UNIVERSITY OF BENIN

DEPARTMENT OF ACCOUNTING

LEVEL: 300 LEVEL

COURSE: ACCOUNTING THEORY (ACC 322)

TITLE: CAPITAL MARKET RESEARCH IN

ACCOUNTING

LECTURERS: PROF. DABOR EYESAN

PROF. OMOKHUDU
MR. OHIDOA

ACC 322 GROUP 3 1

 GROUP MEMBERS
S/N NAMES MAT. NO
1 ABOH BLESSING OLODU MGS1706289

2 ADA DANIEL OSARODION MGS1706290

3 ADAZOR TOBORE BENEDICT MGS1706291

4 ADEESO TITILAYO AFUSAT MGS1708862

5 ADEGOKE OLUWAFEMI FAVOUR MGS1706292

6 ADELEKE SAMUEL IMOLE MGS1807511

7 ADELEYE KEHINDE DANIEL MGS1810741

8 ADEWOLE OPEYEMI ABDULRASHEED MGS1706294

9 AFEARE PRECIOUS OSHUARE MGS1606155

10 AGAZUMA HELEN OMONIGUO MGS1606157

11 AGBODEKHE JULIET AKHUEMESOMI MGS1706295

12 AGBONOGA RAMOTA PROMISE MGS1706296

13 AGHAHOWA IKPONMWONSA BENJAMIN MGS1706297

14 AGUAMAH ALAERE DULYAMBA MGS1706298

15 AIGBE JONAH OSADEBAMWEN MGS1709800

16 AIRHULEYEFE ETINOSASERE MGS1706299

17 AKANDE IKEOLA MGS1807526

18 AKHABUE LAURA EJODAMEN MGS1706306

19 AKHAMIOGU FRANCIS OSHOMA MGS1706304

20 AKILO AGBEBAKU MICHAEL MGS1706305

21 AKINTOLA CONVENANT MGS1709020

22 AKPAN MERCY IMAOBONG MGS1606167

23 ALILE PEACE OSAMUDIAMEN MGS1706307

24 AMAECHI FRANKLYN CHINONSO MGS1810742

25 AMANA PEACE MFON MGS1706309

26 AMEDU GABRIEL MGS1706310

27 ANAGWONYE ANULICHUKWU GRACE MGS1706311

28 ATARI JEREMIAH MGS1709021

29 AUDU-MUSTAPHA JABIR MUHAMMED MGS1606177

30 EBHOHON EMMANUEL MGS1706327

ACC 322 GROUP 3 2

DEFINITION OF KEY TERMS:

WHAT ARE CAPITAL MARKETS?

Capital markets are avenues where savings and investments are channeled between the
suppliers who have capital and those who need capital. The entities that have capital include
retail and institutional investors while those who seek capital are businesses, governments,
and people. Capital markets are comprised of primary and secondary markets. The most
common capital markets are the stock market and the bond market. Capital markets seek to
improve transactional efficiencies. These markets bring those who hold capital and those
seeking capital together and provide a place where entities can exchange securities.

WHAT IS ACCOUNTING?
Accounting is the process of recording financial transactions pertaining to a business.
Accounting in relation to the capital market refers to identifying, measuring, recording,
classifying, summarizing, interpretation and communication of financial information on a
firm's transactions and events to permit informed judgement by users in the capital market.

WHAT IS RESEARCH?
The capital markets research topics of current interest to researchers include tests of market
efficiency with respect to accounting information, fundamental analysis, and value relevance
of financial reporting. Evidence from research on these topics is likely to be helpful in capital
market investment decisions, accounting standard setting, and corporate financial disclosure
decisions.

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INTRODUCTION TO CAPITAL MARKET RESEARCH IN
ACCOUNTING

Capital market research investigates the association between accounting information and key
capital market variables, such as the company's share price, or the rate of return on its shares
over some period or their systematic risk. The stock market, if working perfectly and in line
with theories of market efficiency that we will look at shortly, will control information,
asymmetry, adverse selection and moral hazard, by penalizing any firm who perpetrates any
of it. Accounting standards, principles and the monitoring of compliance with them by
auditors and regulators are a principal means by which investors accomplish this aim, but
they do so as a result more of historical political reaction to scandals than by way of
spontaneous and organic market responses.

