Question

Can anyone help me solve the following Accounting Theory questions.

1. Relationship between earnings announcement and share price movement is inversely related to the company’s size. Discuss why.

2. What are some of the arguments for historic cost accounting?

Answer 1

ANSWER-1)

There exists an inverse relationship between information content in earnings announcements and changes in share prices in regard to the size of an entity. There is often more information available for the larger firms in the marketplace and thus more likelihood that projections about earnings have already been impounded in the share price. Thus the average, earnings announcements for larger firms likely to be more anticipated, provide less surprise, and are already impounded in the share price prior to the announcement of the earnings. Consequently the earnings announcement for big firms would have a relatively limited unexpected component.

On contrary there is relatively less information content for smaller forms thus projections about earnings are difficult. As a result when the earnings are announced it has a greater impact on the share prices of smaller firms relative to larger firms. Thus the relationship between the information earnings announcement and share price movement tends to be more significant for smaller firms