Question

Question:

Answer briefly questions below:

1.    What is ERC and its meaning

2.    List two possible ways to measure investor's earnings expectations.

3.    What are narrow window studies and wide window studies in accounting research, and what are they used for respectively.

4.     List Fair value hierarchy according to IFRS 13, ASC 820-10

Answer 1

1). ERC Is Earning Response Coefficient. It is the estimated relationship between equity returns and unexpected portion of companies earning announcements.or The ERC is an estimate of the change in a company's stock price due to the information provided in a company's earnings announcement.

2). Ways to measure Investor's earning expectation are:
a) Earning per share
b) Return on assets
c) Return on equity

3). Narrow window means that accounting information is the cause of the market reaction and the source of new information to investors because there are relatively few firm- specific events other than net income that affect share returns.
Wide window is the underlying economic performance of the firm that generates the association between net income and return. This shows the price lead earnings effect

4). Fair Value herarchy according to IFRS 13:
IFRS 13 seeks to increase consistency and comparability in fair value measurements and related disclosures through a 'fair value hierarchy'. The hierarchy categorises the inputs used in valuation techniques into three levels.

Level 1 inputs

Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.
A quoted market price in an active market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available, with limited exceptions.

Level 2 inputs

Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 2 inputs include:

• quoted prices for similar assets or liabilities in active markets
• quoted prices for identical or similar assets or liabilities in markets that are not active
• inputs other than quoted prices that are observable for the asset or liability, for example
  • interest rates and yield curves observable at commonly quoted intervals
  • implied volatilities
  • credit spreads
• inputs that are derived principally from or corroborated by observable market data by correlation or other means ('market-corroborated inputs').

Level 3 inputs

Level 3 inputs inputs are unobservable inputs for the asset or liability.
Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. An entity develops unobservable inputs using the best information available in the circumstances, which might include the entity's own data, taking into account all information about market participant assumptions that is reasonably available.