A test of the extended functional fixation hypothesis
Article Abstract:
The traditional functional fixation hypothesis assumes that investors are always unsophisticated and therefore unable to understand the true cash flow implications imbedded in accounting data. The efficient market hypothesis assumes that investors are sophisticated and can accurately understand the accounting data's cash flow implications. A middle view, the extended functional fixation hypothesis, assumes that stock prices are sometimes set by sophisticated investors and sometimes by marginal, unsophisticated investors. The hypothesis holds that the preponderance that the stock price will be set by unsophisticated investors is related to the stock held by said investors. An examination of stock price reactions to quarterly earnings announcements of firms executing debt equity swaps gives support to the extended functional hypothesis and little support for the efficient market view.
Publication Name: Accounting Review
Subject: Business, general
ISSN: 0001-4826
Year: 1990
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Security returns around earnings announcements
Article Abstract:
The relation between risk, excess stock returns, and the behavior of abnormal returns is assessed during the days surrounding the announcement of quarterly earnings. Several hypotheses are tested, in a research environment that permits for a daily variation of risk in event time, to illustrate what previous studies assert regarding the association between positive average excess returns and information releases. Among these hypotheses is J. Hand's functional fixation hypothesis. Since risk was not permitted to vary in event time in this study's framework, no clear differentiation between true abnormal returns and increased expected returns was established. Abnormal returns were found to be inversely related to firm size in a controlled environment of risk increase. No distinguishable effects in firm size anomalies were noted.
Publication Name: Accounting Review
Subject: Business, general
ISSN: 0001-4826
Year: 1991
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Extended functional fixation and security returns around earnings announcements: a reply to Ball and Kothari
Article Abstract:
This article serves as a reply to R. Ball and S.P. Kothari's article 'Security returns around earnings announcements,' which provides an insightful critique of the extended functional fixation hypothesis of J. Hand. Ball and Kothari assert that the effect of firm size related anomalies is indistinguishable. This conclusion is argued to be premature based on the testing of several alternative hypotheses.
Publication Name: Accounting Review
Subject: Business, general
ISSN: 0001-4826
Year: 1991
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