Essay —

Danielle: First, efficient market theory implies that the market fully reflects the available information and react quickly to any new information. In fact, good or bad news related to reported net income is usually evaluated rationally by investors and directly reflected the market share price. Indeed, under an efficient market, this reflected market price will meet the price predicted by the investors and that why in some cases we notice no reactions to the earning performance whether it is good or bad. Second, sometimes there no considerable or even a reversed reaction to change in the stock price for the news related to reported net income and that is due to an other event rather internal or external taking place in the same period that affects the market behaviour towards the investors behaviour. To illustrate, if a company working in gas and petroleum industry can have a decrease in its stock price because of a new environmental low (future expenses) even with the release of a higher net income. Finally, there is also the fact that the investors have certain expectation toward the upcoming net income but in case that the reported net income doesn’t overcome their expectations , even though the income is positive, investor won’t react to these news . In fact, a company that posts a very impressive earnings performance, but its stock price barely moves because the investors had already expected these results and the reported net income just confirm these expectations. Robert: The inefficient market hypothesis consists on a market behaviour that sometimes drive asset prices above or below their true value. In fact, the existence and magnitude of certain stock price variations are sometimes incompatible with an eff… …te earnings and in this situation, investors can have an idea about the level of accrual persistence so they can take the best decision towards that. Applying the Accounting principles framework would be an efficient way to increase the persistence of accruals.To illustrate, the timely recognition and mesurebility of accruals would decreae the anomalies especially if they are implemented and disclosed to the public using the right method. The non cash assets and the non cash liability such as goodwill and future tax obligation are more easily to manipulate than the cash flow. In fact, in order to increase the accruals persistence, these non cash flows items show follow a certain regulation. Indeed, Accounting provisions for impairment related to any decrease in value of these items or any possible loss but also posing a restrictive rule for any possible gain.

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