .

Kraft.Research on Disclosure    Botosan (1997): firms with low analyst following. there is a negative relation between cost of equity capital and the extent of their voluntary disclosures. Fu. Zhang (2012): higher reporting frequency reduces information asymmetry and the cost of equity . Welker (1995): significant negative relation between disclosures and bid-ask spreads.

Park. . & Guthrie (2008): IC issues considered important (proxied by frequency of disclosure of these issues in the corporate reports studied) varied both with company size and from sector to sector. & Wier (2012): socially responsible firms are less likely to manage earnings through discretionary accruals and to manipulate real operating activities Intellectual capital:  Striukova.Research on Disclosure  Sustainability reporting    Dhaliwal. Unerman. Li. & Yang (2011): firms with a high cost of equity capital in the previous year tend to initiate disclosure of CSR activities in the current year and that initiating firms with superior social responsibility performance enjoy a subsequent reduction in the cost of equity capital Kim. Tsang.

Value Relevance Research  Examines the association between a security price-based dependent variable and a set of accounting variables .

brans. and goodwill) are priced (e.. capitalized software. Barth et al.g. Chamber et al.Value Relevance Research   Fair values of financial instruments are priced (Barth et al. 1996) Intangible assets (e. 1998. 1998. 1999) . Barth & Clinch. 1998. Aboody & Lev.g...

& Yi (2010): find that the value relevance of Level 1 and Level 2 fair values is greater than the value relevance of Level 3 fair values Jones & Smith (2011): other comprehensive income (OCI) gains and losses.Value Relevance Research   Song. Thomas. the value relevance of OCI gains and losses is significantly smaller than the value relevance of SI gains and losses. . However. special items (SI) gains and losses are all value-relevant.

so as to maximize their prospects for survival A firm can be viewed as a nexus of contracts   The firm will want to minimize the various contracting costs Many of these contracts involve accounting variables .Positive Accounting Theory   PAT takes the view that firms organize themselves in the most efficient manner.

The Three Hypotheses of Positive Accounting Theory    The bonus plan hypothesis The debt covenant hypothesis The political cost hypothesis .

The Three Hypotheses of Positive Accounting Theory  The bonus plan hypothesis  All other things equal. managers of firms with bonus plans are more likely to choose accounting procedures that shift reported earnings from future periods to the current period .

The Three Hypotheses of Positive Accounting Theory  The debt covenant hypothesis  All other things equal. the more likely the firm manager to select accounting procedures that shift reported earnings from future periods to the current period . the closer a firm is to violation of accounting-based debt covenants.

The Three Hypotheses of Positive Accounting Theory  The political cost hypothesis  All other things equal. the greater the political costs faced by a firm. the more likely the manager is to choose accounting procedures that defer reported earnings from current to future periods .

Empirical PAT Research  Healy (1985)   Dichev & Skinner (2002)   Bonus plan hypothesis  managers of firms with bonus plans based on reported income systematically adopted accrual policies so as to maximize their expected bonuses Debt covenant hypothesis  managers choose accounting policies to maintain their covenant ratios so as to meet or exceed the level required Jones (1991)  Political cost hypothesis  affected firms were systematically choosing accrual policies so as to improve their case for import protection .

or actions affecting earnings. so as to achieve some specific reported earnings objective .Earnings Management  Earnings management is the choice by a manager of accounting choice.

Patterns of Earnings Management     Taking a bath Income minimization Income maximization Income smoothing .

Type of Earnings Management  Opportunistic   Bad side Efficient  Good side .

Earnings Management    Accrual earnings management Real earnings management Classification shifting .

Accrual Earnings Management  Accruals:    Discretionary accruals Non discretionary accruals Discretionary accruals  earnings management .

(2001) Stubben (2010) . (1995) Kothari et al.Discretionary Accruals Model  Several models to estimate discretionary accruals:     Jones (1991) Dechow et al.

and reduction of discretionary expenditure Gunny (2010):  Similar with Roychowdhury + sale of assets .Real Earnings Management  Bushee (1998):   Roychowdhury (2006):   R&D expenditures Price discounts to temporarily increase sales. overproduction to report lower cost of goods sold.

Lin. Barua. Sbaraglia (2010): firms shift operating expenses to income-decreasing discontinued operations to increase core earnings Lee (2012): firms manage cash flows from operation by shifting items between the statement of cash flows categories both within and outside the boundaries of generally accepted accounting principles (GAAP).Classification Shifting  Misclassification of items within the financial statement    Mc Vay (2006): managers opportunistically shifting expenses from core expenses (cost of goods sold and selling. . and by timing certain transactions such as delaying payments to suppliers or accelerating collections from customers. and administrative expenses) to special items. general.

Research on Accruals EM   Management can improve or impair the quality of financial statements through the exercies of discertion over financial statements Motives for accrual management: opportunistic or efficient contracting  Subramanyam (1996): managerial discretion improves the ability of earnings to reflect economic value  efficient contracting .

Zang (2012): whether managers use real activities manipulation and accrual based earnings management as substitutes in managing earnings . & Lys (2008): firms switched from accrual-based to real earnings management methods after the passage of SOX Cohen & Zarowin (2010): SEO firms engage in real activities manipulation. and the decline in post SEO performance due to the real activities management is more severe than that due to accrual management. Dey.Accruals and Real EM     Cohen.

Earnings Quality    Accruals quality Earnings persistence Earnings response coefficient (ERC)   Future earnings response coefficient (FERC) Timeliness .

Earnings Quality & CG  Cohen. when combined with accounting expertise. Hoitash. Krishnamoorthy. & Wright (2014): audit committee’s industry expertise. . can improve the effectiveness of the audit committee in monitoring the financial reporting quality (financial restatements and discretionary accruals).

DSAK-IAI . FASB.Standard Setting   Standard setting is a form of regulation that is ultimately the responsibility of a country’s government or legislature Standard setting bodies: IASB.

Richardson. Thornock (2012): The information content of annual earnings announcements and mandatory adoption of IFRS Clarkson.IFRS Research   Landsman. Thompson (2011): The impact of IFRS adoption on the value relevance of book value and earnings . Maydew. Hanna.

Jagolinzer. & Riedl (2010):    Incrementally positive reaction for firms with lower quality pre-adoption information. and with higher pre-adoption information asymmetry Incrementally negative reaction for firms domiciled in code law countries A positive reaction to IFRS adoption events for firms with high-quality pre-adoption information. .IFRS Research    Li (2010): the IFRS mandate significantly reduces the cost of equity for mandatory adopters. which is more pronounced for banks. and this reduction is present only in countries with strong legal enforcement Yip & Young (2012): mandatory IFRS adoption improves cross-country information comparability Armstrong. Barth.

1987a) .Research On Analysts’ Behavior   Analysts’ behavior is important to accounting research. because analyst are among the major information intermediaries who use and interpret accounting data Security prices reflect the results of their analysis  Analysts’ forecasts outperform the best statistical models (Brown et al.

Financial Accounting Theory. .Referensi   Beaver. 7th Ed.H.R. Perspectives on Recent Capital Market Research. 2002. W. Accounting Review 77 (2). Scott. . Pearson Education. 2014. W. 453-474.

id / sylvia.veronica@ui.Terima Kasih Sylvia Veronica Siregar Pascasarjana Ilmu Akuntansi FEUI / 08129182716 .vnps@gmail.