The stock market is where investors in publicly listed companies buy and sell their stocks and
shares. All stock markets have regulations about information that firms must disclose as a
condition of their listing and all stock markets source such regulations from accounting
principles and standards because that is the most efficient way for regulators to outsource
their responsibilities for designing and reviewing the disclosures, they believe investors need.

The existence of regulation is proof that we live in a world where markets cannot be
perfected without some outside help. It is possible in theory for a market to be imperfect, yet
fully efficient. Because market efficiency is such a strong assumption of so much accounting
theory, research, and practice, we need to understand what is being claimed and to have a
good idea of how well grounded the claims are.

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LITERATURE REVIEW

This study shows the interdependent relationship between capital markets research and
accounting, as its generally understood, capital market reveals the transactional platforms put
in place by regulatory authorities to aid the effective transference of funds from surplus units
to deficit units, while accounting entails the systematic process of recording financial
transactions and the strict application of statutory standards in financial reporting.
Moving further, it might interest one to know that the careful dispersion of relevant, accurate
and timely information has a direct correlation on the investor's decision given the varying
capital market ratios, ranging from the Earnings per share (EPS), Price to earnings ratio(P/E)
amongst others. However, in a case where the wrong information is dispatched either because
of negligence or deliberate, fraudulent manipulations, the unsuspecting, investing public can
be made to pay dearly for it. A very good instance is the Arthur Anderson and Enron's case,
where financial statements were window-dressed in a way that misrepresented the financial
state of the organization, and this led to loss of costly investments and fortunes.
More so, the synergistic relationship between the Efficient market hypothesis (EMH) and the
Positive accounting theory (PAT) has aided in no small way, the understanding of how the
economic world works rather than how it should work. These theories also show flexibility of
manager's choice of accounting systems, which gives room for opportunistic behaviors.
However, the positive accounting theory has suffered some criticism given that, it does not
provide prescription and ways of enhancing accounting practices as it ignores its obvious
struggles and obstacles. Also, PAT is considered to be problematic because it is not purely
scientific in its approach, hence, it is not totally reliable. In addition, given the various
hypotheses put forth by its proponents, it is difficult to predict accurately per time what
manager’s actions and inactions would be in different situations and context.
Lastly, according to the proponents of the efficient market hypothesis, it is believed that all
available information is already adequately reflected in stock prices, however, it is impossible
for any investor in the long run to get returns substantially higher than the market average.
Although, there’s the possibility of manipulating variables to his advantage, thereby, leading
to abnormal profits, even, if it’s just for a short while.

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ASSOCIATION BETWEEN ACCOUNTING INFORMATION AND KEY
CAPITAL MARKET VARIABLES
Ball and Brown (1968) originally researched the correlation between accounting information
and several capital market variables like a firm’ s stock prices and rate of returns on the
firm’ s share over some period. After they empirically studied the correlation between annual
report earnings data and stock price, they found that a company had excess earnings and
investors can get abnormal return.
This reveals that there exists a relationship between accounting earnings and stock prices.
Beaver asserted from another perspective that the company’ s financial reporting and
accounting information could influence stock price. Beaver’ s result shows that investors
used the declared accounting information when they are trading in a particular stock. Black
researched and found that stock price not only reflect financial information but also the noise
of traders is reflected in the scrip prices. And Ball (1995) observed that the stock market
might overreact due to the noise. So according to Ball, available market is not always
effective market as people assumed. Bernard and Stober, Dechow (1994) and Sloan (1996)
respectively empirically studied the influence of earnings information and operating cash
flow information to stock price. Their finding shows that the earnings information is better
correlative to stock prices, but it fails to give accurate model. Ohlson (1995) had done much
of pioneering work for the establishment of appraisal model. The indicators were such as
book value, abnormal surplus and other non-accounting information together with stock. The
appraisal model used by him can be used with current financial statements and other
information to assess the value of enterprise.
Some of these accounting ratios that show the relationship between Accounting information
and the company's share price include:
1. Earnings Per Share;
2. Receivables Turnover Ratio;
3. Return on Net Worth;
4. Operating Profit Margin;
5. Liquidity Ratio;
6. Current Ratio;
7. Inventory Turnover Ratio;
8. Price Earnings Ratio. (P/E ratio)
Whether ROE is deemed good or bad will depend on what is normal among a stock’ s peers.
For example, utilities have many assets and debt on the balance sheet compared to a
relatively small amount of net income.
It's with this Accounting information a user can know his return on share per time. Return on
equity (ROE) is a measure of financial performance calculated by dividing net income by
shareholders' equity. Because shareholders' equity is equal to a company’ s assets minus its
debt, ROE is considered the return on net assets. ROE is considered a measure of a
corporation's profitability in relation to stockholders’ equity.
Return on Equity (ROE) = Average Shareholders’ Equity/Net Income

