Accounting and Capital Markets

introduction
1. what is accounting
part 3 efficient markets and the information approach to decision usefulness
1. efficient markets
  1. past paper Q1
    1. describe the idea of stock market efficiency
      1. 1. 理性投资者（至少是部分）使用info去修正他们的预测。足够的人这样做市场就是有效的
      2. 2. efficient securities market 定义以及与strong form efficiency 的不同
      3. 有效市场的四个含义
        3.1 market prices are efficient with respect to publicly known info
        3.2 市场有效是个相对的概念，对新消息做出调整
        3.3 investing is a fair game 如果市场有效
        3.4 有效市场下，证券的市价fluctuate randomly over time
      4. 1. efficiency 意味着重要的是内容，而非披露的form or location. 2. 会计人员竞争提供信息更useful， timely and cost effective
    2. critically discuss that 有效市场意味着投资者对于审计过的财务报表的需求很低
      1. 1. prices already incorporate all known information about the firm.
        information asymmetry -- inside info
      2. 2. 会计政策和方法都不同，所以投资者不要财务info
      3. 3. 可以得到其他类型的info, 比会计信息更timely
      4. 4. CAPM用beta和the return on market portfolio来决定returns, 不再需要会计信息
2. The information approach to decision usefulness
part 4 The measurement approach to decision usefulness
1. Past Paper Q2
  1. outline the information approach
    1. 1. Assuming securities market efficiency, markets may react to information from any source.
    2. 2. the information approach 定义
    3. 3. the historical cost-based accounting
    4. 4. 投资者根据获得的info assess the future performance；the form and location 不影响，even supplementing the statements with notes or additional info.
  2. outline the measurement approach
    1. 1. greater use of fair value in financial statements
    2. 2, the measurement approach 书上定义
    3. 3. 做更好prediction for investors
  3. compare and contract these two approaches and which best for IASB
    1. IASB continues to increase fair value measurements in financial statements 四大原因
      1. 1. markets are not fully efficient
      2. 2. low explanatory power of net income for share returns
      3. 3. auditors' liability
      4. 4. Ohlson's clean surplus theory provided a theoretical framework supportive of a measurement approach
    2. 对比
      1. The effect on decision usefulness depend on its effect on relevance and reliability
      2. accountants are recognising an increased obligation to measure and report on firm risk
      3. increase the relevance of financial statement info
      4. reliability
2. market is not fully efficient 四大原因
  1. 1. limited attention
  2. 2. overconfident
  3. 3. representativeness
  4. 4. self-attribution bias
3. Market response to accruals
  1. Past paper Q3
    1. explain and distinguish the concepts of accruals and cash flow
      1. 1. accruals 概念
      2. 2. cash flows 概念
    2. discuss whether accruals provide more useful information than cash flows
      1. 1. sloan 的研究
      2. 2. non-discretionary accruals and discretionary accruals
4. the value relevance of financial statement information
  1. Past paper Q5
    1. describe how researchers examine whether info is 'value relevant'.
      1. 1. value relevance 定义
      2. 2. Ball and Brown 研究
    2. critically discuss value relevance research 对会计准则制定有用么
      1. suggests lots of scope to improve financial reporting
5. prospect theory
Part 5 economic consequences and positive accounting theory
1. Conservatism
  1. Past Paper Q4
    1. Explain conditional and unconditional conservatism, giving examples.
      1. 1. conditional conservatism
        1.1 定义 an economic loss in value has already occurred, although it has not been realized.
        1.2 For example, the rule of the lower of cost or market value. This is a partial measurement approach as balance sheet sometimes recognises inventoey at market value. Losses must be recognised immediately; but gains not recognised until goods are sold.
        1.3 when current value has decreased, writing assets down to current value benefits the investors by avoiding the utility loss, thereby decreasing the likelihood of investor suing the auditor. Regulators, who would also like to see fewer investor losses and lawsuits, will encourage conservatism to managers to release bad news and make a new accounting standard such as impairment tests.
      2. 2. unconditional conservatism
        2.1 定义 risky assets are valued at less than current value, even though an economic gain or loss has not yet take place.
        2.2 For example, recording profitable capital assets at cost even though current value is higher; retaining inventories at historical cost until reliable evidence of realization is obtain; writing research costs off as incurred; and amortization expense may run ahead of economic depreciation.
