BUS 421 Lecture Notes - Lecture 4: Stock Valuation, Financial Statement, Accrual

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 421
• Professor: Karel Hrazdil

Document Summary

Deals with the usefulness of financial statement information in equity valuation. Usefulness of financial information is evaluated based on the extent of change in volume/price following the response to that information. Efficient market theory: implies the market will react quickly to new information, so users need to know when information on current year"s net income is first released (publicly) Good/bad news evaluated based on what investors expect. Market response to reported net income (ni) can be hard to find. Investors expectations of current earnings is built into share price prior to release of current earnings. When current earnings information is released, investors will react only to. If this unexpected ni is gn, then given securities market efficiency, a (+) abnormal share return gives evidence that on average, investors are reacting favourably. Under ideal conditions: expected earnings are the accretion of discount of operating firm value.