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PHILOSOPHY OF POSITIVE ACCOUNTING THEORY
The philosophical objective of positive accounting theory is to explain and predict current
accounting practice. Positive accounting theory seeks to understand why accounting practices
are employed by accountants in different circumstances and by different firms.
Milton Friedman championed positive theories in economics.
He stated that "the ultimate goal of positive science (i.e. INDUCTIVE) is the development of
a theory or hypothesis that yields valid and meaningful predictions about phenomena not yet
observed” .
Consistent with Friedman’ s view, Watts and Zimmerman asserts that: "The objective of
positive accounting theory is to explain and predict accounting practice".
Explanation means providing reasons for observed practice. For example, positive accounting
theory seeks to explain why firms continue to use historical cost accounting and why others
use fair value measurement (IFRS 13).
Prediction means such actions as the choices of accounting policies by firms and how firms
will respond to proposed new accounting standards.
Positive Accounting Theory has three hypotheses around which its predictions are organized.
1. Bonus plan hypothesis: Managers of firms with bonus plans are more likely to
choose accounting procedures that shift reported earnings from future periods to the
current period. By doing so, they can increase their bonuses for the current year.
2. Debt covenant hypothesis: The closer a firm is to violating accounting-based debt
covenants, the more likely the firm manager is to select accounting procedures that
shift reported earnings from future periods to the current period. By increasing current
earnings, the company is less likely to violate debt covenants, and management has
minimized its constraints in running the company.
3. Political cost hypothesis: The greater the political costs faced by the firm, the more
likely the manager is to choose accounting procedures that defer reported earnings
from current to future periods. High profitability can lead to increased political heat
and can lead to new taxes or regulations especially for large firms which may be held
to higher reporting standards.
By changing accounting policies, managing discretionary accruals, timing the adoption of
new accounting standards and changing real variables such Research and Development
(R&D), advertising, repairs and maintenance, Positive Accounting Theory can be achieved.

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 STRENGTHS OF POSITIVE ACCOUNTING THEORIES
The beginning of positive accounting theory is the Efficient Markets Hypothesis (EMH). The
EMH assumes that capital markets react in an efficient and unbiased manner to publicly
available information. The main strengths of Positive Accounting Theories over Normative
Accounting Theories are the facts that hypotheses are framed in such a way that they are not
capable of falsification by empirical research. Also, these theories aim to provide an
understanding of how the world works rather than stating how the world should work.
Moreover, PAT tries to understand the relationship and connection between various
accounting information, managers, firms, and markets; also analyze these relationships within
an economic framework.
There are several assumptions made in development of positive accounting theory. The first
is that the firm is a nexus of contracts. In relation to Positive Accounting Theory, because
there is a need to be efficient, the firm will want to minimize costs associated with contracts.
Contract costs involve accounting variables as contracts can be stipulated in terms of
accounting information such as net income, and financial ratios. The firm will choose the
accounting policies that best acknowledge the need for minimization of contract costs. PAT
recognizes that changing circumstances require managers to have flexibility in choosing
accounting policies which brings forward the problem of ‘ opportunistic behavior’ . This
occurs when the actions of management are to better their own personal interests. The other
assumption is that the managers are rational economic decision makers and will act to
maximize their own profit and not the profit of the company. Under Positive Accounting
Theory, firms want to maximize their prospects for survival, so they organize themselves
efficiently.

