Capital Market Equilibrium and Annual Accounting Numbers: Empirical Evidence

Abstract

Equilibrium prices of firms' ownership shares are dependent upon assessed distribution functions of returns to those shares. Such assessed distributions are, in turn, dependent upon available information pertaining to firms' production-investment (operating) decisions. One potential source of this type of information is the collection of accounting numbers periodically issued by firms. If newly issued accounting numbers do reflect new events pertaining to firms' production-investment decisions and assessed distributions of returns conditional on these decisions, then one expects some association between these numbers and equilibrating price adjustments in the market for firms' shares. The purpose of this paper is to present empirical assessments of the information content of several accounting number series. The series examined are financial ratio swies that are viewed as providing information on key characteristics of firms' operations. The approach used throughout is based upon the implications of an efficient capital market for external accounting; see Gonedes [19721 and Ball [1972]. The emphasis of this study is on the joint implications of the accounting numbers examined. Thus, we provide results conditional upon multivariate statistical analyses. Most existing studies of the information content of accounting numbers deal with the implications of one accounting number or, if more than one number is examined, they only examine the implications of one number at a time. The number that is most frequently used