Securities Markets Efficiency & Accounting Information (증권시장의 효율성과 회계 정보).

Securities Markets Efficiency & Accounting Information. (증권시장의 효율성과 회계 정보).

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Reasons of Security market inefficiency.

Some people argue that stock market is efficient and some others people argue that stock market is not efficient. News is happening all the time. The capital market is efficient if at any time the security prices fully and correctly reflect all the available information and news at that date.
But market may not respond to information exactly as the efficiency theory predicts. Share prices sometimes take some time to fully react to financial statement information. If the information is not fully and correctly reflect in the market at the right time then we can see securities market anomalies or excess stock volatility or stock market bubbles. So, the security market will be inefficient.
Reasons of Security market inefficiency are as below:
1.Overconfidence: -Psychological evidence suggests that individuals tend to be overconfident. They overestimate the precision of information they collect themselves. If, on average, investors behave this way, share price will overreact.
2. Self-attribution bias:-Self-attribution bias occurs when people feel good decision outcomes due their own skills or abilities, whereas bad outcomes are due to unfortunate realizations of states of nature or unsuccessful outcomes on bad luck, hence not their fault. Suppose that following an overconfident investor’s decision to purchase a firm’s shares, its share price rises (for whatever reason). Then, the investor’s faith in his or her investment ability rises. If share price falls, faith in ability does not fall. If the average investor behaves this way, share price will increase.
3. Post –announcement drift: Once a firm's current earnings become known, the information content should be quickly digested by investors and incorporated into the efficient market price. However, it has long been known that this is not exactly what happens. For firms that report good news in quarterly earnings, their abnormal security returns tend to drift upwards for at least 60 days following their earnings announcement. Similarly, firms that report bad news in earnings tend to have their abnormal security returns drift downwards for a similar period. This phenomenon is called post-announcement drift.
For the post-announcement drift investors can earn arbitrage profits (risk free profit). By buying good news firms on the day announced earnings and selling short shares of bad news firms. But post-announcement drift is workless if a greater portion of a firm’s is held by institutional investors (Sophisticated investors).
4. Buying and short-selling shares based on non earnings financial statement information such as changes in sales, accounts receivable, inventories and capital expenditure.
5. Another possible explanation for the anomalies is transaction costs. The investment strategies required to earn arbitrage profits may be quite costly in terms of investor time and effort, requiring not only brokerage costs but continuous monitoring of earnings announcements, annual reports and market prices, including development of the required expertise. For the transaction costs sometimes investors can’t take advantage of post-announcement drift.
6. Another reason is “jump on the bandwagon”. To take advantage people get involved in something that has recently become very popular. When people see positive feedback then they join the group then increase the stock market volatility.
On the above discussion we can say that securities markets are not fully efficient. Improved financial reporting may be helpful in reducing inefficiencies and security price will be protected. Improved financial reporting, by giving investors more help in predicting fundamental firm value. Indeed, by reducing the costs of rational analysis, better reporting may reduce the extent of investors’ behavioral bias. So, financial accounting information is very important and helpful to investors in securities market to protect securities market inefficiency.