WEAKNESSES OF POSITIVE ACCOUNTING THEORIES

There are several criticisms to the Positive Accounting Theory (PAT). Firstly, it does not
provide prescription and ways of enhancing accounting practices as it ignores various
struggles and obstacles. Secondly, it is not value-free in nature because it asserts an
assumption that every action is driven by self-interest. Moreover, the variable that had been
removed from the theory could be substituted by the size of firms and other bonus plans
(Horngren, 2013). Further it is based on invalid fundamental assumptions that every action
is driven by a desire to enhance the wealth of an individual. It has to be noted that such
assumptions represent a far too simple and negative aspect of mankind. It needs to be noted
that the holdout samples in the theory were not employed by the managers in the time of
making choice of accounting methods (Needles & Power, 2013). The issues being addressed
by the theory have not portrayed great development since its general inception in the 1970’ s.
Various research accompanied within the positive accounting theory gives due importance to
individual accounting choices in time of its application but it must be noted that because of
this organizations will have a varied number of options related to accounting, that can have a
negative impact on the financial position and performance of the organization. Further, the
proxies or measurements that are employed within the theory are often far too simple in

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nature which means that it failed to address the relevant and true matters within the
organization.
Positive accounting theory is considered scientifically flawed and hence it is also regarded as
a very problematic theory as accountants cannot place a good amount of reliance on such
theory (Deegan, 2009). Last but not the least, researchers of positive accounting theory
believe that they can create several principles and laws which can function in every situation
but during the conduct of large-scale empirical researches, positive accounting theory does
not take into account several relationships that are mostly organizational specific. All these
criticisms must be given due importance by the organizations because ignorance of such can
hamper its functioning. Therefore, it must be observed that positive accounting theory has
some limitations and several criticisms too. It fails to provide a clear and appropriate
understanding of the problems and also does not predict accurately (Watts & Supreme,
1986). The main purpose behind this theory was to provide enhanced exposure and simplicity
but these limitations and flaws restrict them to do so. Because of these shortcomings and
limitations, verifiability standards to consider incomes and losses are not much required
which gives an unfair advantage to companies just like in the examples stated above (Watts
& Supreme, 1986). Banks took the support of positive accounting theories and falsely
predicted their financial performance by hiding the material changes in the value of
securities. Refinement of such theories is highly required so that it can serve its purpose in a
more appropriate way.

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EFFICIENT MARKET HYPOTHESIS; AN INTRODUCTION AND THE
ASSUMPTIONS
AN INTRODUCTION

Eugene F. Fama and Paul A. Samuelson independently suggested Efficient Market

Hypothesis (EMH) in the 1960s. According to them the theory of EMH implies that all
available information is already reflected in stock prices. Therefore, it is impossible for any
investor in the long run to get returns substantially higher than the market average. In other
words, a lucky investor may outperform the market in the short term, but it is impossible in
the long run.
Fama’ s investment theory – which carries essentially the same implication for investors as
the Random Walk Theory – is based on a number of assumptions about securities markets
and how they function. The assumptions include the one idea critical to the validity of the
efficient markets’ hypothesis: the belief that all information relevant to stock prices is freely
and widely available, “ universally shared” among all investors.

As there are always a large number of both buyers and sellers in the market, price movements
always occur efficiently (i.e., in a timely, up-to-date manner). Thus, stocks are always trading
at their current fair market value.

The major conclusion of the theory is that since stocks always trade at their fair market value,
then it is virtually impossible to either buy undervalued stocks at a bargain or sell overvalued
stocks for extra profits. Neither expert stock analysis nor carefully implemented market
timing strategies can hope to average doing any better than the performance of the overall
market. If that’ s true, then the only way investors can generate superior returns is by taking
on much greater risk.

THE IMPLICATION OF THE EFFICIENT MARKET HYPOTHESIS

The implication of EMH is that the market can't be beaten because all information that could
predict performance is already built into the stock price. The concept has fallen out of favor
in the last couple of decades with research advances in behavioral finance and, to a lesser
extent, with the success of quantitative trading algorithms. High-frequency trading is one
example. Over time, it's been shown to contribute to market efficiency, implying that markets
weren't efficient before.

