Accounting Theory

Topics: Financial markets, Stock market, Stock Pages: 4 (1237 words) Published: March 18, 2013
10.3 If some research is undertaken that provides evidence that capital markets do not always behave in accordance with the Efficient Market Hypothesis, does this invalidate research that adopts an assumption that capital markets are efficient?

As Chapter 10 questions, if further evidence continues to surface that capital markets do not always behave in accordance with the efficient market hypothesis, then should we reject the research that has embraced the EMH as a fundamental assumption? In this regard we can return to earlier chapters of this book in which we emphasised that theories are abstractions of reality. Capital markets are made of individuals and as such it would not (or perhaps, should not) be surprising to find that the market does not also act in the same predictable manner. Nevertheless, the EMH has helped provide some useful predictions and no doubt will continue to be relied upon by many researchers for a considerable period of time. As Lee (2001, p.238) states:

A common assertion is that even if the EMH is not strictly true, it is sufficient to serve as a starting point for research purposes. Like Newtonian physics, it is more than good enough for everyday usage. Unfortunately, it has becoming increasingly more difficult to accommodate what we know about the behaviour of prices and returns within this traditional framework.

At the present time there is a great deal of research into capital markets that does not rely upon market efficiencies. The consideration of ‘other forces’ that shape share prices and returns might eventually lead to a revolution in thought (Kuhn, 1962)—but it will arguably take a long time.

10.7Evaluate the following statement:
If an item of accounting information is released by a corporation and there is no apparent change in the share price of the company, the information is not relevant to the market and therefore there is no point in disclosing such information again.

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