A perspective on the stock market's fixation on accounting numbers
Article Abstract:
Financial and accounting research has focused on the effect of information on the prices of securities in order to test the hypothesis that the stock market is rational, and rapidly and unbiasedly assimilates information. Investors are assumed to correctly use information and that their reaction to information is reflected in the prices of securities. The efficient market hypothesis assumes that the price of a security is an estimate of the present value of future cash flows, and that competition among investors causes superior performance and ensures that the current values of widely traded securities are barometers of their future values. The Functional Fixation Hypothesis (FFH) assumes that investors do not recognize the different accounting numbers created by alternative accounting methods, and thus, different accounting methods have an effect on the prices of securities. A test of the FFH with data on stock returns reveals that the FFH provides useful insight into how investors use accounting information for forming forecasts of future cash flows.
Publication Name: Accounting Review
Subject: Business, general
ISSN: 0001-4826
Year: 1990
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Accounting disclosures and the market's valuation of oil and gas properties: evaluation of market efficiency and functional fixation
Article Abstract:
Research by T.S. Harris and J.A. Olson (1987) investigating the relation between certain accounting disclosures about oil and gas properties' value and the market value of the properties revealed that the net book value has a high correlation with the market value. The research indicated that the book value is the most important explanatory variable. A study of property portfolios constructed from imputed market values was conducted to analyze whether the significance of book values is a result of value-relevance or whether it is a result of investors' functional fixation on the book values. Research results do not support the functional fixation hypothesis and indicates that investors probably pay too little attention to book values. The results support the findings of Harris and Olson that, to a large extent, oil and gas properties' book value explains their market value, a relationship that cannot be attributed to the functional fixation hypothesis.
Publication Name: Accounting Review
Subject: Business, general
ISSN: 0001-4826
Year: 1990
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Accounting disclosures and the market's valuation of oil and gas properties
Article Abstract:
Various measures of oil and gas property valuation are examined for their explanatory power. Cross-sectional valuation models are applied to data from 1977 to 1983. Results indicate that net book value data are a good way to explain the market value of oil and gas properties. Results also suggest that there is a rational distinction between full cost accounting methods and the successful efforts which is made by the market.
Publication Name: Accounting Review
Subject: Business, general
ISSN: 0001-4826
Year: 1987
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