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 ASSUMPTIONS OF EMH

• All market participants have equal access to historical data on stock prices, and both
public and private information is available. This condition proves that no arbitrage
opportunity is available. Thus, none of the investors has an advantage over the others
in making investment decisions.

• The efficient market hypothesis only holds if investors are rational, i.e., investors are
risk averse. To put it simply, if there are two investments of the same return but of
different risk, a rational investor will always prefer the one with lower risk.

• It is impossible to beat the market in the long run, which means that it is impossible in
the long term to consistently receive returns higher than the market average.

• Stock prices change randomly, i.e., trends or patterns in the past do not allow
someone to forecast their movements in the future. Therefore, the efficient market
hypothesis makes both technical and fundamental analysis completely useless.

CRITICISMS OF EFFICIENT MARKET HYPOTHESIS

The recent findings of three schools of thought challenge the efficient market hypothesis
based on their claims that evidence of predictable patterns in stock prices exists.
One school of thought challenging the efficient market hypothesis is momentum investing, a
combination of technical and fundamental analysis that claims that certain price patterns
persist over time. The second is behavioral finance, which maintains that investors are guided
by psychology more than by rationality and efficiency. And the third is fundamental analysis,
which holds that certain valuation ratios predict outperformance and underperformance in
future periods.

Momentum investors base their argument against the efficient market hypothesis on the
following.

In a truly efficient market, the short-term serial correlations among stock prices should be
zero, but several studies have shown examples of short-term serial correlations that are not
zero, thus indicating the possibility of a discoverable pattern. Although these findings are
statistically significant, they may not be economically significant. For example, as soon as
evidence of the so-called January effect was made public, investors incorporated the
information into their investment decisions and the effect disappeared. Furthermore,
momentum strategies do not perform well in all markets. Although they led to excess
performance in the late 1990s, they generated underperformance relative to the poorly
performing market of the early 2000s.

The findings of behavioral finance indicate that investors overreact to some events and
underreact to others. Underreaction is as common as overreaction and post-event continuation
of abnormal returns is as common as post-event reversals. In other words, what appears to be
a trend according to the tenets of behavioral finance may merely be a random event.
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With regard to fundamental analysis, many believe that initial dividend yield and price-to-
earnings multiples can be used to predict future stock results. However, these measures do
not consistently predict stock performance in all time periods, which means that they do not
contradict the efficient market hypothesis. More so, occasional anomalies do not violate the
efficient market hypothesis; they lose their predictive power when they are discovered and do
not hold true in the long run.

Burton G. Malkiel, a well-known proponent of the efficient market hypothesis, refutes the
claims of all these schools of thought currently challenging the efficient market hypothesis.
He notes, however, that a difference between market efficiency and perfect pricing exists; the
market often misprices securities, at least in the short run, but an investor cannot know before
the fact when mispricing will occur.
Stock Prices often reflect evidence of:

• Irrational exuberance: people getting carried away by booms and asset bubbles (e.g.
US house prices in the 2000s, Dot Com Bubble and Bust.

• Behavioral economics places greater emphasis on the irrationality of human behavior

in making economic decisions e.g. herding effect etc.

• Empirical evidence that stock prices do not reflect. E.g. According to Dreman, in a
1995 paper, low P/E stocks have greater returns.

