Share Prices and Accounting Information

The module links share prices or returns to accounting items from the income statement and the balance sheet and in doing so effectively advises standard setters and regulators regarding the value-relevance of accounting information, especially bottom-line earnings and book value of equity. It also advises about the value-relevance of management (performance related) narratives, which often complement the disclosure of the audited income statement and balance sheet. Unlike classical financial statement analysis this module does not attempt to value individual companies. Instead, it analyses large sample evidence generated from regression analysis.

It is important to note from the very beginning that this module is based to a large extent on journal articles. The main journals of interest in this course are Accounting Review, Journal of Accounting & Economics, Review of Accounting Studies, European Accounting Review (EAR), and Accounting & Business Research (ABR). The first three journals are US journals, while ABR is a UK journal.

It is essential to work steadily throughout the semester. This course is unusual in the sense that it is based on journal articles not a textbook. It will take some time for students to be familiar with the concise writing style usually adopted in journal articles.

BMAN23000(A), (B) or (C) are pre-requisites of BMAN30071.

BMAN 23000 (A) or (B) Foundations of Finance 

The course aims to increase students’ knowledge of how accounting information, broadly defined, affects equity prices. Students will learn how models are constructed and how models are tested by empirical evidence.

Accounting information, broadly defined, is regarded as being useful in evaluating equity investments. The module reviews various models that have been proposed for calculating a firm’s intrinsic equity value. These formal valuation models link share price or returns to items from the income statement and the balance sheet and include the Simple Earnings Capitalisation Model, Option-style Valuation Models, and Abnormal Earnings Valuation Models. In addition, the module introduces the notion of earnings conservatism; and argues that earnings conservatism is related to share price anticipation of earnings.

The final three lectures examine three topical issues around the value-relevance of information provided by firms outside the audited financial statements. One lecture looks at the tone, or sentiment, in earnings press release narratives, and examines whether investors are misled by abnormal positive tone when pricing equities. Another lecture examines whether additional annual report narratives increase, rather than reduce, the cost of equity capital. The final lecture looks at reporting frequency and asks

Lectures

There are ten lectures scheduled on this module. Lectures are used to introduce new material. Lecture notes are available in advance from the Canvas module website.

Workshops

There are five workshops scheduled on this module. Workshops consolidate and build on material from lectures. Workshops constitute an important element in your exam preparation. It is advisable to attempt the required work beforehand. For some workshops, quantitative model answers, but not qualitative model answers, will be uploaded to the module website, at the end of the relevant week.

Several workshops are designed to give you some hands-on experience with accounting-based valuation models. We will use real firm data to estimate some of the models. It is expected that these practical exercises will give you a better understanding of the methodology employed in empirical journal articles. It will also give you a deeper understanding of the relevant econometrics. Another workshop is designed to assist you in developing certain reading skills that should allow you to deal with empirical journal articles in a time-efficient way.

understand how accounting information affects equity prices, including a familiarity with seminal and topical research developments, and an understanding of the limits of such developments;

understand the price relevance of accounting information provided outside the financial statements, like, for example, narratives in annual reports, quarterly reports, and earnings press releases;

understand the methodology that is employed in order to test price-relevance empirically;

evaluate theories and evidence related to formal accounting-based valuation models;

access relevant journal articles in accounting journals and draw on them in critical consideration of arguments;

use communication and information technology (like excel spreadsheets) in acquiring, analysing and communicating information.

Exam (100%)

Core Text

It is very important to note from the very beginning that this module is based to a large extent on journal articles. The main journals of interest in this course are Accounting Review, Journal of Accounting & Economics, Review of Accounting Studies, European Accounting Review (EAR), and Accounting & Business Research (ABR). The first three journals are US journals, while ABR is a UK journal.

Supplementary Text

Several parts of the module are also covered in the following two textbooks:

Barker, R. (2001). Determining Value: Valuation Models and Financial Statements, Harlow: Financial Times Prentice Hall.

Scott, W. R. (and O’Brian, P.) (2019), Financial Accounting Theory, 8th edition, Pearson.  

To understand the methodology employed in empirical tests we need to have an understanding of some econometrics like OLS estimates, t-tests and dummy variables. These tools will be introduced in Lecture 2. Two standard introductory textbooks in econometrics are:  

Maddala, G. S. (and Lahiri, K.) (2001 or 2009). Introduction to Econometrics, 3rd or 4th edition, John Wiley & Sons Ltd.  

Wooldridge, J. (2018). Introductory Econometrics: A Modern Approach, 7th edition, Cengage. 
 

BMAN 23000 (A) or (B) Foundations of Finance