    2. Discuss whether conservatism is useful to providers of debt and equity finance
      1. 3.1 reduce legal liability
      2. 3.2 an early warning system of impending financial distress
      3. 3.3 also for stewardship purpose
2. economic consequences: is a concept that asserts that, despite the implications of efficient securities market theory, accounting policy choice can affect firm value.
  1. the change of accounting policy
    1. not fully efficient market
      1. change the reported earnings, then securities price reaction - cost of capital
    2. fully efficient market
      1. affect real management decisions (Employee Stock Options - give them the right to buy company stock over some time period)
3. Positive Accounting Theory
  1. predicting such action as the choices of accounting policies by firm managers and how managers will respond to proposed new accounting standards.
    1. PAT 认为firms organise themselves in the most efficient manner so as to maximize their prospects for survival.
  2. Efficient contracting
    1. a firm is viewed as a nexus of contracts. (employees, suppliers, capital providers)
      1. the firm wants to minimize the various contracting costs
        including: cost of negotiation, costs arising from moral hazard and monitoring of contract performance, costs of possible renegotiation or contract violation when unanticipated events arise during the term of contract, and expected costs of bankrupty and other typed of financial distress.
        as an example, contracts often depend on accounting variables, such as reported net income or debt-to-equity. such contracts can be in force for a long time and it is difficult to anticipate changes in IASB that might take place over the life of the contract and allow for them in the contract itself. As a result, if IASB does change, this can affect the amount of manager compensation and include technical vialation of debt covenants, both of which can impose costs on the firm.
        managers - manage accruals or change policies
        opportunistic form of PAT: in their own interest
    2. Explain why managers would rather have the freedom to choose their accounting policies rather than have them imposed on them by the IASB
      1. managers are motivated to minimise the cost
  3. PAT
    1. 三个 Assumption
      1. managers are rational. like investors, it implies conflict between interests of managers and investors
      2. efficient securities markets
      3. efficient managerial labour markets. 但是经理的努力和能力不能直接observable (moral hazard); stewardship role
    2. Bonus plan hypothesis
    3. Debt covenant hypothesis
    4. Political cost hypothesis
Part 6 Earnings management
1. 定义：is the choice by a manager of accounting policies or real actions, affecting earnings so as to achieve some specific reported earning objective.
  1. accounting policy choices
  2. real variables
  3. Past Paper Q6
    1. Describe the patterns and the motivations
      1. four patterns
        1.1 taking a bath
        发生在organizational stress or restructuring 时期，如果企业必须报告a loss，管理层就会报告a large one
        clean the desk, write off assets, provide for expected future costs，增加未来盈利的可能性。over-provision at time t enhances the profitability at t+1
        1.2 income minimization
        类似洗大澡，但没有那么extreme；may be chosen be a politically visible firm during periods of high profitability
        方法有：rapid writeoffs of capital assets and intagibles, 费用化广告费用和R&D花费
        1.3 income maximization
        经理会增加收入来增加bonus，但不会put them above the cap
        当企业 are close to debt covenant violations，也会增加income
        1.4 income smoothing
        from a contracting perspective, risk-averse managers prefer a less variable bonus stream.
        the more volatile the stream of reported net income, the higher the probability that covenant violation will occur.
        经理觉得reported earning 太低会被fired，因此平滑收入降低了出现低报告收入的可能性
        公司为了external reporting purpose；向市场传达了自己企业有expected persistent earning power.
      2. four motivations
        2.1 contractual motivations
        bonus plan hypothesis
        debt covenant hypothesis
        2.2 political cost hypothesis
        2.3 to meet earnings expectations
        2.4 initial public offerings
    2. outline 会计研究人员如何发现通过操纵accruals 的盈余管理
2. can be viewed from 两个角度
  1. a financial reporting
  2. a contracting perspective

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Accounting and Capital Markets

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