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CAPITAL MARKET EFFICIENCY
A perfect market is one that allocates resources between competing buyers and sellers in such
a way that no better allocation is possible, where “ better” means with less waste, fewer
unsold inventory or sock, fewer unsatisfied potential customers etc. In classical economics
this requires perfectly competitive equilibrium conditions wherein there is a vast multitude
both of buyers and sellers and a potentially infinite number of both buyers and sellers outside
the market at any one, there is NO information asymmetry, there are no barriers of any kind
to entry into or exit out of the market, the is one price for the item all over the world (after
accounting for foreign exchange rates, transport costs and any other legitimate cost of getting
the stock to the local market except for the price of the stock itself) and there is no pressure of
any kind on the parties to do business or not to do business. Any taxes, interest charges or
government fees are either zero or affect every single member of the market equally. The
result is that no one buyer or seller can ever affect the market price, for there too many others,
and this is a primary symptom of market perfection.
Optimally means the best possible allocation of resources with the prevailing conditions, and
these conditions prevent the allocation being perfect. So, in real life we are very happy to
identify what is optimum since we cannot have what is perfect. An optimal stock market is an
efficient stock market. In general, a process is efficient when it has minimum input for
maximum output, thereby maximizing productivity and minimizing waste. An efficient stock
market takes information as its inputs and stock trades as its output. An efficient stock market
immediately and accurately translates new information into a rise, fall or deliberate
maintaining of the stock price.

CAPITAL MARKET RESEARCH AND EFFICIENT MARKET

HYPOTHESIS
Efficient Market Hypothesis (EMH) is a concept that attempts to simulate the workings of an
economic perfect market where there is no information asymmetry. Basically, everyone has
the same information and this concept can be explained in the forms elaborated below:

THE STRONG FORM EMH

Strong form efficiency is one that would prevail if there ever was a stock market where news
immediately and accurately became impounded into the stock price, so that even inside
information would not enable anyone to outperform the market in any systematic or sustained
manner. In a strong form efficient market, detailed accounting and other regulation would be
unnecessary to impose from outside because the market would already be behaving optimally
and efficiently. Accurate information processing means seeing through spin, propaganda,
public relations, advertising, manipulation of words or numbers to perceive what really
occurs. If accounts and other sources of investor information faithfully represent the business
reality of the firm in every material respect, then accurate processing of information is easier.
Immediate processing of information means there is no time lag between the release of
information and the stock market response to it, and also that the stock market response is

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complete and does not drag itself or dribble over the consequent hours, days or weeks so that
the import of the information takes a while to sink in to the stock market. The strong form
version of the efficient market hypothesis states that all information—both the information
available to the public and any information not publicly known—is completely accounted for
in current stock prices, and there is no type of information that can give an investor an
advantage on the market.
Advocates for this degree of the theory suggest that investors cannot make returns on
investments that exceed normal market returns, regardless of information retrieved or
research conducted.

THE SEMI-STRONG FORM EMH

Semi-strong form efficiency is the highest form of efficiency we see in the real world. With
this form of efficiency inside information, information asymmetry, adverse selection and
moral hazard exist to enable inside information holders to be able to beat the market average
sustainably and systematically. The law and the stock market regulations, at least in the big
stock markets of the world, make insider trading a criminal offence punishable by fines and
jail, to minimize the prevalence. Public information and the patterns of the past stock price
movements, however, cannot be used to beat the market, because in a semi strong form stock
market those things are already fully impounded into the current stock price. There are parts
of other stock markets that may be semi strong form efficient and international trading across
exchanges has made for semi strong form efficiency much of the time in a country’ s major
stocks that are traded internationally. There is a continuum rather than a firm and sharp
boundary between the semi-strong parts of a stock mark market and the rest. The semi-strong
form efficiency theory follows the belief that because all information that is public is used in
the calculation of a stock's current price, investors cannot utilize either technical or
fundamental analysis to gain higher returns in the market.

Those who subscribe to this version of the theory believe that only information that is not
readily available to the public can help investors boost their returns to a performance level
above that of the general market.

THE WEAK FORM EMH

Weak form efficient stock markets are the majority of markets round the world, are ones
where so-called fundamental analysis pay. This means a person can beat the market by
studying news and accounts as soon as they are released to get ahead of other players in the
market. Since the information being used to advantage by the investor or trader here is
publicly available, no crime is committed by using it. The accounting framework defines
understandability in relation to accounts with reference to diligent truly and pre-existing skill
in reading accounts, so the framework might be said to be assume weak form efficient stock
markets are the prevailing kind for which accounts have to be prepared. The weak form
ACC 322 GROUP 3 14
suggests that today’ s stock prices reflect all the data of past prices and that no form of
technical analysis can be effectively utilized to aid investors in making trading decisions.

