Professional Documents
Culture Documents
Q1
a) What is the role of capital markets research? Explain the
underlying assumption of capital markets research as it
particularly relates to the usefulness of accounting information
for investor decision making purposes.
b)
Capital market research explores the role of accounting and other
financial information in capital markets. Involves examining
statistical relations between financial information and share
prices.
The capital market research relies on the assumption that market
is EFFICIENT. If the market is not efficient, the statistical relations
between accounting/financial information and share prices are
likely to be distorted and the findings may not be reliable.
c) Define the efficient markets hypothesis (EMH) and explain three
forms of market efficiency.
Efficient market defined as a market that adjusts rapidly to
information into share prices when the information is released.
- Weak form: price reflect information about past price and
trading volumes.
- Semi-strong form: all PUBLICLY available information is rapidly
and fully impunded into share prices in an unbiased manner
when released
- Strong form: security prices reflect all information (public and
private).
Q2
a) Explain the objective of fair value measurement in accordance
with AASB 13 Fair Value Measurement, paragraph 2
To estimate the price at which an ORDERLY transaction that
would take place between market participants at the
MEASUREMENT DATE under current MARKET CONDITION.
b) AASB 13 Fair Value Measurement, paragraph 16 prescribes that
if there is no active market there are three widely used valuation
techniques: (i) the market approach; (ii) the cost approach; and
(iii) the income approach. Explain what are meant by the cost
approach and income approach.
c)
Cost approach: reflects the amount that would be required
currently to replace the service capacity of an asset (current
replacement cost).
Income approach: converts future amounts to a single current
amount. It is the current market expectation of future amounts.
d) Managers and accountants need to make judgements and
Q6 Earnings Quality
(a) Explain one technique academic research uses to measure
earnings management; and
Jones model, Modified- Jones model, Earnings smoothing metrics
and managing earnings towards positive targets.
(b) What is meant by the term value relevance? Explain why
accounting information prepared in accordance with international
accounting standards is considered value relevant.
Value relevance refers to the incorporation of information into stock
prices. Due to the fact that accounting numbers generated by IAS are
considered of higher quality than others, such accounting information
is considered more informative and will be incorporated into stock
prices accordingly. Investor will rely more on such information in
making their investment decisions.
Q7 Executive Compensation
(a) Explain the roles of the remuneration committee and
compensation consultants in setting CEO pay levels;
2013 S2
Q1 Capital Markets research