Question

Discuss market efficiency in responding to potential earnings management?

Answer 1

When people talk about market efficiency they are referring to the degree to which the aggregate decisions of all market participants accurately reflect the value of public companies and their common shares at a given moment in time this requires determining a company's intrinsic value and constantly updating those valuations as new information become more the faster and more accurate the market is able to price securities the more efficient it is said to be. How market efficiency championed in the Efficient market hypothesis suggests at any given time prices fully reflect all available information about a particular stock and market. The principal is called Efficient market hypothesis which acids that the market is able to correctly price securities in a timely manner based on the latest information available based on this principle there are no undervalued stocks to be had since every stock is always trading enterprise equal to its intrinsic value however the theory has its Detractors who believe the market overreacts to economic changes resulting in stock be coming over price and under price and they have their own historical data to back it up. The implication is that investors shouldn't be able to beat the market because all information that could predict performance is already built but into the stock price it is assume that stock prices follow a random walk meaning that they are determined by today's news rather than par stock price movements it is reasonable to conclude that market is considered equally efficient most of the time however history has proved that market can overreact Tu new information both positively and negatively as an individual investor the best thing you can do to ensure you pay and accurate price for your shares is to search a company before purchasing their stock and analyse whether or not the market appears to be reasonable in its pricing. Earnings management is the use of accounting techniques to produce financial report that present and overall positive view of companies business activities and financial position many accounting rules and principles require company management to make judgements. As individual investor who manages their potential earnings in the market the best policy of the best thing the individual can do to ensure you pay and accurate price for your shares is to research a company before purchasing their stock in analyse whether or not the market appears to be reasonable in its pricing inverness then the market understands investors behaviour. Behavioural Finance certainly reflect some of the attitudes embedded in the in investment system behaviourist will argue that investors open behaviour rationally producing in Efficient market and Miz price securities not to mention opportunities to make money that may be true for an instant but consistently uncovering these inefficiency is a challenge that said investors can be their own worst enemy is trying to get out the market doesn't pay off over the long run in fact it often results in irrational behaviour not to mention a Dent in your wealth implementing a strategy that is well thought and sticking to It may help you avoid many of these common investing mistakes.