Advocates for the weak form efficiency theory believe that if the fundamental analysis is
used, undervalued, and overvalued stocks can be determined, and investors can research
companies' financial statements to increase their chances of making higher-than-market-
average profits.

Lastly there are inefficient stock markets. They may be closely controlled by the State or
entirely unregulated or anywhere in between. What they have in common is that they are
stock markets where technical analysis pays off and enables an analyst to beat the market
systematically and sustainably. Technical analysis is a set of techniques for analyzing
previous share price movements in the hope of establishing patterns that will repeat.
Technical analysis is popular with analysts even in cities with large stock markets with quite
substantial semi strong sections, such as London and Hong Kong. Patterns undoubtedly do
exist in stock price movements over time, both at the level of the individual stock and at the
level of the market. Stock price movements over the medium term may therefore be to some
extent predictable. In an efficient market, however, any gain from studying such patters is
already impounded into the stock price and therefore cannot be used to beat the market
systematically and over time.
Capital Market Research as a concept comprises of two things:
• Financial Reporting
• Financial Analysis

Financial Reporting refers to the standard practiced giving shareholders/end-users of

financial information an accurate depiction of a company's finances including their revenue,
expenses, profits, capital and cash flows, as formal records that provide in-depth insights into
financial information.
Some of the relevant benefits include improved debt management, trend identification,
progress, and compliance.
The essence of financial reporting is for decision making purposes.

Financial Analysis involves the detailed and critical examination of the individual
components (companies, investors and investing psychology) and the market. Financial
analysis is not complete without highlighting the importance of fundamental, technical and
investment psychology analysis. Fundamental analysis is the examination of the publicly
available information on reported happenings of the market. These kinds of information
provide an insight into how the market will react which is basically what investing
psychology is about. Technical Analysis is the analysis of the different pointers provided by
the market in a bid to predict where the market might be headed. The concept of Efficient
Market Hypothesis majorly centers around how the market reacts to the information available

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and how much of information is available. If this is true, then investing psychology cannot be
sidelined as this provides an insight into the response to the information available in the
market.
A combination of these three is financial analysis and in conjunction with financial reporting
is Capital Market Research.

Conclusively, the concept of a strong EMH makes it impossible to beat the market because
information is equally available to every component of the market and it is assumed and
expected they will react in the same manner. Conversely, in the weak EMH, the structure of
the market makes it highly possible to exploit the market as there is information asymmetry.
Given that the semi-strong EMH is the closest we are to an efficient market, there are
loopholes which may be exploited to beat the market however, government, statutory and
legal regulations have made it difficult.

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BIBLIOGRAPHY & REFERENCES
Gabriel Donleavy (2016); An Introduction to Accounting Theory
Thune (May 18, 2021); Efficient Market Hypothesis. Retrieved from
https://www.thebalance.com/efficient-markets-hypothesis-emh-2466619
J.B. Maverick (September 30, 2020); The Weak, Strong, and Semi-strong Efficient Market
Hypotheses. Retrieved from https://www.investopedia.com/ask/answers/032615/what-are-
differences-between-weak-strong-and-semistrong-versions-efficient-market-
hypothesis.asp#:~:text=Though%20the%20efficient%20market%20hypothesis%20theorizes
%20the%20market%20is%20generally,technical%20analysis%20can%20aid%20investors
http://financialmanagementpro.com/efficient-market-hypothesis/
https://www.wallstreetmojo.com/efficient-market-hypothesis/
https://www.investopedia.com/ask/answers/033115/what-are-primary-assumptions-efficient-
market-hypothesis.asp
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/efficient-
markets-hypothesis/
https://www.investopedia.com/terms/r/returnonequity.asp
https://www.investopedia.com/terms/c/capitalmarkets.asp
https://corporatefinanceinstitute.com/resources/careers/companies/key-players-in-capital-
markets/
https://www.economicshelp.org/blog/1661/economics/efficient-market-hypothesis/
https://www.cfainstitute.org/en/research/cfa-digest/2003/11/the-efficient-market-hypothesis-
and-its-critics-digest-summary
https://www.datapine.com/blog/financial-reporting-and-analysis/

ACC 322 GROUP 3 17