ChThe Measurement Approach to Decision Usefulness.pptVIP

Can Beta (thus CAPM) be Rescued? Answer 1: yes Non-stationarity of beta Answer 2: no Behavioural finance Share returns driven by investor overconfidence, not by beta Conclusion Beta not dead, but other risk variables (e.g., book-to-market, firm size) also explain share returns This suggests increased role of reporting on risk Conclusions re: Investor Rationality and Market Efficiency Rational decision theory model of investment still the most useful model to guide accountants about investor decision needs Anomalies explained equally well by rational theory as by behavioural theory Securities markets not fully efficient, but close enough that accountants can be guided by its reporting implications To extent markets not fully efficient, role of financial reporting increases Current value accounting helps to fulfil this increased role The Value Relevance of Financial Statement Information Low R2 problem R2 a measure of proportion of share return explained by accounting information Empirical evidence shows R2 quite low (2 – 5%) Getting worse? Effect of accounting information on share price can be statistically significant (e.g., ERC research, Chapter 5) but practically insignificant (i.e., low R2) Suggests lots of scope to improve financial reporting Will current value accounting help? Three Formulae for Firm Value Firm value = PV of expected future dividends The fundamental determinant of firm value Firm value = PV of expected future cash flows The traditional approach in accounting and finance Firm value = net assets ± PV of expected future abnormal earnings (goodwill) The clean surplus approach In principle, all 3 formulae give same firm value Unbiased v. Biased Accounting in Clean Surplus Unbiased accounting Current value accounting for all assets and liabilities Unrecorded goodwill = zero Biased accounting E.g., historical cost accounting, conservative accounting Unrecorded goodwill ≠ zero Relation to measurement approach Increased use of current value accounti