Question 1 -
a. Ball and Brown's research examined the association between stock returns and earnings when the period (or window) over which earnings and stock returns are measured is one year. Explain what Ball and Brown found in their research. Explain this could happen.
b. Identify and explain three (3) reasons why share prices of different firms might react differently to earnings announcements even when these firms report the same amount of unexpected earnings.
c. The role of disclosure is capital markets has been discussed by many researchers. For example, Diamond and Verrechia (1991) and Merton (1993) argue that the better the quality of a firm's disclosure, the higher its share price.
Required: Explain why better disclosure will lead to higher share prices. Provide two reasons.
Question 2 -
a. Describe the circumstances when the fair market value of a firm is equal to its fundamental value. Describe what is meant by "fundamental value of a firm" in your answer.
b. In 1973, W.H. Beaver considered the implications of efficient securities markets for financial reporting. Many of Beaver's arguments are still relevant today. Explain Beaver's argument.
c. Should companies use historical cost or the measurement approach to prepare financial statements? Explain. In your answer discuss relevance versus reliability.