Introduction
Academic researchers have been preoccupied with questions about the market efficiency in respect to accounting information. The question is the stock market effective. There is massive research literature, all the researchers have not come to an agreement with descriptive statistics to quantify the effectiveness of market hypothesis. Accounting information is one of the areas of interest in accounting research on market efficiency which has also not given a descriptive consensus on the efficiency of the market. Market efficiency is vital given that it has significant implications and impacts to the accounting profession. For instance, there will be diminished rewards in an efficient market. The security prices of an efficient market is not affected with the direct change from one accounting to another without signalling or direct flow of cash. With an effective market, disclosing in footnote and recognition in financial statements to does not impact on the security prices too in an efficient market.
If the market is not efficient the above examples are true hence there is a bigger need to research on market efficient. Developing and running of a free securities market is significant to the growing economies which serves as a mechanism to develop good investor relationship. Therefore, the efficient operation of the capital market is a critical issue itself in this view hence looking at its efficiency is important. Market efficiency has been research in finance, economics and accounting. This paper is aimed at examining various literatures to establish the disconnect that has resulted to this state of no consensus on this subject and establish the degree of efficiency with which market basing on the accounting information. The paper will analyse current research on stated subject with the research validity classical framework developed by Cook and Campbell (1979). They came up with four types of validity; statistical conclusion validity, internal validity, constructs validity and external validity which should be employed when designing a research. The researcher also is purposed to propose a new methodology or improvements in the existing methodology in the empirical market efficiency research field based on the accounting information.
Research questions
The following questions will be answered by this study:
- Does the capital market serve as efficient and accurate information collecting mechanism for the participants?
- Do differences in corporate governance structures affect the degree of information asymmetry in capital markets and, in turn, influence the timing and strength of the relation between security returns and earnings information?
Literature review
Fama (1965) one of the contributors in the testing of the efficient market hypothesis, in his research “Efficient Capital Markets: A review of Theory and Empirical Work”. Fama (1970, 1991) points out that, ‘‘In an efficient market, on the average, competition will cause the full effects of new information on intrinsic values to be reflected ‘instantaneously’ in actual prices’’. (Fama 1965, p.4). Fama lays down the ground for other studies by defining the theoretical framework of Market efficient study where he compares market efficiency with the ability of a firm making a ‘productive investment decision’ with justification from financial market prices. Fama also defines three group of market efficiency as weak form, semi-strong form and strong form where weak form was the lowest form of market efficiency. This resulted in more research in capital market research where Ball and Brown(1968, P. 160) affirms that the behavior of security prices can be selected basing on capital market efficiency as an operational test of usefulness. Where Beaver (1968) was in consensus with Ball and Brown. Security prices on the capital market is therefore an objective which is used to determine the if participants can use information from accounting productively.
Ball and Brown (1968) and Beaver (1968) documents that there is announcements of accounting earnings information. In their studies they find positive correlation which was significant on the firm’s previous year earnings.
Methodology of the study
The paper will look at the previous works hence qualitative research methodology. The researcher will use secondary data sources to analyze the efficiency of a market. The main focus will be looking at the all-share index which represents the exchange. Since there has been research in this area over 30 years, the researcher will not go to the field to collect primary data since the main object of the study is to find out the disconnect between this researches and propose a better methodology that will be used in research based on this subject.
References
Ball, R., Brown, P., 1968. An empirical evaluation of accounting income numbers. Journal of Accounting Research 6, 159–177.
Beaver, W., 1968. The information content of annual earnings announcements. Journal of Accounting Research Supplement 6, 67–92.
Fama, E., 1970. Efficient capital markets: a review of theory and empirical work. Journal of Finance 25, 383–417.
Fama, E., 1991. Efficient capital markets: II. Journal of Finance 46, 1575–1617.
Fama, E., 1996. Discounting under uncertainty. Journal of Business 69, 415–428.
Fama, E., 1998. Market efficiency, long-term returns, and behavioral finance. Journal of financial Economics 49, 283–306.