Capital Market PDF

Preview

Summary

Capital Market Theory...

Description

Capital Market is the place where sellers and buyers are engaged in trading securities. Capital Market Research accordingly examines the statistical relation between financial information and share prices. Capital Market Research is generally used to examine stock market’s reaction towards the announcement of the information by the organisation, and to evaluate the significance of alternative accounting and disclosure options for investors (Deegan, 2009). A relevant information that is presumed to be favorable will generally result in a price increase in the related security while information that are assumed to be unfavorable, generally result in a price decrease. On the other hand, when there is no reaction to the information, there is no any fluctuation in price of security. According to Fama (1970), the efficient market was defined as “a market with great number of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where current important information is almost freely available to all participants”. Apart of definition, Fama also stated the three forms of efficiency – weak, semi-strong and strong. Capital Market Research assumes that security markets are semi strong form efficient. It also assumes that investors react promptly without any biasness to publicly available new information that is related to future earnings of a firm and cash flows and this is referred to as efficient market hypothesis. According to Modern Finance theory, the share price of a company can be determined by discounting the expected future cash flows of the company in form of dividend to its present value where the discounting rate is based on the company’s level of risk (Deegan, 2009). According to Ball and Brown (1968), the sign and magnitude of stock prices are positively correlated to unexpected earning changes. Shares price will change based on the unexpected earnings information rather than announced earnings. Even though smaller losses are announced, the share price may rise when the market is expecting huge losses and vice versa. Often an announcement of one firm in the industry may result in fluctuation of share price of other firms in the same industry. The study conducted by Olang & Akenga (2017) showed that the stock market is a semi strong efficient market where share prices reacted only to currently available information of earnings announcement, and the relationship between earnings announcement and abnormal return is positive. Investors take into consideration relevant information when making an investment decision instead of waiting for publishing of the annual report (Deegan, 2009). According to Kothari (2001), much of the researches was based on the view that a capital market reacts instantly to relevant information via change in stock prices. Thus, the current share price does anticipate future earnings announcement. In general, earnings announcement of larger firms such as retail giant like JB Hi-Fi, has lower impact on share price as compared to smaller firms as it is expected that larger firms have more information available and thus the earnings announcement is assumed to be more anticipated with investors less surprised and the prediction already impounded in share price prior to earning announcement. However, investors tend to react more on surprise or unexpected announcement specially related to profit(revenue) announcement. According to Beaver, Lambert & Morse

(1980), share prices and return from shares are related to accounting earnings. The share price of JB Hi-Fi accordingly decreased due to the unexpected future earnings announcement to the capital market in a form of its profit downgrade, as the announced profit was smaller than the profit expected by market....